2016 (1) TMI 366 - AT - Income Tax

Disallowance of commission paid to the Directors / shareholders - enhancement of income - assessee had claimed expenditure of Rs. 1 crore on account of commission paid to three main directors - CIT(A) had disallowed the claim of the assessee on the premise that where dividend was to be paid out of the profits of the assessee company the payment of commission to the directors was hit by the provisions of section 36(1)(ii) of the Act - Held that - The CIT(A) has not held the payment made to the directors to be excessive in view of the provisions of section 40A(2) of the Act which is a safeguard for controlling the payment to relatives or connected persons. Under the amended provisions of section 36(1)(ii) of the Act there is no restriction on the quantum of payment. However the spirit of section that where the expenditure has been incurred in connection with carrying on of the business the same is allowed as deduction the commercial exigency is to be viewed in the light of the requirement of business and the actual services rendered by the persons concerned. Looking at the nature of sub-contract executed by the assessee which is in specialized field it cannot be held that the same was carried out without the efforts of concerned directors. In any case the businessman is the best person to decide its affairs and expenditure cannot be disallowed on any surmises. We find merit in the plea of the learned Authorized Representative for the assessee that in case the concerned entity was a partnership concern under the provisions of section 40(b) of the Act 60% of the profits of business could be allowed as remuneration to the partners of the said entity. The assessee has furnished the details of directors remuneration and commission paid to the directors and the total of the same does not exceeds 60% of the profits. Merely because the assessee is a private limited company and had agreed to pay the commission to the directors by passing Resolution in this regard before the close of year the same cannot be brushed aside and the said expenditure was disallowed in the hands of assessee on mere surmises. In view thereof we hold that where the directors had given services and in recognition thereof there was proposal to pay commission to the said directors then the same could not be questioned merely on the basis of speculation by the Revenue that the same was to avoid payment of dividend tax. The assessee company had paid the commission to the directors who in turn had declared the same in their individual return of income on which taxes have been paid and applying the simili laid down by CIT. Vs. Indo Saudi Services (Travel) Private Limited 2008 (8) TMI 208 - BOMBAY HIGH COURT in such circumstances no disallowance was warranted in the hands of payer as there was no attempt to avoid tax.t the assessee is entitled to the claim of deduction on account of commission paid to the directors for the services rendered by them at Rs. 1 crore. Accordingly we direct so. - Decided in favour of assessee Disallowance of deduction on account of expenditure incurred on construction of road and RCC chambers - Assessing Officer had re-computed the work in progress of the assessee by including the aforesaid amounts as part of work in progress - CIT(A) deleted the addition - Held that - As held that the construction of site road is not capital expenditure and the same is allowable as revenue expenditure. The A.O. has held that the site road from Rigaon is to be included in W.I.P. In this regard the appellant has pointed out that the contractee is not required to pay any consideration towards site road and hence the said expenditure cannot form the part of W.I.P. This contention of the appellant is supported by tender document. In view of the above facts it is of the considered view that the A.O. is not justified in making the addition by holding that the site road is to be included in WIP. The addition is therefore deleted. As regards the expenditure on RCC chambers it has been noticed that the appellant has incurred the expenditure and paid the same to the sub-contractor M/s.SMPL who carried out the said work. As per the standard practice all the irrigation projects are to be approved by Central Design Organization Nashik i.e. CDO Nashik. The CDO has reviewed the irrigation projects and recommended latest surge protection devices which needed to be imported from abroad. As per the recommendation of the, CDO Nashik the revised Board Conceptual Layout (BCL) was finalized on 10/2/2009 with deletion of delivery chambers and on later date the appellant was informed about the revised BCL. In support of the above claim the appellant has filed copy of Boards Conceptual Design with relevant letters and enclosures. In view of the above facts the contention of the appellant that the expenditure incurred by the appellant on RCC Chambers is lost and cannot be included in WIP as at 31/3/2009 is found to be correct and hence accepted. The addition is therefore deleted. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of commission paid to directors/shareholders.
2. Deletion of addition made on account of wrongly claimed revenue expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Commission Paid to Directors/Shareholders:
The primary issue in the appeals filed by the assessee for the assessment years 2009-10 and 2010-11 revolves around the disallowance of commission paid to the directors/shareholders. The assessee, a private limited company, had paid a commission of Rs. 1 crore and Rs. 1.10 crore to three directors for the respective years, which was disallowed by the CIT(A) under section 36(1)(ii) of the Income Tax Act, 1961. The CIT(A) contended that the commission paid could have been distributed as a dividend and thus, was disallowable. The CIT(A) observed that the directors were substantial shareholders and the payment of commission was not backed by any documentary evidence of extra services rendered. The CIT(A) also noted that the rise in turnover and profit was due to the sub-contract awarded by a related concern and not due to the directors' efforts. The CIT(A) concluded that the payment was made to avoid full payment of taxes.

The Tribunal, however, found merit in the assessee's arguments that the directors had rendered significant services which resulted in higher profits. The Tribunal noted that the business was managed by the directors without any managerial personnel and the commission was paid in recognition of their efforts. The Tribunal also observed that the payment of commission was duly authorized by a Board Resolution and was in line with the commercial exigency of the business. The Tribunal held that the payment of commission was justified and allowable under section 36(1)(ii) of the Act. The Tribunal relied on various judicial precedents, including the decisions of the Hon'ble Delhi High Court in CIT Vs. Career Launcher India Ltd. and AMD Metplast Pvt. Ltd. Vs. DCIT, which supported the allowability of such commission payments. Consequently, the Tribunal allowed the assessee's appeals and directed the deduction of the commission paid to the directors.

2. Deletion of Addition Made on Account of Wrongly Claimed Revenue Expenditure:
The Revenue's appeal focused on the deletion of an addition of Rs. 74,66,434/- made by the Assessing Officer on account of wrongly claimed revenue expenditure. The Assessing Officer had re-computed the work in progress by including the expenditure incurred on the construction of a road and RCC chambers. The CIT(A) deleted the addition, observing that the construction of the site road was a revenue expenditure and not a capital expenditure. The CIT(A) noted that the expenditure on the road was necessitated by the terms of the tender document and was not to be included in the work in progress. Similarly, the expenditure on RCC chambers was incurred but subsequently lost due to revised project recommendations, and hence, could not be included in the work in progress.

The Tribunal upheld the CIT(A)'s findings, noting that the construction of the road and RCC chambers was essential for carrying out the business operations and was rightly claimed as revenue expenditure. The Tribunal observed that the Revenue had failed to controvert the findings of the CIT(A) and found no merit in the grounds of appeal raised by the Revenue. Consequently, the Tribunal dismissed the Revenue's appeal.

Conclusion:
The Tribunal allowed the assessee's appeals regarding the disallowance of commission paid to directors/shareholders and upheld the deletion of the addition made on account of wrongly claimed revenue expenditure, thereby dismissing the Revenue's appeal. The Tribunal's decision was based on a thorough examination of the facts, commercial exigencies, and judicial precedents supporting the assessee's claims.