B.K. Anand, CA for the Assessee. Alka Gautam, Sr. DR for the Revenue

(A) This appeal by Assessee is filed against the order of Learned Commissioner of Income Tax (Appeals)-2, New Delhi, [“Ld. CIT(A)”, for short], dated 13.11.2019 for Assessment Year 2013-14. Grounds taken in this appeal of Assessee are as under:

“1. That the Authorities below erred in disallowing Rs. 1,00,66,740 out of total interest paid with complete disregard to the fact that the assessee had itself added back Rs. 1,16,43,087/- out of the interest paid as per Profit & Loss Account and hence needs to be deleted.

2. That in the absence of material on record to prove that the payment of enhanced remuneration to the whole time Director was excessive or unreasonable having regard to the fair market value of the service rendered the learned CIT(A) erred in sustaining the disallowance of Rs. 6,00,000 as made by the AO, which needs to be deleted.

3. That the learned CIT erred in not holding that the AO disallowed the rent of Rs. 54,00,000 for premises used partially for the residence of the Director and partially for business purposes u/s 37 (of Income Tax Act, 1961) contrary to the provisions of section 38 (of Income Tax Act, 1961) and as such the disallowance cannot be sustained.”

(B) The return of income was filed on 30.09.2013 by the Assessee showing total income of Rs. 66,03,420/-. Initial assessment order dated 18.01.2016 was passed by the Assessing Officer (“AO’, for short) on 18.01.2016 making an addition of Rs. 39,950/- on account of interest on TDS; thereby assessing the total income at Rs. 66,43,370/-. Order under Section 263 (of Income Tax Act, 1961) (“I.T. Act”, for short) dated 28.03.2018 was passed by Ld. Principal Commissioner of Income Tax, (“Ld. PCIT”, for short), directing the AO to frame the assessment afresh. Fresh assessment order dated 03.12.2018 was passed by the AO under Section 263 (of Income Tax Act, 1961)/143(3) of I.T. Act wherein the assessee’s income was assessed at Rs. 2,26,70,161/- (rounded off to 2,26,70,160/-). In the aforesaid fresh assessment order dated 03.12.2018, additions amounting to Rs. 1,00,66,740/- (on account of disallowance of interest on loan); Rs. 6 lakhs (on account of disallowance out of Director’s Remuneration ) and Rs. 54 lakhs ( on account of disallowance of rent) were made by the AO. The relevant portion of the Assessment Order is reproduced below for ease of reference:

“6. Further vide notesheet entry dated 13.11.2018, the CA/AR of the assessee was asked to submit reply according to questionnaire dated 26.09.2018 alongwith documentary evidences. In response, neither anybody attended nor filed any written submission till date. The onus to prove genuineness of transactions is on assessee to substantiate its claim in return o income. But the assessee has failed to do the same.

As the assessee has failed to substantiate its claim, the following disallowance /addition is being made:-

(i) Interest on loan:- The assessee company has advance long term loan of Rs. 22,54,94,660/- to M/s Durga’s Global Hotel U.K. Rs. 24,44,560/- to Sikandra Auto India , Rs. 9,00,000/- to S.C. S.C. bloc and Rs. 9,98,570/- to Sushil Motors. The assessee has not charged any interest on these advances whereas the assessee has paid significant amount as interest on loans. Regarding these Advance/loans, the AR of the assessee company submitted that the assessee company is expected better returns in future from UK company and hence not charged any interest. For rest advance/loans, the AR activities, those are not materialized at all. The plea of the assessee company is not acceptable on the basis that on one hand the assessee company is paying interest on loan taken from others and on the other hand the assessee is not receiving interest income from the loan/advances giv ne to others. The justification submitted by the AR of the assessee company is not acceptable hence, interest on loan of Rs. 1,00,66,740/- debited in profit & loss account is hereby disallowed.

(ii) Director’s Remuneration:- The Assessee Company has increased remuneration of Mrs. Geetanjali Behl from Rs. 6,00,000/- during the year under consideration whereas there is downfall in business of the assessee company.

The AR of the Assessee Company submitted that the remuneration is duly authorized by the Board Resolution. This plea of AR of the assessee company is not acceptable on the basis that even a Private Limited Company must have a credible and transparent policy in determining and accounting for the remuneration of the directors. Directors or Promoters of a Private Companies cannot simply divert the funds from corporate accounts to their personal accounts in the name of remuneration, to reduce the tax burdens or for any other reasons. Hence the remuneration of Rs. 6,00,000/- enhanced during the year under consideration is being disallowed and added to the income of the assessee company.

(iii) Rent Paid for property:_ The AR of the assessee submitted that the rented property was not utilized personally at all by the director’s. This plea of the assessee is not acceptable as the plea is contravening the terms and conditions of the lease deed. Para 1(b) of the Lease Deed Clearly state that the premises shall be exclusively used for the residential purpose of Mrs. Geetanjali Behl, Chairperson of the Lease Company. Accordingly the expenses of Rs. 54,00,000/- claimed by assessee company is disallowed as the expenditure is not incurred wholly and exclusively for the purpose of business.

(Disallowance of Rs. 54,00,000/-)

6.1 In view of the above, I have reasons to believe that the assessee has furnished inaccurate particulars of its income and therefore penalty proceedings u/s 271(1)(c) (of Income Tax Act, 1961) are being initiated separately for furnishing inaccurate particulars of income mentioned at para 6 above.”

(C) The assessee filed an appeal before the Ld. CIT(A). Vide impugned appellate order dated 13.11.2019, the Ld. CIT(A) dismissed assessee’s appeal, sustaining all the aforesaid additions made by the AO in the aforesaid fresh Assessment Order dated 03.12.2018. The relevant portion of the aforesaid impugned appellate order dated 13.11.2019 is reproduced as under for ease of reference:

“6.1 Ground no.1:- This ground is directed against addition of Rs. 100,66,740/- u/s 36(l)(iii) (of Income Tax Act, 1961) on account of disallowance of interest as the appellant extended interest-free advances by diverting interest-bearing funds for non-business purposes. During the hearing of set aside case, the appellant submitted that the appellant is expected to get better returns in future and therefore, did not charge ’any interest from the party.

As this justification does not have any merit, it was not accepted.

6.2 During the appellate proceedings, it is submitted that the appellant has already added back the entire interest amount of Rs. 1,16,83,520/- in computation of income as well as return of income. This submission was not made before the AO.

The appellant has not clarified why the submission was not made before the AO.

Further, it is not supported by any documentary evidence like return of income.

Hence, this being an entirely new argument without any basis is rejected.

6.3 The appellant, at any stage, has not established the business nexus of interest-free advances. In view of this, I’m not inclined to interfere with the decision of the AO and the addition is confirmed. This ground is ruled against the appellant.

6.4 Ground no.2:- This ground is directed against addition of Rs.6,00,000/- on account of disallowance of remuneration paid to the director. The AO has noted that the director received remuneration of Rs.6,00,000/- in the earlier year which was increased to Rs. 12,00,000/- which is double the amount of remuneration in the earlier year. As against this phenomenon increase of remuneration, today is a downfall in the business. The appellant has not been able to establish the justification of this excessive payment whereas AO has noted that business is going down.

6.5 During the appellate proceedings, the appellant has agitated that the AO has not mentioned any section under which the disallowance was made. It also submitted that if the disallowance has been made u/s 40A(2) (of Income Tax Act, 1961), the AO had to determine a reasonable remuneration which was not done. However, it is observed that the AO has already allowed Rs. 6,00,000/- as remuneration and disallowed only the increased part of remuneration during the year.

6.6 No justification was given during the appellate proceedings for this phenomenal increase in the remuneration of the director. The logic of the AO appears justified that this is nothing but a ploy to divert the funds from corporate accounts to personal accounts in order to suppress the taxable income of the company. The addition is, therefore, sustained and the ground is ruled against the appellant.

6.7 Ground no.3:- This ground is directed against addition of Rs.54,00,000/- on account of disallowance of rental expenditure. The AO has noted that the lease deed for rented/leased property clearly shows that the premises were exclusively used by the director for residential purposes. However, the appellant had submitted that the property was not utilized personally by the director. As the documentary evidence goes against the submission of the appellant, the AO made addition accordingly.

6.8 During the appellate proceedings, it was agitated that the rent paid for residential accommodation of the director is a business expenditure. No legal justification or any judicial precedence has been relied on by the appellant in support of the claim. The submission is devoid of merit and is rejected. This ground is ruled against the appellant.”

(D) Assessee filed the present appeal in Income Tax Appellate Tribunal (“ITAT”, for short) against the aforesaid impugned appellate order dated 03.12.2018 of Ld. CIT(A). Vide order dated 06.03.2020 in S.A. No. 162/Del/2020, coordinate Bench of ITAT, Delhi stayed the entire demand in the case of the assessee which resulted from the aforesaid impugned appellate order dated 13.11.2019 of the Ld. CIT(A). In the appellate proceedings in ITAT, the following papers were filed from the assessee’s side:

(1) Paper book consisting of the following

i. Copy of written submissions dated 05/11/2019 filed before CIT(Appeals)

ii. Copy of Computation of Total income for A.Y. 2013-14

iii. Copy of Abstract of Profit & Loss and Finance charges for accounting year 2012-

1. (2) Judicial Pronouncement:

i. Order dated 30 June, 2020 in the case of IKEA Trading (India) (P.) Ltd. vs. Deputy Commissioner of Income Tax, Circle 11(1) , New Delhi [2021] 123 taxmann.com 129 (Delhi-Trib.)

ii. Order dated 22.11.2019 passed by ITAT, Mumbai in the case of Acuity Holdings Pvt. Ltd. vs Dy. Commissioner of Income Tax in ITA No. 4011/Mum.2017 (E) First ground of appeal in the present appeal before us filed by the assessee is regarding the aforesaid disallowance of Rs. 1,00,66,740/- on account of disallowance of interest. At the time of hearing before us, the Ld. Counsel for assessee drew our attention to computation of total income filed by the assessee alongwith return of income; to show that the amount of interest of Rs. 1,16,43,087/- was suo-moto disallowed by the assessee; and that the aforesaid amount of Rs. 1,00,66,740/- disallowed by the AO was not even claimed by the assessee as an expenditure in the return of income. The Ld. Counsel for assessee strongly contended that there was no case for disallowance of Rs. 1,00,66,740/- when this amount was not even claimed from the assessee’s side. The learned Senior Departmental Representative (“Ld. Sr. DR”, for short) neither disputed this factual position, nor the contention made by the Ld. Counsel for the assessee. However, she relied on the orders of the Ld. CIT(A) and the AO. We find that there is no dispute on the fact that the aforesaid amount of Rs. 1,00,66,740/- disallowed by the AO, and sustained by the Ld. CIT(A), was not even claimed by the assessee as an expenditure in the return of income. That being the case, we agree with the contention of the Ld. Counsel for assessee that there was no case for disallowance of the amount of Rs. 1,00,66,740 on account of interest expenses. We direct the AO to delete this amount. Accordingly, first ground of appeal is allowed.

(F) The third ground of appeal is regarding disallowance of rent paid, amounting to Rs. 54,00,000/-. Relevant portions of the order of the AO and Ld. CIT(A) have already been reproduced in foregoing paragraphs (B) and (C) of this order respectively. At the time of hearing before us, the ld. Counsel for assessee drew our attention to order of ITAT, Mumbai in the case of Acuity Holdings Pvt. Ltd. vs. DCIT in ITA No. 4011/Mum/2017. The Ld. Counsel for the assessee also relied on the submissions made before the Ld. CIT(A) in written submissions dated 05th November, 2019 which is reproduced as below:

“6. Ground- of Appeal No. 3: The ground of appeal relates to disallowance of Rs.54,00,000 paid by the assesses Company for lease property taken on lease for the purpose of business of the assessee company.' During the course of the Massessment proceedings the' AO, following the direction of learned C.I.T. sought reason why such expense may not be disallowed as the premises was “used by director, ” The assessee filed reply which is reproduced in the assessment order, but the AO being dissatisfied disallowed the rent paid holding that- the expenditure "is not incurred wholly and exclusively for the purpose of business. ”

7. It is humbly submitted that the AO erred in disallowing the said rent amount paid, by the assessee company even if the premises in question was partially used for residence of working Director of the company. It is settled law that the director who works as a wholetime director is akin to any other employee rendering services to a company and rent paid for premises given to employees is for the purpose of business of the assessee. Further, section 30 (of Income Tax Act, 1961) provides for allowability of rent and section 38 (of Income Tax Act, 1961) for any apportionment thereof (if required).

The disallowance u/s 37 (of Income Tax Act, 1961) is otherwise not sustain able as the said section will apply to instances, of expenses which are not covered in the specific provisions of section 30 (of Income Tax Act, 1961) to 36 of the Act, which is not the case-in present appeal. In the circumstances it is prayed that the disallowance be deleted and appeal allowed.”

(F.1) The Ld. Sr. DR relied on the orders of the Ld. CIT(A) and the AO.

(F.2) We have taken due cognizance of the submissions made by the assessee in the appellate proceedings before the Ld. CIT(A). We have also considered the judicial pronouncement and other materials brought to our attention. We have perused the materials on record. We find that, it is the assessee’s case that director who works as the whole time director is akin to any other employee rendering services to the company and rent paid for premises given to employee is for the purposes of business of the assessee. At paragraph 6.8 of her impugned appellate order, dated 13.11.2019 of Ld. CIT(A) she has noted the assessee’s contention that rent paid for residential accommodation of the director is a business expenditure. However, on perusal of therecords we find that details of whether any tax was deducted at source by the assessee on account of perquisite to the director by way of rent-free accommodation, within the meaning of section 17(2) (of Income Tax Act, 1961) read with section 192 (of Income Tax Act, 1961); is not available on the records. Under Section 17(2) (of Income Tax Act, 1961), rent free accommodation provided by employer to an employee is the employees’ income under the head ‘Salary’, being a perquisite. Further, Under Section 192 (of Income Tax Act, 1961), the assessee was required to deduct tax at source in respect of salary payment made to the employee. We find that the lower authorities - the AO as well as the Ld. CIT(A) - have not examined this aspect; and the relevant facts are not available before us in the records. The assessee has also made a reference to Section 38 (of Income Tax Act, 1961) for apportionment of expenses U/s 38 (of Income Tax Act, 1961).

Under Section 38 (of Income Tax Act, 1961), a portion of the expenses is allowable to the assessee as deduction, having regard to use of the premises / building for the purposes of assessee’s business. We find that the lower authorities – the AO as well as the Ld. CIT(A) - have not considered the applicability of Section 38 (of Income Tax Act, 1961); and further, that the relevant facts are not available on the records on the basis of which fair apportionment can be made. Moreover, neither the assessee has furnished details for such apportionment; nor the lower authorities - the AO as well as the Ld. CIT(A)-have considered apportionment of expenses U/s 38(1) (of Income Tax Act, 1961). In view of these facts and circumstances, we are of the view that the relevant facts for deciding this ground of appeal are not available on records of the Tribunal;

and that these relevant facts are needed to be brought on record. Therefore, we set aside this issue to the file of the AO with the direction to pass a fresh order as per law for deciding the issue regarding allowability of rent paid amounting to Rs. 54,00,000/-; after providing the assessee a reasonable opportunity. For statistical purposes ground 3 is partly allowed.

(G) The second ground of appeal is regarding disallowance of Rs. 6 lakhs out of an amount of Rs. 12 lakhs paid by the assessee towards director remuneration. This disallowance was made by the AO, alleging that the amount of Rs. 6 lakhs was diverted from the corporate accounts (i.e from the accounts of the assessee) to the personal accounts (i.e. remuneration paid to the directors), to reduce the tax burden or any other reason. The Ld. CIT(A) has stated in her order that no justification was given during the appellate proceedings for increase in the remuneration of the director. She concluded that the logic of the AO, that this was nothing but a ploy, divert the funds from corporate accounts to personal account in order to suppress the taxable income of the company, appeared justified. At the time of hearing before us, the Ld. Counsel for the assessee contended that the observation of the Ld. CIT(A), that no justification was given during appellate proceeding, was factually incorrect. He drew our attention to written submissions dated 05.11.2019 in which detailed submissions were made by the assessee before Ld. CIT(A). The Ld. Counsel for assessee also relied on CBDT Circular No. 6-P dated 6-7-1968 which states that no disallowance is to be made U/s 40A(2) (of Income Tax Act, 1961) in respect of the payments made to relatives and sister concerns where there is no attempt to evade tax-Whether since Assessing Officer had not brought any comparable case to demonstrate that payments made by assessee were excessive /unreasonable and fact that payees were also assessed to tax at same rate of tax, Commissioner (Appeals) had rightly deleted addition. The Ld. Counsel for assessee contended that the assessee company as well as the director to whom the remuneration was paid, both were in the highest tax bracket; and paid tax at the highest rate. Therefore, there was no case for any disallowance out of remuneration paid to the director. The Ld. Counsel for assessee also relied on order of co-ordinate Bench of ITAT, Delhi in the case of IKEA Trading (India)(P.)Ltd. vs. Deputy Commissioner of Income Tax [2012] 123 taxmann.com 129 (Delhi-Trib.). The Ld. Sr. DR for Revenue relied on the orders of the AO and the Ld. CIT(A). We have heard both sides. We have perused the materials on record. We have considered the judicial pronouncement brought to our attention.

Although it has been contended by the Ld. Counsel for the assessee, for claiming benefit of CBDT Circular dated 6-7-1968, that the assessee company as well as the Director are both in the highest tax bracket; relevant papers to show the rate at which the Director is taxed is not available on our records. Moreover, whether the assessee has deducted tax at source under Section 192 (of Income Tax Act, 1961) in respect of the disputed amount of enhanced remuneration paid to the Director, is also not available on our record. We find that the lower authorities, AO as well as Ld. CIT(A), have also not examined these aspects; and have not brought relevant facts on record. Further, we find that for the purposes of Section 40A(2) (of Income Tax Act, 1961), relevant facts pertaining to enhanced remuneration paid to the Director, such as free market value, legitimate needs of assessee’s business and benefit derived by / accruing to the assessee are not available on the records. In view of the foregoing, we are of the view that the relevant facts for deciding this ground of appeal are not available on records of the Tribunal; and that these relevant facts are needed to be brought on record. Therefore, we set aside this issue to the file of the AO with the direction to pass a fresh order as per law on the dispute under second ground of appeal. For statistical purposes, 2nd ground is partly allowed.

(H) In the result, appeal is partly allowed.

Order pronounced in open court on 28/01/2021.