DCIT Vs M.G.S. Hospitalities (ITAT Delhi)- Section 40A(2)(b) – When assessee firm pays hefty salary to the father of a partner, it attracts provisions of Sec 40A(2)(b) but dis allowance can be made without verifying the market value of services provided by the partner’s father.
DCIT Versus M.G.S. Hospitalities
No. – ITA Nos. 2415 and 2416(Del)/2010
Dated- November 19, 2010
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These two appeals of the revenue raise a similar ground. In view thereof, the appeals were argued in a consolidated manner by the ld. DR. However, none appeared on behalf of the assessee. As a common issue is involved, we think it fit to pass a consolidated order. The ground taken in assessment year 2006-07 is that the ld. CIT(Appeals) erred in deleting the addition of Rs. 9.00 lakhs made by the AO without considering the fact that the payment made to Shri Anil Gupta, Chief Executive and father of the partner, was excessive and unreasonable as he was lacking required qualification and experience for holding this post and provisions contained in section 40A(2)(b) were clearly attracted on the facts of the case. The dis allowance in assessment year 2007-08, made by the AO, amounts Rs.6.00 lakhs, which has also been deleted by the ld. CIT(A). As the facts are similar, we proceed with the facts in the appeal for assessment year 2006-07.
2. The facts are that the return declaring loss of Rs. 12,67,574/- was filed on 31.10.2006. The assessment proceedings were initiated by issuing notices u/s 143(2) and 142(1). The assessee is engaged in the business of running a restaurant and bar. In this year, expenditure of Rs. 12,67,068/- was incurred as salaries, out of which salary of Rs. 12.00 lakhs was paid to Shri Anil Gupta, father of Shri Sahil Gupta, partner. The assessee was requested to justify the reasonableness of the amount of salary paid to him. It was submitted that Shri Anil Gupta is looking after all activities like arrangement of parties, marketing, events and presentation etc. of the restaurant and the bar on a day-to-day basis in the capacity of “Chief Executive”. He has been appointed by the partners on a gross salary of Rs.1.00 lakh p.m. The copy of appointment letter was also filed. It was further submitted that he was appointed after conducting interview and appointment letter dated 25.3.2004 was issued to him mentioning inter-alia that the role and responsibilities would be as per norms set by the organisation and it may used your services for any other assignment, as deemed fit. The AO considered the facts of the case. It is mentioned that no specific assignment has been given to Shri Anil Gupta. Various clauses of the appointment letter require him to maintain safe custody of papers, books and magazines, secrecy and discipline and not to engage in any other occupation. He has been appointed with effect from 1.4.2004 till he attains the age of 58 years. There is no evidence regarding experience or specialised qualification required in the hospitality industry. Out of total expenditure of Rs. 12,67,068/- under this head, a sum of Rs. 12.00 lakhs has been paid to him. Thus, it has been held that the salary paid to him is not commensurate with his qualification, knowledge, experience and is unreasonable having regard to the duties assigned to him. It is also mentioned that similar services can be obtained by paying salary of Rs. 25,000/- p.m. Therefore, it has been held that excessive salary was paid to him and the amount was quantified at Rs.9.00 lakhs. The facts for assessment year 2007-08 are similar with some further elaboration. It has been mentioned that apart from Shri Anil Gupta, Mrs. Shalini Gupta and Mr. Birju were working as Receptionist and Attendant, who were paid salaries of about Rs. 1,04,500/- and Rs. 77,400/- respectively for the whole year. The AO considered the salary of Rs. 50,000/- p.m. to be reasonable and disallowed an amount of Rs. 6.00 lakhs by invoking the provision of section 40A(2)(b).
3. Aggrieved by the order, the assessee moved appeal before the ld. CIT(Appeals). Apart from the facts submitted before the AO, it was submitted before him that Shri Anil Gupta is assessed to tax and in his case the tax is paid at maximum marginal rate of 30%. The ld. CIT(A) considered the facts of the case and submissions made before him and passed similar orders for both the years. On the basis of the fact that Shri Gupta was assessed to tax at maximum marginal rate, it has been inferred that the assessee did not employ any devise to avoid payment of tax. Further, it has been mentioned that the AO made dis-allowances on his subjective observation that similar services could be obtained by paying Rs. 25,000/- p.m. or Rs. 50,000/- p.m. In this connection, it needs to be appreciated that the assessee derived income of Rs. 23.07 lakhs and Rs. 32.96 lakhs in these years. Being a closely held firm, the assessee thought it fit to engaged the father for taking care of its interests which was a collaboration between Shri Sahil Gupta and R.J. Cuisine. Shri Anil Gupta is aged about 54 years. The expenses incurred on personnel primarily consists of the salary paid to Shri Anil Gupta. It is further mentioned that no evidence has been brought by the AO for coming to the conclusion that the payment of salary was excessive. Therefore, the additions made in both the years were deleted.
4. Before us, the ld. DR drew our attention towards the discussion in paragraphs nos. 4 to 6 of the assessment order and paragraph no. 5.2 of the impugned order, which has already been summarized by us. It is fairly admitted that no comparable case has been brought on record by the AO to come to the conclusion that the salary was excessive having regard to the services rendered by the employee to the assessee-firm.
5. We have considered the facts of the case and the submissions made before us. It is a fact that being the father of a partner, the provisions contained in section 40A(2)(b) are applicable to the facts of the case. Therefore, the payments made to him have to be examined in the light of the provisions contained in section 40A(2)(a), which reads as under:-
“40A(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.”
5.1 From the language of the provision, it is clear that the dis allowance can be made if the AO is of the opinion that such expenditure is excessive or unreasonable having regard to -(a) the fair market value of goods, services or facilities or (b) the legitimate needs of the business or (c) the benefit derived by or accruing to the assessee therefrom. The revenue has taken the ground that the salary paid to Shri Anil Gupta was excessive and unreasonable having regard to the fair market value of the services rendered by him. It is admitted before us by the ld. DR and it is also a matter of fact on record that no enquiry has been made in respect of the fair market value of the services rendered by Shri Anil Gupta to the assessee-firm. No comparable case has been brought on record. On the other hand, the ld. CIT(A) has clearly mentioned that the services were engaged to take care of the interest of the firm and the firm has been able to derive income of about Rs. 24.00 lakhs in these years. These findings have not been displaced by the ld. DR in any manner. Otherwise, tax has been deducted at source from the salary paid to Shri Anil Gupta and composition of his total income is such that a part of it falls within the maximum marginal rate of tax. In absence of any evidence that the fair market value of services rendered by him to the firm was less than the actual amount paid to him, we are of the view that the ld. CIT(A) was right in deleting the dis allowances made by the AO.
6. In the result, the appeals are dismissed.
This order was pronounced in the open court on 19.11.2010.