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2016 (1) TMI 366 - ITAT PUNE

2016 (1) TMI 366 - ITAT PUNE - TMI - Disallowance of commission paid to the Directors / shareholders - enhancement of income - assessee had claimed expenditure of ₹ 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( .....

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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 .....

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s 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 assess .....

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r the services rendered by them at ₹ 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 .....

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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 .....

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t 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 - ITA No.2201/PN/2012, ITA No.2280/PN/2012, ITA No.1767/PN/2013 - Dated:- 30-11-2015 - MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA, AM For The Assessee : Shri Sunil Pathak For The Department : Shri B.C. Malakar ORDER PER SUSHMA CHOWLA, JM: Out of this bunch of appeals, cross-appeals filed by the assessee and the Revenue are against t .....

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s consolidated order for the sake of convenience. 3. The assessee in ITA No.2201/PN/2012 has raised the following grounds of appeal :- 1. On the facts and in law the ld. CIT(A) has erred in making addition / enhancing income of ₹ 1,00,00,000/-. (Rs.1 crores). 2. On the facts and in law the ld. CIT(A) has erred in not appreciating the fact that the commission of ₹ 1 crore was paid for the services rendered by directors / shareholders, which resulted into substantial increase in turnov .....

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count of wrongly claimed as revenue expenditure. 2) On the facts and circumstances of the case, the CIT(A) has erred in not considering the fact that the expenditure on construction of Road and RCC Chambers was not yielding any extra income as admitted by the assessee itself before the Appellate Authority and as such it was not for business purpose and hence not allowable. 3) The appellant craves leave to amend, add, alter the above grounds, if felt necessary, later. 5. The assessee in ITA No.17 .....

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t appreciating the fact that the provisions of section 36(1)(ii) are not applicable to the facts of the case of the appellant. Your appellant craves, leave to add, alter, delete above or any other ground/s of appeal. 6. The issue arising in the appeals filed by assessee both in assessment year 2009-10 and 2010-11 is against the disallowance of commission paid to the Directors / shareholders. The facts and issue are identical in both the appeals. However, reference is being to the facts and issue .....

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of the assessee, who had received the contract from SMP Ltd., Jalgaon. The assessee in this regard had raised bills for ₹ 10.49 crores, against which work was allotted to ICSA and GPT Pipe Industries Limited. The Assessing Officer further considered the contract receipts received by the assessee from M/s. Siddhartha Construction and the explanation filed by the assessee in this regard and disallowed certain expenditure. One of the additions made by the Assessing Officer was on account of .....

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hereof, the revenue expenditure claimed to the extent of ₹ 74,66,434/- was disallowed and added to the income of the assessee. 8. The CIT(A) deleted certain additions made by the Assessing Officer on account of site office, motorable road, etc., against which Revenue is not in appeal. Further, the CIT(A) also deleted addition on account of underestimation of work in progress by calculating the work in progress at ₹ 2.37 crores as against work in progress shown by the assessee at S .....

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road. In respect of second expenditure on construction of RCC delivery chamber, the assessee claimed that the said construction had been lost due to the revised Board Conceptual Layout, which was finalized on 10.02.2009, hence the said expenditure of ₹ 45,55,000/- incurred on construction of RCC delivery chambers was claimed as revenue expenditure. The CIT(A) vide paras 7.5 and 7.6 allowed the claim of assessee, in view of terms of tender document, in which the assessee was required to ma .....

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er had not disallowed the said deduction claimed. The said show cause notice is reproduced under para 13 of the appellate order of CIT(A). In response to the same, the assessee furnished reply which is incorporated under para 13.1 at pages 33 to 36 of the appellate order. The CIT(A) observed that in addition to remuneration of ₹ 30 lakhs, commission of ₹ 1 crore was paid to three directors. The CIT(A) was of the view that where the assessee company had earned substantial profits to t .....

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(A) further observed that the Assessing Officer had failed to bring on record any evidence that the payment of commission commensurated with the market value of services. He further observed that the Assessing Officer had not considered the provisions of section 36(1)(ii) of the Act at all. Hence, the contention of assessee that the Assessing Officer had verified the said transaction of commission payment to the directors, was held to be not tenable by the CIT(A). The CIT(A) then, traced the wor .....

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and the same had been paid in the garb of commission. Only ₹ 1,90,000/- was proposed as dividend available out of profit of ₹ 93.48 lakh available for appropriation after payment of commission of ₹ 1 crore. The CIT(A) held that there was no justification in the contention of the assessee that increase in turnover / profit was due to extra efforts of the directors. As per the CIT(A), the payment was made with an intention to avoid full payment of taxes, hence, the contention of .....

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d Representative for the assessee pointed out that the assessee had paid commission of ₹ 1 crore to three directors in addition to the remuneration paid to them. The Assessing Officer had allowed the deduction on account of both remuneration and commission. However, the CIT(A) enhanced the income and disallowed commission paid to the directors. The learned Authorized Representative for the assessee fairly admitted that the commission was not paid in shareholding pattern, but was paid on ac .....

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assed by the assessee company, which is placed at page 128 of the Paper Book. Further, the contention of the learned Authorized Representative for the assessee was that all the directors were tax payers and in view of the profits earned by the assessee company, the Resolution was passed on 30.03.2009 to pay the said commission. Generally, the Resolution to pay the commission is passed in March of close of the year. It was further explained by him that the commission was paid to three directors o .....

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on the following decisions for the allowability of the claim of expenditure:- (i) CIT Vs. Career Launcher India Ltd. (2013) 358 ITR 179 (Del) (ii) AMD Metplast Pvt. Ltd. Vs. DCIT (2012) 341 ITR 563 (Del) (iii) New Silk Route Advisors (P.) Ltd. Vs. DCIT (2015) 55 taxmann.com 540 (Mumbai - Trib) (iv) K.L. Concast Pvt. Ltd. Vs. Addl.CIT (2013) 35 CCH 431 (Delhi - Trib) 12. The learned Authorized Representative for the assessee further pointed out that the CIT(A) had denied the said deduction as th .....

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presentative for the assessee further pointed out that apart from the provisions of section 36(1)(ii) of the Ac, the provisions of section 40A(2) of the Act were much more rigorous i.e. the related party transaction. Reference was made to the decision of Hon ble Bombay High Court in CIT. Vs. Indo Saudi Services (Travel) Private Limited (2009) 310 ITR 306 (Bom) for the proposition that if the payee has been paid, then there is no tax avoidance and hence, there was no disallowance under section 40 .....

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learned Departmental Representative for the Revenue further pointed out that there was no such terms of employment and in any case, the decision to pay the commission was at the fag end of the year. 14. The learned Authorized Representative for the assessee in rejoinder pointed out that the evidence of services rendered by the said directors is imminent as both the Assessing Officer and the CIT(A) have allowed the salary and the commission was paid at the end of the year. 15. We have heard the r .....

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ks, delivery chamber, etc. The assessee in the statement of facts filed before the CIT(A) had explained the nature of contracts to be the work of Lift Irrigation projects primarily involves lifting the flood water from rivers during the monsoon, using mechanical means like pumps, transporting the water by M.S. pipes and subsequently filling an earthen dam / reservoir at required elevation. Thereafter, the water stored in the dam is utilized during the balance year to irrigate the neighboring fie .....

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mperative for carrying on of the business in order to facilitate smooth and efficient movement of men and machinery / equipment. For the year under consideration, the turnover of the assessee company was ₹ 10.62 crores. The assessee had declared profit of ₹ 1,17,60,552/- and had debited commission to directors at ₹ 1 crore against the same. The claim of the assessee before the CIT(A), who had issued enhancement notice to the assessee during the course of appellate proceedings, .....

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it and in view thereof, the terms of contract had to be complied with by the assessee on behalf of the contractor. The assessee had not appointed any managerial person for managing the business, but on the other hand, the business was managed by the directors of the company. The directors of the assessee company belonged to Kotecha group, who had been awarded the contract work by TIDC and in order to execute the work, extra efforts were put in by the directors of the assessee company at the site .....

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ssion of ₹ 40 lakhs, ₹ 35 lakhs and ₹ 25 lakhs, respectively. The other three directors were not paid any commission. The claim of the assessee before us was that the said three directors had put in extra efforts to obtain the sub-contract and further to execute it during the year, which resulted in higher profits and hence, the decision by the directors of the assessee company to pay commission to the said persons. The assessee has placed on record the Agreement executed for a .....

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d to be executed by the assessee. The obligations of the contractor and the subcontractor are provided in the said Agreement. Admittedly, the assessee has carried on the aforesaid sub-contract work during the year under consideration. The income arising from the said work contract has been offered to tax by the assessee. In view of the awarding and earning of contract of ₹ 70 crores, the efforts of the three directors was acknowledged by the five directors of the assessee company, who were .....

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ting. Both of them were engaged in the execution of all the work and also management of the project. Another director Shri Prakash K. Kotecha was in-charge of accounts, banking and taxation. The commission paid to the three directors was as follows:- Directors Name Commission Prakash K. Kotecha Rs.40,00,000 Sachin Prakash Kotecha Rs.35,00,000 Rahul Prakash Kotecha Rs.25,00,000 17. The assessee in the written submissions filed before the CIT(A) has also filed detailed break-up of monthly sales / .....

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d the company in getting the projects. In the totality of the above said facts and circumstances, the issue arising before us is whether the assessee company is entitled to the claim of deduction of ₹ 1 crore paid as commission to the directors. 18. Under the provisions of section 36(1)(ii) of the Act, it is provided that the bonus or commission paid would be allowed as deduction without any restriction subject to the provisions of section 43B of the Act, wherein it is provided that the sa .....

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to the directors was hit by the provisions of section 36(1)(ii) of the Act. 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 c .....

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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 assess .....

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of CIT(A) in this regard. The assessee out of total profits of ₹ 93.48 lakhs available for appropriation, proposed dividend amounting to ₹ 1.90 lakhs only and the taxes on distributed profits were ₹ 0.30 lakhs. 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 .....

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d to the shareholders in view of dividend with the objective of avoiding taxes. The Hon ble Delhi High Court held as under:- 43. The final question that arises for this Court's determination in the present appeal is the assessee's claim for deduction under Section 36(1)(ii) of the Act in respect of the bonus paid by it to its two shareholders - Ashish Dhawan and Kunal Shroff. The lower authorities denied such claim, holding that the bonus was paid to the shareholders in lieu of dividend .....

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r, the bonuses paid to the two shareholder directors in the preceding two financial years were in the ratio of 60-65%: 40-35%, even though their shareholding was 1:1. The balance sheet of the assessee placed on record also indicates that the two shareholders also hold directorial positions in the assessee. Therefore, the assessee's contention that the bonus was paid to the shareholders in their managerial capacity, like in the case of other managers, cannot be questioned merely on the basis .....

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the assessee has placed reliance on series of decisions. The Hon ble Delhi High Court in AMD Metplast Pvt. Ltd. Vs. DCIT (supra) has laid down the ratio that where commission was paid as part and parcel of salary and TDS was deducted and where the director was liable to pay tax on both the salary and component in the commission, no disallowance was warranted under section 36(1)(ii) of the Act on the surmise that the dividend had to be paid to the shareholders in terms of the Companies Act. The .....

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or, then the same cannot be said to be distribution of dividend or profits in the guise of commission. Where commission was paid as a form of remuneration for actual services rendered, the dividend was a return on investment and was to be paid to all the shareholders equally. It was thus, held that if the commission was paid for actual services rendered, provisions of section 36(1)(ii) of the Act would not apply. 21. Another aspect to be kept in mind while allowing the claim of the assessee is t .....

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he facts of the present case, 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 the Hon ble Bombay High Court in such circumstances, no disallowance was warranted in the hands of payer as there was no attempt to avoid tax. 22. The CIT(A) while disallowing the claim of assessee had found support from the ratio laid down by the Mumbai Special Bench .....

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salary, then the disallowance of commission paid to managing director was not justified by applying the provisions of section 36(1)(ii) of the Act. Reliance in this regard was placed on the ratio laid down by the jurisdictional High Court in AMD Metplast Pvt. Ltd. Vs. DCIT (supra). In view thereof, the reliance placed upon by the Revenue on ratio laid down by the Mumbai Special Bench of Tribunal in Dalal Broacha Stock Broking (P) Ltd. Vs. Addl.CIT (supra) was held to be not correct, in view of t .....

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the assessee is entitled to the claim of deduction on account of commission paid to the directors for the services rendered by them at ₹ 1 crore. Accordingly, we direct so. The grounds of appeal raised by the assessee are thus, allowed. 24. The facts and issue raised in ITA No.1767/PN/2013 are identical to the facts and issues in ITA No.2201/PN/2012 and following the same parity of reasoning, we hold that the assessee is entitled to the claim of deduction on account of commission of ₹ .....

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The Assessing Officer made an addition of ₹ 74,66,434/- on account of alleged under estimation of work in progress by calculating work in progress at ₹ 2.37 crores as against work in progress shown by the assessee at ₹ 1.63 crores. The Assessing Officer made the said addition as per his observations in para 6.8 (VIII) at page 15 of the assessment order. 28. Before the CIT(A), the contention of the assessee was that from the assessment order, it could not be inferred as to on w .....

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ss. The amount was picked up from RA Bill. 30. The learned Authorized Representative for the assessee pointed out that the Assessing Officer had allowed the deduction on account of other roads constructed by the assessee except the road from Rigaon to site. Our attention was drawn to the details furnished at page 98 of the Paper Book. It was further clarified by the learned Authorized Representative for the assessee that the said road would not be the asset of the assessee company after the proj .....

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o site at ₹ 36,02,535/- and expenditure on RCC chambers of ₹ 45,50,000/-. The Assessing Officer had re-computed the work in progress of the assessee by including the aforesaid amounts as part of work in progress. However, the claim of the assessee was that the said expenditure was allowable as revenue expenditure and could not be included in the work in progress. The CIT(A) vide paras 7.5 and 7.6 observed as under:- 7.5 I have carefully considered the facts of the case and rival cont .....

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diture. 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, I am of the considered view that the A.O. is not justified in making the addition of ₹ 36,02,535/- by holding that the site road .....

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