TMI Blog2016 (1) TMI 366X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 - 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 the order of CIT(A)-II, Nashik, dated 11.09.2012 relating to assessment year 2009-10 against order passed under section 143(3) of the Income Tax Act, 1961 (in short the Act ). Further, the assessee is in appeal against the order of CIT(A)-II, Nashik, dated 22.08.2013 relating to assessment year 2010-11 against order passed under section 143(3) of the Income Tax Act, 1961 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /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 in ITA No.2201/PN/2012. 7. Briefly, in the facts of the present case, the assessee was a private limited company. The assessee furnished return of income declaring total income of ₹ 1,17,60,552/-. During the course of assessment proceedings, the Assessing Officer noted that the assessee was engaged in execution of lift irrigation scheme. The assessee had undertaken the work as a sub-contractor from M/s. Siddhartha Construction, proprietor Shri Sunil M. Kotecha, Jalgaon i.e. sister concern 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectors, who had substantial shareholding, which as per the CIT(A) was disallowable under section 36(1)(ii) of the Act. The CIT(A) issued show cause notice under section 251 of the Act, since the Assessing Officer 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 the tune of ₹ 93.48 lakhs, the same could have been distributed as dividend. The assessee s contention that the commission was paid to the directors for their hard work and extra efforts for procuring the contract and its subsequent execution, as per the CIT(A) was not backed by any documentary evidence. The Board Resolution filed by the assessee as an evidence of extra service was rejected, since the Board was constituted by the director employees to whom the payment had been ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntative for the assessee fairly admitted that the commission was not paid in shareholding pattern, but was paid on account of services rendered by the directors of the assessee company. Our attention was drawn to page 34 para (3) of the appellate order, wherein the CIT(A) had noted that the assessee company s income was ₹ 2.17 crores. It was further explained by him that the said directors were instrumental in getting irrigation contracts, which resulted in higher profits. Our attention was drawn to the qualifications of the said persons placed at page 52 of the Paper Book and further to the Resolution passed 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 out of total of six directors. The learned Authorized Representative for the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id for allowing the claim of the assessee. The 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 rival contentions and perused the record. The assessee is a private limited company and is engaged in the business of execution of contract work of lift irrigation scheme. The assessee undertook the said work as sub-contractor of the principal contractor. During the year under consideration, the assessee was awarded sub-contract of Kurha- Vadhoda Lift Irrigation Scheme at Muktainagar Taluka, Dist. Jalgaon. The work consisted of rising main, online pump house, pumping machinery with electrical works, 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 L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors, there were enhanced profits for the year under consideration. 16. The assessee had claimed expenditure of ₹ 1 crore on account of commission paid to three main directors. The assessee has filed the details of directors remuneration and commission paid for the year under consideration, under which out of six directors, three directors i.e. Shri Prakash K. Kotecha, Shri Sachin Prakash Kotecha and Shri Rahul Prakash Kotecha were paid commission 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 award of sub-contract by M/s. Siddharth Construction to Arihantam InfraProjects Pvt. Ltd. at pages 74 to 105 of the Paper Book. As per the said contract, the designing, planning and execution of online pump house for Stage II, rising main along ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he concerned directors helped 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 said amount would be allowed as deduction in the year of payment. There is another restriction to the said allowability of deduction that in case unreasonably excessive payments are made to relatives or connected persons, the same could be disallowed under the provisions of section 40A(2) of the Act. It may be put on record that the 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. The CIT(A) has not held the payment made to the directors to be excessive in view of the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of ₹ 1 crore under section 36(1)(ii) of the Act. For the above proposition, we find support from the ratio laid down by the Hon ble Delhi High Court in Chryscapital Investment Advisors (India) Pvt. Ltd. Vs. DCIT (2015) 93 CCH 29 (Del), wherein similar issue arose in respect of payment of commission and its allowability as deduction under section 36(1)(ii) of the Act and its denial on the premise that the same was paid 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 with the objective of avoiding tax. Such inference was drawn from two facts: a) the bonus paid was in proportion of their shareholding in the assessee company, i.e. 2:1; and b) no dividend had been declared by the assessee. However, a perusal of an excerpt from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that where the commission has been paid to the directors and the taxes have been paid by the said directors on its income, then no disallowance is warranted in the hands of the assessee company. The Hon ble Bombay High Court in CIT. Vs. Indo Saudi Services (Travel) Private Limited (supra) have laid down the proposition that where the payee has been paid incentive commission, then there is no tax avoidance and hence, no disallowance under section 40A(2)(b) of the Act. Applying the same simili to the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the Revenue, the assessee had claimed deduction on account of expenditure incurred on construction of road and RCC chambers at ₹ 74,66,434/- i.e. the construction of road at ₹ 36,02,535/- and construction of RCC chambers at ₹ 45,55,000/-. 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 what account, the Assessing Officer had made the addition. The explanation of the assessee before the CIT(A) is incorporated under paras 7.2 to 7.4 at pages 22 to 25 of the appellate order. The CIT(A) vide paras 7.5 and 7.6 deleted the aforesaid addition, against which the Revenue is in appeal. 29. The contention of the learned Departmental Representative for the Revenue before us was that the aforesaid amount was disallowed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is to be included in WIP. The addition of ₹ 36,02,535/- is therefore, deleted. 7.6 As regards the expenditure on RCC chambers, it has been noticed that the appellant has incurred the expenditure of ₹ 45,55,000/- 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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