TMI Blog2014 (11) TMI 1151X X X X Extracts X X X X X X X X Extracts X X X X ..... contention of the Ld. A.R. that company was justified in paying the commission to the working directors which was quite reasonable. The lower authorities have not noticed these facts while deciding the issue under consideration. Disallowance of professional fees paid to three relatives under section 40A(2)(b) - Held that:- We find that the amount of remuneration paid was quite reasonable in view of the qualification of the said persons. It is not the case of the Revenue that the amount is excessive in comparison to market rates. The above said relatives of the assessee are duly qualified in their respective fields and in our view the assessee did not commit any illegality while availing their services and paying them reasonable remuneration for the purposes of business necessity. We, therefore, allow this issue in favour of the assessee. Disallowance being the consultation and legal charges - Held that:- Shri R. Vaze family filed a petition for operation and mismanagement before the Company Law Board. Due to the above disputes, company was not functioning efficiently with a view to bring settlement between the brothers/directors’ consultancy and legal fees were incurred for v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid as commission. He therefore disallowed the claim of deduction in respect of payment of commission to the above said directors in view of the provisions of section 36(1)(ii). 4. In first appeal, it was pleaded before the Ld. CIT(A) that the payment of commission to the above said directors was for commercial expediency being reasonable consideration for their qualification and experience and was a part of their salary. However, the Ld. CIT(A) was not satisfied with the submissions of the assessee and therefore he confirmed the addition. The assessee has thus come in appeal before us. 5. The Ld. A.R. of the assessee has submitted that Shri G.D. Kelkar was the Managing Director and Shri R. Vaze was the Working Director, who were appointed w.e.f. 01.01.01 to 31.12.05 on the following terms: 1) Salary (Rs.50000/- PM - 5000/- - 75000/- PM 2) Commission at 50% of salary subject to an overall ceiling of 1% of Net profits. 3) Co s contribution towards PF as per Rules of the company not exceeding 12% of the salary 4) Others such as Pension/Retirement benefits, Gratuity etc., 6. In accordance with the above terms, the salary paid for the year was ₹ 8,85,000/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market. There is no denial of the fact that the dividend of ₹ 3 crore was declared in the year under consideration. There seems merit in the contention of the ld. AR that the company has 29 shareholders and 4 directors whereas the commission was paid to two working directors only. So far the reliance of the Ld. D.R. on the special bench decision of the Tribunal in the case of Dalal Broacha Stock Broking P. Ltd. v. Addl. CIT (supra) is concerned, we find that the facts of the present case are quite distinguishable. In the said case there were only three shareholders who were directors of the company and no dividend was declared and there was no explanation as to why the dividend was not declared. Under such circumstances, we find force in the contention of the Ld. A.R. that company was justified in paying the commission to the working directors which was quite reasonable. The lower authorities have not noticed these facts while deciding the issue under consideration. 8. In view of our observations given above, the order of the lower authorities is set aside and the addition made on this account is ordered to be deleted. ITA No.7257/M/2010 (A.Y.2007-08 9. The sol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal of the assessee is allowed for statistical purposes. ITA No.678/M/2012 (A.Y. 2008-09) 12. In this appeal, the assessee has taken the following grounds of appeal: A) Sustaining disallowance of ₹ 10,94,18,059/- being the excise duty to the valuation of closing stock of finished goods, raw materials, packing material, fuel etc. 1. The learned Commissioner of Income Tax (Appeals) [CIT(A)] erred on facts and circumstances of the case in sustaining the disallowance of ₹ 10,94,18,059/- on account of addition of excise duty to the valuation of closing stock of finished goods, raw materials, packing materials, fuel etc. 2. The learned CIT(A) failed to appreciate that as per s.145A, addition of excise duty arises only when the liability is actually incurred, which arises only when the goods are cleared and hence, no addition is called to the goods lying in stock. 3. The appellant prays to your honours to delete the addition of ₹ 10,94,18,059/- made to the valuation of closing stock made u/s. 145A. B) Sustaining disallowance of Commission paid to Managing Director and Working Director of ₹ 84,00,000/- under section 36(1)(ii) 4. The learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressed. Ground Nos.4 to 6 14. Ground Nos.4 to 6 are relating to disallowance of commission of ₹ 84 lakhs under section 36(1)(ii) of the Act. The facts of this case being identical to assessment year 2007-08 and in view of the application for additional evidence of the assessee dated 16.01.14 and further in view of our observations made above during disposal of ITA No.7257/M/2010 (A.Y.2007-08), this issue is restored to the file of the AO for decision afresh accordingly. Ground Nos.7 to 9: 15. The issue taken by the assessee through ground Nos.7 to 9 is relating to disallowance of professional fees paid to three relatives of ₹ 3,42,000/- under section 40A(2)(b) of the Act. 16. The brief facts are that, during the year under consideration, the AO noted that the assessee had paid professional fees of ₹ 1,14,000/- each to three relatives namely Ms. Swati Sathe, Ms. Jyoti Bhadkamkar and Mr. Gaurav Sathe. He, therefore, disallowed the said amount under section 40A(2)(b). 17. In appeal, the Ld. CIT(A) also confirmed the said disallowance. The assessee has thus come in appeal before us. 18. Before us, the Ld. A.R. submitted that the professional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itors. For this purpose, the past records of the company including of tax matters and physical verification of assets was carried out. This shows that the expenditure claimed has not been incurred wholly and exclusively for the purpose of the business of the assessee. The consultancy fees paid for preparation for business report is capital expenditure. Reliance is placed on the decision in the case Vazir Sultan Tobacco Co. V CIT [1987] 35 Taxman 406 (AP). (ii) ₹ 25,28,100/- raid to Interlink Professional: The expenditure claimed to have been incurred for a new project which was aborted in the middle of first phase itself. Thus the expenses incurred for new project which did not materialize are of capital nature though no asset came into existence. Reliance is place on the decision in the case of M/s. Triveni Engineering Works Limited V CIT [1998] 232 ITR 639 (Delhi). (iii) ₹ 19,59,907/- paid to Earnest Young: The expenditure claimed to have been incurred preparation of DDR report and there was a proposal of Kotak Mahindra Bank to make investment with the assessee company. However, the processes was aborted and did not find favour with all the family member. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity has to be considered u/s. 37. As per the provision of section 37, the expenditure not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purpose of business shall be allowed. Unless the entire expenditure incurred is exclusively with sole motive of promoting the business, the expenditure will not qualify for deduction as upheld by various high courts. Further, commercial expediency and direct and immediate benefit to trade of the assessee are relevant factors, which in the case of assessee are not established. The expenses incurred must be directly and intimately connected with the character of assessee as trader, and not as a owner of assets as held in the case of Travancore Titanium Product Limited Vs. CIT [1966] 60 ITR 277 (SC). The assessee has not proved that any of the above expenses were incurred wholly and exclusively for the purpose of the business of the assessee and hence the same are disallowed. The total amount of the above expenses works out to ₹ 1,32,74,005/-which is disallowed and added to total income of the assessee. Penalty proceedings u/s.271(1)(c) are initiated. 20. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant company to successfully overcome the competition from some of the foreign companies such as Givaudan, International Flavours and Fragrances etc. Due to disagreement on certain decisions of the Board of Directors a group of shareholders, viz. Ajit S. Vaze, Mr. Girish S. Vaze and their families filed a operation u/s. 397-398 of the Companies Act against the company with the Company Law Board. The company was managed by 3 divisions of Kelkar Vaze family headed by Mr. G. D. Kelkar (who expired recently on 2nd March 2010) and 2 divisions of Vaze family (Ramesh Vaze faction and Ajit Vaze faction) which ultimately resulted in separation of these two factions from the company viz. The Ajit Vaze Faction and The G. D. Kelkar Faction. Because of this separation, there was every likelihood of the other two separated branches of the family entering the some field of Aroma Chemicals, Fragrances and Flavours for which your appellant company had to strengthen its production capacity by enlarging the scope of product manufactured with the introduction of new Aroma Chemicals. Fragrance and flavours on the production side, strengthen its marketing strategies by widening the market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be denied. Therefore, the disallowance made by the A.O. is confirmed. This ground of appeal is, therefore, dismissed. 22. Before us, the Ld. A.R. of the assessee has submitted that the legal expenditure was paid for representing and defending the company in the legal matters before the Company Law Board. It has been further contended that there was a dispute between the shareholders regarding the royalty encashed by Shri G.D. Kelkar, Managing Director of ₹ 4,86,69,596/-. Shri R. Vaze family filed a petition for operation and mismanagement before the Company Law Board. Due to the above disputes, company was not functioning efficiently with a view to bring settlement between the brothers/directors consultancy and legal fees were incurred for valuation purposes. The fee was also incurred for operation of new manufacturing facilities at Vashivali near Panvel, Raigad district. 23. From the above arguments it is clear that most of the legal and consultancy charges were incurred were related to inter-se dispute between two factions of the directors of the company. Even the other expenses as observed by the AO are of capital nature and are not allowable as revenue in nat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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