ITAT MUMBAI BENCH 'D'

IT Appeal No. 391 (Mum) of 2011
[ASSESSMENT YEAR 2007-08]

B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND SANJAY GARG, JUDICIAL MEMBER

Dharmesh Shah for the Appellant.
D.P. Sharma for the Respondent.

Sanjay Garg, Judicial Member - The present appeal has been filed by the assessee company against the order of the learned CIT(A) dated 21.09.2010 relevant to assessment year 2007-08.

2. The appeal has been filed with a delay of 36 days. An application for condonation of delay has been filed alongwith memorandum of appeal. In the said application it has been stated that though the appeal was drafted well in time and even the fees for filing the appeal before the Tribunal was deposited by the company on 15.11.2010 i.e. within the limitation period and the complete set of appeal papers was handed over to the accountant of the company on 16.11.2010 for onward filing with the Tribunal, he could not file the appeal by the last date of limitation i.e. 10.09.2010. When the fact came into the knowledge of the Director of the assessee company, another memorandum of appeal was prepared and immediately filed before the Tribunal. The application is also supported with an affidavit of the accountant, wherein it has been stated that though the fees for filing of appeal was well deposited in time with the Tribunal, due to oversight and the fact that he got busy with the time barring assessments of the assessee company for the A.Y. 2008-09, the appeal could not be filed on time. It has been further stated that the delay in filing of appeal was due to bona fide error and not intentional. In view of the reasons given by the assessee as also the reasons mentioned above, the application for condonation of delay is hereby allowed and the delay of 36 days in filing the present appeal is hereby condoned.

3. Now coming to the merits of the case. The grounds of appeal read as under:

The brief facts of the case are that the assessee company is engaged in the business of "educational advice". The assessee company filed its return of income declaring total income of Rs. 4,82,47,568. During the assessment proceedings u/s. 143(3) of the Act, the AO noticed that the assessee had claimed deductions of expenses of Rs.30 lacs being Rs.10 lacs paid as incentives to each of its three Directors. The AO found that the assessee could not furnish any justification for the payment of incentives to the Directors noticing that no such incentives were ever paid in the past and the same were paid for the first time during the year under consideration. The assessee could not convince the AO regarding the services rendered by the Directors to justify the payment of incentives. Hence, the AO made disallowance of entire sum of Rs.30 lacs.

The AO also disallowed a sum of Rs.9,60,000 being payment of consultancy charges to the related parties. He further made disallowance of depreciation of Rs.3,05,992 on three cars, which the assessee company claimed to be owned by it, whereas the AO found that the cars were owned by the Directors of the assessee company and, hence, the assessee company was not entitled to claim depreciation on the same.

Aggrieved against the assessment order dated 24.11.2009 the assessee preferred appeal before the learned CIT(A). The learned CIT(A) for the reasons recorded in his order dated 21.09.2010 deleted the disallowance made in respect of consultancy charges but at the same time he confirmed the disallowances relating to incentives of Rs.30 lacs paid to the Directors and also on account of depreciation on three cars amounting to Rs.3,05,992. The assessee company is thus in appeal before us.

4. We have heard the learned representatives of the parties and have also gone through the record. The learned AR before us has submitted that all the three Directors to whom the remuneration has been paid are highly qualified and are full time working Directors managing the affairs of the company. The remuneration and incentives paid to the Directors during the relevant year were much lower than the prevailing market rate for the equivalent services. It is evident from their return of income that they do not have any other business income or salary income except the remuneration paid by the assessee company as they have been devoting their full time for the business of the company. As compared to earlier years, the turnover and net profit of the company during the relevant year increased substantially which justifies the incentives paid to the Directors. The Directors having paid taxes @ 30%, there was no basis for the AO to derive a conclusion that the assessee evaded payment of tax by alleged payment of incentives to its Directors. On the other hand, the learned DR relied on the findings of the AO and the learned CIT(A) on this issue.

5. After going through the record it is observed that the assessee company has paid incentives of Rs. 10 lacs each to its Directors Mr. Assan Sukhwani, Mr. Sushil Sukhwani and Mr. Ajay Sukhwani. Apart from the incentive, Mr. Ajay Sukhwani has been paid salary of Rs.3,60,000 as well as consultation charges of Rs.3,60,000. However, no salary or consultation charges have been paid to Mr. Assan Sukhwani and Mr. Sushil Sukhwani. The assessee in his written submissions before the learned CIT(A) has claimed that all the Directors are whole time Directors fully engaged in the business of the company and they do not have any other business income or salary income. The assessee has relied upon the return of income of the said Directors. However, a perusal of the return of income of the Director Mr. Assan Sukhwani, at pages 7 and 8 of the paper-book filed by the assessee, reveals that he has shown salary income of Rs.2,10,000 from 'Blue Star Air Travel Services (I) Pvt. Ltd.', Rs. 1,50,300 from 'Micro Solutions India Pvt. Ltd.' and Rs.10 lacs from 'Right Fin Cap Pvt. Ltd.' (the assessee company) totaling to Rs.13,60,300. Apart from that he has also earned professional fees of Rs.71,000 from 'Bhuta & Co.' He also has income from other sources such as rental income, compensation etc. A perusal of the said computation of total income reveals that the said Director namely Mr. Assan Sukhwani is not working with the company on full time basis. He has received salary income from other two companies and has also received professional fees etc. Similarly on perusal of computation sheet of Director Mr. Sushil A. Sukhwani, it reveals that apart from remuneration of Rs.10 lacs received from assessee company, he has shown income from business or profession to the tune of Rs.1,46,988. A perusal of the income tax return along with computation sheet pertaining to Mr. Ajay A Sukhwani reveals that apart from remuneration of Rs.10 lacs received from assessee company, he has earned salary income of Rs.2,10,000 from 'Blue Star Air Travel Services (India) Pvt. Ltd.' and Rs.2,82,534 from business or profession. However, there is no mention in his return of income regarding salary of Rs.3,60,000 and consultation charges of Rs.3,60,000 received by him from the assessee. A perusal of return of income of the Directors of the assessee company which have been relied upon by the learned AR reveals beyond doubt that the said Directors are not solely engaged in the affairs of the company on whole time basis. Rather they are receiving salary income from other companies as well. Apart from salary income they also have income from their own business and profession as also rental income, compensation, etc. They cannot be said to be whole time Directors devoted fully to the affairs of the company. The documents produced and relied upon by the assessee company itself disapprove the case of the assessee in this respect. Only because the company has earned sound profits during the year under consideration cannot be a ground to pay such a hefty sum to its Directors on account of incentives. It may be noted that Mr. Ajay A Sukhwani has already been paid salary of Rs.3,60,000 and consultation charges of Rs.3,60,000. The learned AR could not point out as to what extra services were provided or offered by Mr. Ajay A Sukhwani for which extra incentive of Rs.10 lacs was paid to him. It may be pointed out that apart from receiving the salary Mr. Ajay A Sukhwani has also received consultation charges from the assessee company. It may be further noted that the said Mr. Ajay A Sukhwani is claimed to be handling the affairs of the company being a Director. A lot of emphasis has been placed upon his qualification, experience and services given by him in managing the affairs and business of the company. He has been paid salary for it then how can the payment of any money as consultation charges for his services can be justified. Since the learned CIT(A) for the reasons recorded in his order has deleted the disallowance on account of consultation charges paid to Mr. Ajay Sukhwani along with other persons and the revenue has not preferred any appeal, we are not supposed to give any finding in respect of that matter. However, the point of argument which has emerged is that if a Director, who is already receiving his remuneration as salary and apart from that has also received consultation charges for his services, how can the payment of Rs.10 lacs extra as incentive be justified without mentioning what extra or specialized services were given by him apart from the services in day to day course for which he has already been paid sufficient remuneration. The payment of Rs.10 lacs extra as incentive, only because the company has earned good profits cannot be justified. In our view, neither there was any legitimate requirement of business of the company for the payment of such incentive amount nor there seems to be any justification for the same. Even otherwise there cannot be two separate heads for remuneration for services i.e. one for consultation charges and the other incentives for the services over and above the salary paid for such services. In view of the fact that the assessee company has already paid Rs.3,60,000 as salary and further a sum of Rs.3,60,000 as consultation charges to Mr. Ajay A Sukhwani, the payment of Rs.10 lacs extra as incentive does not seem to be justified. Even otherwise his return of income shows that he has received salary of Rs.2,10,000 from 'Blue Star Air Travel Services (India) Pvt. Ltd.' and when we compare the salary and professional fees received by other Directors from various other companies as is revealed from their returns of income, the payment of Rs.3,60,000 as salary income plus Rs.3,60,000 as consultation charges seems to be more than the price of services received by the Directors from other companies. Under such circumstances, the finding of the CIT(A) that expenditure amount of Rs.10 lacs paid as incentive to Mr. Ajay A Sukhwani was excessive and unreasonable having regard to the fair market value of the services is correct and the same is hereby upheld.

So far as the payment of incentive of Rs. 10 lacs each to other two Directors of the assessee company is concerned, it may be observed that the said Directors neither during the current year nor during the past have ever received any remuneration from the assessee company, whereas they are receiving salary income as well as professional fees etc. from other companies. If they have not received any remuneration in the past it does not mean that they are barred from receiving reasonable remuneration for their services to the assessee company in requirement of the legitimate needs of business of the company. Taking into consideration the overall facts and circumstances and also the salary and professional fees received by the said two Directors from other companies to whom they are offering their services and also taking into consideration the fact that the other Director namely Ajay Sukhwani has been paid Rs. 3,60,000 as consultation charges during the year, an equal sum of Rs.3,60,000 to each of the above said two directors can be said to be justified and reasonable remuneration for their services to the assessee company. The expenditure of Rs. 3.6 lacs each paid to the said to Directors viz. Assan Sukhwani and Sushil Sukhwani is hereby held to be justified and the disallowance of expenditure made by the authorities below to that extent is hereby deleted whereas the disallowance of expenditure of Rs.6.4 lacs each out of Rs. 10 lacs paid to the Directors is hereby confirmed.

6. Now coming to the second issue regarding disallowance of depreciation of Rs.3,05,992 on three cars registered in the name of Directors. The learned AR before us has submitted that though the cars are registered in the name of the Directors, the said motor cars are shown in the books of the company and are appearing in the balance sheet as asset of the company. The said motor cars are used for the business of the assessee company and, therefore, depreciation has rightly been claimed on the said cars. To stress his point he has relied upon the following authorities:

7. We have heard the learned representatives on this point and have also gone through the record. We may observe that in this case all the three cars on which the assessee claims ownership and has claimed depreciation, were purchased by the assessee company in the individual names of the Directors. Not only invoice/bills have been issued in the individual names of the Directors, they are also the registered owners of the said cars. The claim of the assessee company is that the payment for the purchase of said cars was made by the assessee company and the said cars have been shown as assets in the books of account of the company. We do not agree with the contention of the learned AR in this respect. The assessee company has failed to give any explanation as to why the cars were purchased in the individual names of the Directors and registered in their name, when the company wanted to claim ownership over the said cars. The learned AR has submitted that in the authorities cited by him it has been held that it is not necessary that the cars should be registered in the name of the company. He has further stressed that even if the cars are not registered in the name of the company itself is no ground for disallowance of depreciation on the cars especially when the said cars are found in the list of assets as well as books of account of the company. In our view the authorities cited by the learned AR does not fit into the facts and circumstances of this case.

Firstly, we take up the authority of the Hon'ble Supreme Court in the case of 'Mysore Minerals Ltd. (supra). The said case is relating to the ownership of a building. In the said case the assessee company had purchased for the use of its staff seven low income group houses from the Housing Board. The assessee had made part payment and was in turn given allotment of the houses followed by delivery of possession by the Housing Board. The actual deed of conveyance was not yet executed by the Housing Board in favour of the assessee. The assessee made a claim u/s. 32 of the Act in respect of depreciation of buildings used for the purpose of the business of the assessee. The claim was rejected by the AO forming an opinion that the assessee had not become the owner for want of deed of conveyance in its favour. It was under such circumstances, the Hon'ble Supreme Court while interpreting the term "owned" as occurring in section 32(1)of the I.T Act has held as under:

"In our opinion, the term "owned" as occurring in section 32(1) of the Income-tax Act, 1961, must be assigned a wider meaning. Anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded therefrom and having the right to use and occupy the property and/or to enjoy its usufruct in his own right would be the owner of the buildings through a formal deed of title may not have been executed and registered as contemplated by the Transfer of Property Act, the Registration Act, etc. "Building owned by the assessee" the expression as occurring in section 32(1) of the Income-tax Act means the person who having acquired possession over the building in his own right uses the same for the purposes of the business or profession though a legal title has not been conveyed to him consistently with the requirements of laws such as the Transfer of Property Act and the Registration Act, etc., but nevertheless is entitled to hold the property to the exclusion of all others."

The Hon'ble Supreme Court has further observed as under:

"It is well settled that there cannot be two owners of the property simultaneously and in the same sense of the term. The intention of the Legislature in enacting section 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. Assigning any different meaning would not sub-serve the legislative intent. To take the case at hand it is the appellant-assessee who having paid part of the price, has been placed in possession of the houses as an owner and is using the buildings for the purposes of its business in its own right. Still the assessee has been denied the benefit of section 32. On the other hand, the Housing Board would be denied the benefit of section 32 because in spite of its being the legal owner it was not using the building for its business or profession. We do not think such a benefit-to-none situation could have been intended by the Legislature. The finding of fact arrived at in the case at hand is that though a document of title was not executed by the Housing Board in favour of the assessee, but the houses were allotted to the assessee by the Housing Board, part payment received and possession delivered so as to confer dominion over the property on the assessee whereafter the assessee had in its own right allotted the quarters to the staff and they were being actually used by the staff of the assessee. It is common knowledge, under the various schemes floated by bodies like housing boards, houses are constructed on a large scale and allotted on part payment to those who have booked. Possession is also delivered to the allottee so as to enable enjoyment of the property. Execution of documents transferring title necessarily follows if the schedule of payment is observed by the allottee. No third person intervenes. The part payments made by the allottee are with the intention of acquiring title. The delivery of possession by the Housing Board to the allottee is also a step towards conferring ownership. Documentation is delayed only with the idea of compelling the allottee to observe the schedule of payment."

In this case, we may observe that the houses were allotted in the name of the assessee company and the possession of the same was also given to the assessee company. The assessee company exercised its domain over the property to the exclusion of all others but due to certain exigencies the conveyance deed could not be executed in the name of the assessee company as there was a fixed schedule of payment to be paid by the assessee company to the Housing Board. It was held by the Hon'ble Supreme Court that the delivery of possession by the Housing Board to the allottee towards conferring ownership. Documentation was delayed only with the idea of compelling the allottee to observe the schedule of payment. It was not the case that the houses were allotted in the name of the persons others than the assessee company. Not only the houses were allotted to the assessee company but also the possession was given by the Housing Board to the assessee company. It was under such circumstances, the Hon'ble Supreme Court has held that the assessee company was exercising its domain, possession and ownership over the property to the exclusion of all others and only because the documentation of the title deed was delayed due to certain reasons, that itself was not a ground to disallow the depreciation on the houses of which the assessee company was having use and possession being its owner.

In the case of Navdurga Transport Co. (supra), the assessee firm was constituted of seven partners to carry on transport business. Four partners contributed money as capital while the other three partners brought their trucks into the firm as their capital contribution. The three vehicles were shown as assets of the firm in the balance-sheet. The AO rejected the claim of depreciation on the said vehicles. It was observed in the said authority that the vehicles were contributed by the partners as their capital contribution. The assessee firm appointed three agents for supervision, control and plying of vehicles. The three trucks became the assets of the firm and they were used through agents by the assessee firm. It was under such circumstances that the Tribunal came to the conclusion that the assessee owned and used the trucks though the registration of the vehicle continued in the name of three partners, who initially acquired the vehicles. Though the registration of the vehicle could not be made in the name of the firm, the assessee firm was in a position to exercise the rights of an owner and not on behalf of the person in whom the title vested, but in its own rights.

Similarly, in the case of 'Dilip Singh Sardarsingh Bagga' (supra), the assessee had purchased a truck from one Shri Agrawal. The brand new truck was originally allotted to Mr. Agarwal. Since the vendor did not have sufficient funds to purchase the truck, he made an offer to the assessee to finance the purchase of the said truck and to operate the said truck on licence as owning to the restrictions under the Motor Vehicles Act. The truck in question could not be registered immediately in the name of the assessee. It was under such circumstances, the Hon'ble Bombay high Court held that the assessee, who had actually purchased the motor vehicle, for valuable consideration and used the same for business cannot be denied the benefit of depreciation on the ground that due to some restrictions its transfer was not recorded in the name of the assessee under the Motor Vehicles Act.

Thus, in the case laws relied upon by the learned AR, the common fact was that though the ownership and possession over the asset was transferred to the assessee, the title could not be registered due to certain exigencies, reasons, compulsions or omissions. However, in the case in hand, there was no restriction or compulsion or explanation for the assessee company as to why the cars had been purchased in the name of its Directors when, in fact, the assessee company wanted to have ownership and domain over the said cars. It is not the case where due to some reasons as explained above, the registration of the vehicle could not be transferred in the name of the assessee company, whereas the assessee company had been using the said vehicles being its owner and exercising its domain over the vehicles to the exclusion of all others. The assessee company without assigning any reasons, not only purchased the vehicle in the name of the Directors but also the said vehicles were registered in the individual name of the Directors. The Directors under law are not only the legal owners of the property (car) but are also in actually using and possessing the same. Only because the said cars have been shown in the balance sheet or books of account as asset of the company, that does not mean that the company has become the owner of the same. As held by the Supreme Court in the case of 'Mysore Minerals Ltd.' (supra)', owner is one who is entitled to own the property to the exclusion of the others. In the present case, the assessee company cannot be said to be holding the property to the exclusion of the Directors especially when the cars are not only purchased in the name of the Directors but also they are the registered owners of the cars. The said Directors of the assessee company have not sold or transferred the cars to the company itself. The authorities cited by the assessee can be applied to a case where infact the property has been transferred to the assessee and the assessee has been using, possessing and exercising its rights as owner over it, but due to certain circumstances the title could not be transferred in the name of the assessee. But where a person who claims himself to be the owner of the property he does not without any sufficient explanation purchase the property in its own name and never make any efforts for getting its ownership or title transferred in its own name, rather allows deliberately its title registration in the name of other person cannot claim its ownership to the exclusion of the said registered owner/purchaser of the property. The purchase of the cars in the name of other persons by the assessee company itself implies that the assessee company treated the said persons as owner of the property and did not want to exercise its domain over the property. Merely because the company has shown the cars as its assets in the books of account, cannot put it into the definition of owner of the cars to the exclusion of the legal/registered owners of the cars. Under such circumstances, the company cannot be said to the owner of the cars even in the light of the extended definition of ownership u/s. 32(1) of the I.T Act. The learned CIT(A) has rightly observed that payment having been made by the assessee company for the cars which were purchased by the Directors in their own name requires that such payment be treated as advance/loan to the Directors.
The findings of the learned CIT(A) on this issue is hereby upheld.