TMI Blog2015 (7) TMI 801X X X X Extracts X X X X X X X X Extracts X X X X ..... of the FAA is not a speaking order.He had not dealt with the objections raised by the assessee.As the basis for endorsing the reopening after four years is missing,so,we are reversing his order.We hold that the order passed by the AO and upheld by the FAA was not a valid order,as the twin conditions of reopening of the matter,after a period of four years,were missing.Effective ground of appeal filed by the assessee is decided in its favour. Directors remuneration for making disallowance u/s.14 A - Held that:- While completing the original assessment,the AO had called for information about commission payment and had considered it while computing the disallowance to be made under section 14A of the Act.At that time if he did not invoke the provisions of section 36(1)(ii)then it has to be presumed that he had applied his mind and had taken a conscious decision about the disputed item.It is not the case of the AO or the FAA that material was not available at the time of the original assessment.The AO has reviewed his original order and in our opinion in the reassessment proceedings it is not permissible. See M/s. OHM Stock Brokers Pvt. Ltd. Versus Commissioner of Income Tax-4, Mumb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, paid commission to two of its directors in particular against their full time rendering of services thus the disallowance is uncalled for as the said payment is not an appropriation of profits or a payment in lieu of dividend but purely a charge of against profits. ii) Without prejudice to above, any payment made even to a director with substantial holding purely in terms of appointment against the services rendered is outside the scope of Sec. 36(1 )(ii); thus the same cannot be attributed as distribution of dividend or profits in the guise of commission. As the payments have direct nexus to the services rendered, Sec. 36(1)(ii) has no role to play under the circumstances and the disallowance may be deleted. iii) The ld.. CIT(A) erred in confirming even the payment of remuneration of ₹ 9,60,000/paid to Directors as includible while making disallowance u/s.36(1 )(ii). iv) The lower authorities erred in considering disallowance u/s. 36(1 )(ii) of ₹ 26,47,146/as ₹ 26,57,146/which may be a typographical error that needs to be rectified. 3. Levy of Penal Interest u/s. 234A, 2348, 234C and 234D The Appellant, on merits, denies its liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guise of commission. As the payments have direct nexus to the services rendered, Sec. 36(1)(ii) has no role to play under the circumstances and the disallowance may be deleted. iii) The ld. CIT(A) erred in confirming even the payment of remuneration of ₹ 10,80,000/paid to Directors as includible while making disallowance u/s.36(1 )(ii). 3. Levy of Penal Interest u/s. 234A, 2348, 234C and 234D The Appellant, on merits, denies its liability to penal interest. 4. The Appellant craves leave to add, amend or alter all or any of the above Grounds of Appeal. ITA/6365/MUM/2013-AY.2007-08: 1. Defective jurisdiction - Issue of Notice u/s. 148 on a change of opinion - Re-assessment Order may be quashed i) The ld. CIT(A) erred in treating the issue of notice u/s. 148 as proper without appreciating that during original scrutiny assessment, entire materials pertaining to the issue as per reasons were furnished before the Assessing Officer who had duly applied his mind and infact considered the same claim while making disallowance u/s. 14A; therefore, in the absence of' any allegation that there was no true and full disclosure of material facts by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e u/s. 148 on a change of opinion Reassessment Order may be quashed i) The ld. CIT(A) erred in treating the issue of notice u/s. 148 as proper without appreciating that during original scrutiny assessment, entire materials pertaining to the issue as per reasons were furnished before the Assessing Officer who had duly applied his mind and infact considered the same claim while making disallowance u/s. 14A; therefore, in the absence of any allegation that there was no true and full disclosure of material facts by the Appellant, the jurisdiction acquired through the issue of notice u/s. 148 becomes defective and untenable for being tainted with a change of opinion and the Order may, consequently, be quashed. ii) The ld. CIT(A) ought to have appreciated that the notice u/s. 148 issued even within four years time has to have the support of any external tangible material in hand/records of the Assessing Office so as to form an opinion about possible escapement; otherwise, the very issue of notice becomes a nullity in the eyes of law as there was no reason to belief that the alleged claim or income has escaped the eye of taxability. iii) Without prejudice to above, the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fy and allow the remuneration to the directors which was not segregated from commission in the Tax Audit report and Director's report. 2.On the facts and in the circumstances of the case and in law,the impugned order of the Ld.CIT(A)is contrary to law and consequently merits to be set aside and that of the Assessing Officer be restored. 3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. ITA/19/MUM/2014-AY.2007-08: 1. On the facts and in the circumstances of the case and in law,the Ld.CIT(A) was not justified in directing the A.O. to verify and allow the remuneration to the directors which was not segregated from commission in the Tax Audit report and Director's report. 2.On the facts and in the circumstances of the case and in law,the impugned order of the Ld.CIT(A)is contrary to law and consequently merits to be set aside and that of the Assessing Officer be restored. 3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. ITA/20/MUM/2014-AY.2008-09: 1. On the facts and in the circumstances of the case and in law,the Ld.CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per section(1)(ii), only such commission payments are allowed as expenditure as any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend, if it had not been paid as bonus or commission. .The Directors of this company are also shareholders in the company.Clearly, the payments being made to the shareholders are not covered under this section to be eligible for deduction as the same could have been made to the director who is a share holder as disbursement of profit or dividend. Since, the assessee has violated the provisions of section of 36(1)(ii) in making such claim of commission payment as expenditure, I have reasons to believe that income chargeable to tax has escaped the assessment. Issue notice u/s.148 of the IT Act after seeking prior approval of CIT4, Mumbai vide letter No. .. as required u/s. 151 of the Income tax Act, 1961. He passed an order u/s.143(3)r.w.s.147 of the Act on 22.03.2013 computing the income of the assessee at ₹ 1.28 Crores. 3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er directors.He referred to the decision of Dalal Broacha Stock Broking (P) Ltd.(supra) and held that the commission paid to the two directors was not linked to any extra services rendered by them in due course of their duties,that the payment was apparently in lieu of the dividend and is a device to avoid payment of full tax,that the commission paid to the directors is not allowable u/s. 36(1)(ii) or 37 of the Act.As regards to the merit of the addition of commission u/s. 36(1)(ii),he observed that the AO had treated the entire payment made to the directors as commission,that the payment has been made in respect of both the salary as well as commission. Giving bifurcation of the fixed remuneration and commission, the FAA held that the payment of remuneration to the directors is based on the Resolution passed by the company in its General Body Meeting as well as guided by the provision of Sec.309(5A) of the Companies Act, 1956.He further held that the AO had not verified the eligibility / allowability of the remuneration to the directors which was allowable to the working director.He directed the AO to verify as to whether the remuneration was allowable to the directors and secondl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... four years are that there must be reason to believe that income chargeable to tax had escaped assessment and that such escapement of income is on account of omission or failure on the part of the assessee to disclose fully and truly all material facts for assessment of the income of the assessee for the year under consideration.In other words,in the absence of any satisfaction having been recorded by the AO,as required under the proviso to section 147 of the Act, that the income has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for the assessment year under consideration, the assumption of jurisdiction under section 147 of the Act would be invalid. ii.For the AO to invoke the provisions of section 147 of the Act,there must be material facts based on some reasonable belief which would have a material bearing on the question of under - assessment. iii.As long as it can be demonstrated that both the conditions were satisfied and that there was material before the AO on the basis of which he came to such a conclusion in what manner in the reasons recorded,he conveyes this is not mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d also like to refer to three judgments dealing with the issue.First of them is matter of Ohm Stock Brokers Pvt.Ltd.(351 ITR 443) of the Hon ble Mumbai High Court.Facts of the case were that the assessee,for the AY.s.2005-06 and 2006-07,had by letters dated 12.03.2007, and 31.08.2007 placed on the record before the AO the nature of payments, the agreements with the two directors in pursuance of which they were paid a fixed monthly remuneration and a commission/performance bonus representing 35% of the net profit before taxation as well as the a justification for the payment.The AO was apprised by the assessee of all the material facts necessary for the assessment and did not make any addition.He reopened the assessments after four years on the ground that under section 36(1)(ii) only such commission payments are allowed as expenditure as are for services rendered, where such sum would not have been payable to him as profits or dividend, if it had not been paid as bonus or commission.Deciding the writ petitions,the Hon ble Court held as under: Under the proviso to section 147 of the Incometax Act, 1961, where an assessment has been completed under section 143(3) ,the validity o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee had specifically placed before the Assessing Officer by its letter dated September 4, 2009, copies of the agreements dated June 16, 2005, between the assessee and its directors in pursuance of which remuneration was paid to them for the assessment year 200708 which included the payment of commission. The attention of the Assessing Officer was clearly and specifically drawn to the quantum of the fixed monthly remuneration and in addition to the payment of commission which was computed at a stipulated proportion of the net profits. The assessee explained the basis on which a decision was taken to make the payment of commission at a fixed monthly remuneration and the rest at a proportion of the net profits. According to the assessee, this decision was based on the volatility of the stock market and having regard to the fact that the income of the assessee from share business had reduced and in fact, it was ₹ 35.51 crores in comparison to the income of ₹ 57.07 crores for the previous year. This was, therefore, a case where the nature of the payment, the basis of the computation and the rationale for computing the remuneration to the two directors with reference to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the AO, the set off of unabsorbed depreciation for the AY. 1994-95 against the income of the AY.2004-05 was not in accordance with law and, consequently, income had escaped assessment. The second issue in relation to which the assessment was reopened was that while giving effect to the order of the Tribunal,income was computed under section 115JB without any addition on account of provision for diminution in the value of investment and provision for doubtful debts/ advances.In this regard reliance had been placed on a subsequent amendment made by the Finance (No. 2) Act, 2009 with retrospective effect from 01. 04. 2001.According to the AO,since the amendment to section 115JB had been brought about with retrospective effect from April 2001,he was ipso facto entitled to issue a notice under section 148 since the relevant income by way of diminution in the value of assets/investments which was required to be added back had not been brought to tax.The Hon ble Court held that the fundamental condition for reopening the assessment beyond a period of four years had not been fulfilled and that the notice was not valid and was liable to be quashed. 5.b.3.Lastly we would like to di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o believe that income chargeable to tax has escaped assessment but such reassessment cannot be initiated on a mere change of opinion to merely re-examine an issue on the basis of information or material which was already available to the Assessing Officer at the time of the completion of the original assessment. Reason to believe could never be an outcome of a change of opinion.Consequently,before taking any action, he is required to substantiate his satisfaction in the reasons recorded by him. If such reasons recorded disclose a mere change of opinion the assessment proceedings cannot be initiated. Once the Assessing Officer has made an assessment on the primary facts and documents placed before it, the Assessing Officer cannot at another point of time form another opinion on the same primary facts and arrive at a conclusion that he had committed an error or come to a conclusion that he has now reason to believe that income had escaped assessment and reopen the assessment proceedings. Further, on the basis of an audit report, notice under section 148 cannot be issued as such audit report cannot be regarded as information within the meaning of 147(b) the reasons recorded b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otices u/s.148 by the AO is in order and no interference is therefore called for.This ground of appeal is accordingly, dismissed. Nowhere he had discussed as to how the facts of the cases relied upon by him were applicable to the facts of the case under appeal.In these circumstances,in our opinion,the order of the FAA is not a speaking order.He had not dealt with the objections raised by the assessee.As the basis for endorsing the reopening after four years is missing,so,we are reversing his order.We hold that the order passed by the AO and upheld by the FAA was not a valid order,as the twin conditions of reopening of the matter,after a period of four years,were missing.Effective ground of appeal filed by the assessee is decided in its favour. As we have held that the assessment order for the AY.under appeal was not valid,therefore we are not adjudicating the second ground raised by the assessee. ITA./6364/Mum/2013-AY.2006-07: 6.Facts and circumstances of the case for the AY.under appeal are identical to the facts of the earlier AY.-the only difference is about the amount of commission.Therefore,following our order for AY.2005-06,we hold the order of the AY.under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in great length by us in the earlier part of the order.Following the same,we hold that action taken by the AO u/s.147of the Act with regard to the commission payment made to the Director is invalid.Even on merits the issue is covered by the judgment of Ohm Stock Brokers Pvt.Ltd.(supra).We find that facts of the judgment are almost similar to the facts of the present appeal.Therefore,in our opinion,the order of the FAA has to be reversed.Effective ground of appeal is decided in favour of the assessee as we are of the opinion that the reassessment order is not valid. As we have held the proceedings of section 147 invalid,so,we are not deciding the second ground of appeal. ITA./6366/Mum/2013-AY.2008-09: 10.Grounds of appeal for the year under consideration are identical to the grounds of earlier AY. the only difference is about the commission amount involved.Following our order for the the immediate past AY.We decide ground no.1 in favour of the assessee and hold that the reassessment proceedings were invalid.Ground no. 2 is not being adjudicated. ITA./17-18/Mum/201-AY.2005-06 2006-07: 11.Effective ground of appeal,raised by the AO in both the AY.s.is about dire ..... X X X X Extracts X X X X X X X X Extracts X X X X
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