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TMI Blog2016 (9) TMI 1439X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-12) (iii)ITA No.130/Mds./12(Revenue's Appeal: 2012-13) 2. Revenue has taken altogether three grounds of which Ground Nos.1 & 3 are general in nature, requiring no specific adjudication. 3. The common ground in all these Revenue's appeal are related to the disallowance made by the AO U/s.40A(2) of the Act as payments of commission were considered excessive, which were deleted by the Ld.CIT(A). 4.0 Profit commission to Shri E.K. Pathasarathy: The learned Assessing Officer found that the assessee company has paid profit commission to Shri E.K. Pathasarathy, Chairman & Managing Director(CMD) apart from the payment of fixed salary as follows: Assessment year Commission Salary 2011-11 Rs.349.37 lacs 32.00 lacs 2011-12 Rs.371.86 lacs 60.00 lacs 2012-13 Rs.347.01 lakhs 60.00 lacs (being 20% of the Profit Before Tax) The AO found that the amount paid to Shri E.K. Pathasarathy falls under the ambit of section 40A(2) of the Act, since he is holding substantial interest in the company. It was submitted that Shri E.K. Pathasarathy was the founder director of the company ,with his high educational qualification, experience and leadership qualities he made the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor(CMD) of the company and was responsible for leading the company for long term strategy with a view to creating share holder value. His leadership role is responsible for all management decisions for implementing the assessee company's long term/short term plans. Because of his continuous efforts and the dedicated services, experience and marketing strategies and liaison with other organizations, the company has achieved the total sales of 142.25 crores for the year ended 31.03.2010. Further, the ld.A.R has highlighted that the company is one of the leading company for the production of slack adjusters. Further, the ld.A.R also submitted that it is not a new phenomena for payment of salary and profit commission in the industry. It is very common practice to make the payment of salary and performance based commission to the managerial staff of the companies in both private limited and public limited companies Further, ld.A.R relied on the following decisions in support of his argument. i) In the case of Abbas Wazir (P) Ltd. Vs. CIT reported in 265 ITR 77(Allahabad). ii) In the case of CIT Vs. Computer Graphics Ltd., reported in 285 ITR 84(Madras.) iii) In the case of CIT V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income tax act. 4.5 The assessee company is making the payment of commission to Shri E.K. Parthasarathy, right from the assessment year 2002-03 onwards, which was accepted by the Department. Though the rule of Res judicata is not applicable to the Income Tax proceedings but the rule of consistency does applicable to the tax assessment as referred by the Ld.A.R in the case of CIT Vs. LG Ramamurthy reported in 110 ITR 453(Mad.) & Radhasoami Satsang Vs CIT. In the case of same assessee for the different assessment years, contradictory decisions cannot be taken on the same set of facts. 4.6 The Ld.CIT (A) has referred the decisions of The Mumbal High Court in the case of Karondas Ranchhoddass vs. Commissioner of Income Tax (83 ITR 1), the Calcutta High Court in the case of Smt Sakti Rani Roy vs. Commissioner of Income Tax (115 ITR 722), the Allahabad High Court in the case of Commissioner of Income Tax vs. Kamala Town Trust (198 ITR 191), the Kerala High Court in the case of P.Krishna Warner (208 ITR 823) and the Delhi High Court in the case of CIT vs Neo Polypack (P) Ltd., (245 ITR 492) where in it was consistently held that the judicial propriety requires consistency and as long a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of business and it was paid for the benefit of the Directors. On appeal, the Ld.CIT(A) allowed the expenditure holding that the guarantee commission paid to the directors was reasonable. While deleting the addition the Ld.CIT(A) relied on the decision of Hon'ble Supreme Court in the case of Addl CIT Vs. Akkamamba Textiles Ltd., reported in (1998) 144 CTR (SC) 172 and in the case of Mahalakshmi Sugar Mills Co. Ltd. Vs. CIT in 252 ITR 0691(Del.). 6.1 Before us, the ld.D.R argued that the guarantee commission paid to the directors was in no way connection with service rendered by the Directors. Ld.D.R placed reliance on the assessment order and also relied on the decision of Hon'ble Karnataka High Court in the case of CIT Vs. United Breweries reported in 204 Taxman 244 (2012) and also the decision of Hon'ble Gujarat High Court in the case of Coronation Flour Mills Vs. ACIT reported in 314 ITR 1(2009). 6.2 On the other hand ld.A.R argued that directors have no personal responsibility to stand as a surety for the credit facilities granted by the banks. By standing as creditors for the purpose of loan granted by the banks, the liability of the directors increases and it is co-termin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quantum of the expenditure undertaken by an assessee for the AO has only to determine whether the transactions are genuine and real. The Authorised Representative of assessee also furnished a copy of sanction advice of the SBI dated 19.01.2007. 7. We have heard both the parties and perused the material on record. The assessee company has paid 2% of guarantee commission on Rs. 20.60 crores credit limits sanctioned by SBI to both Mr.Parthasarathy & Mrs. Radha Parthasarathy, Directors, aggregating the payment of Rs. 82.40 lacs. The assessee submitted that guarantee commission was paid in the earlier years also i.e. F.Y 2001-02 onwards which was accepted by the Department. There is no change in the facts as submitted by the assessee. The AO disallowed the commission holding that the payment was made for the personal benefit of the Directors without rendering any additional services. We have gone through the sanction advice of SBI dated 19.01.2007. The sanction order submitted by the assessee was relevant to the F.Y 2006-07 relating to the assessment year 2007-08 but not to the assessment year under dispute which is 2010-11. As per the sanction memo the existing credit limits under var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonal assets given as security. The assessee also has not furnished the evidence of wealth tax returns submitted to the Bank. The case Laws relied up on by the Ld CIT(A) as well as the Ld.A.R relates to the question whether the guarantee commission is an allowable expenditure or not for which the Hon'ble courts have answered affirmatively. But in the case of the appellant as discussed above the loans were granted on the strength of the financial soundness and the value of the assets of the company and there is no risk involved/foreseen to the directors. Therefore, the case laws relied by the assessee are not applicable in the assessee's case and there is no risk involvement to compensate the personal guarantee. The company has chosen to make the payment of guarantee commission as a source of income to the directors and the facts of the Hon'ble Karnataka High court in the case of United Breweries reported in 204 Taxman 244 are clearly applicable in the assessee's case. Accordingly, we hold that the payment of commission to guarantors is not wholly and exclusively incurred for the purpose of business and is not allowable deduction u/s. 37(1) of income tax act. Accordingly, the additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents dated 09.02.2008 and 01.10.2008 respectively. The commission was paid for promotion of sales to the above mentioned companies and the commission was payable to JBUK Ltd., after full realization of the export proceeds by the assessee as spelt out in these contracts. Sample details of export proceeds received and the payments of commission made thereafter were furnished by the assessee in support of its contention before the Ld.CIT(A) and being satisfied with the explanation, deleted the disallowance made by the AO. 8.4 Being aggrieved by the order of the ld. CIT(A) the revenue filed appeal before us. The Ld.D.R has argued that the JBUK ltd is foreign company in which Mr.John Bruce is holding substantially. Mr. John Bruce is holding 22.22% stake in the assessee company and paid commission without rendering any services. Further DR also stated that the assessee company has not furnished any details called for by the AO to support or substantiate the services rendered by the JBUK. Mere agreements and the details of export commission are not conclusive proof of the services rendered by the JBUK without supporting documents. The DR further argued that there was no evidence to suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erned, JBUK exhibits the assessee's products at trade fairs in St.Petersburg and Moscow developed appropriate marketing literature in Russian for those fairs. The assessee's current business in Russia was built on the contacts of JBUK made at those exhibitions. The A.R brought our notice that Specifically JBUK does the following to propel the assessee's business with Kamaz: (i) schedules regular visits to Kamaz; (ii) schedules regular training for local team to deal with Kamaz; (iii) has a timetable for regular reviews with the assessee in relation to Kamaz's business and in light of discussions with Kamaz in such reviews, JBUK sets product performance standards/revise them regularly when market conditions change; (iv) provided back-up service to Kamaz (v) gets the useful feedback and relevant information. 8.7 The A.R further stated that the JBUK has invested (and continues to invest) a great deal of time and resources to develop maintain strong relationships with Kamaz which results in a stable contract and a beneficial pricing for the assessee. It should be noted that since JBUK is an European company, Kamaz tends to trust JBUK because of the trust that Russian companies have to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n South Korea. The assessee also submitted that M/s.John Bruce (UK) Ltd., has promoted the sales of the company by arranging in trade fairs at Russia. The details of sales made were furnished by the assessee. However as per the assessment order the assessee company has not furnished the information called for by the AO. Even the agreements were not furnished before the AO . The paper book submitted by the AR is not certified by either assessee or the AR. Therefore, we are of the opinion that the material placed before the Bench is not made available to the AO. The assessee had submitted the details of commission paid, and the invoice amounts, but not placed the copies of invoices to verify whether the sales were made through the JBUK or not? The Ld.CIT(A) examined the agreements and came to conclusion that the expenditure was incurred for the purpose of business but he has not given any opportunity to the AO. Therefore we are of the considered opinion that this issue requires further verification to examine the genuiness of expenditure. Therefore we deem it fit to remit the matter back to the AO. Accordingly we direct the AO to examine the issue decide the issue as per law and meri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed from Rs. 35.50 lacs to Rs. 60.01 lacs in the A.Y 2011-12 on wards commission was paid additionally without giving any valid reason and additional responsibility. Though there were several employees working in the company in various senior capacities no commission or incentive was paid to any of the staff. Therefore the AR argued that there is no business need for the payment of commission to Mrs P.S and the expenditure was not wholly and exclusively incurred for the purpose of business. 12. On the other hand, the Ld A.R submitted that the salary compensation of Mrs.P.S consists of (a) a fixed portion of monthly salary and (b) a variable portion (profit commission )@5% of the profits from the A.Y 2011-12 and 10% from Assessment year 2013-14 on wards annually. The variable portion is linked to the overall performance of the company computed with reference to the profits reflected in the audited accounts of the assessee. This variable portion varies from year to year depending on the performance of the assessee. The A.R. further submitted that Mrs.Priya Sriraman is highly educated having MBA degree and having vast experience and worked with various other companies and undertaken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has paid commission the A.O has not made any discussion and allowed the payment of commission. It appears that the AO has not examined the issue. For the A.Y year under consideration the A.O has made elaborate discussion and disallowed the payment of commission. Therefore the facts of the A.Y 2011-12 cannot be made applicable for the A.Y 2012-13. Though she is working in the company from 2008-09, for the first time the commission was paid to her from the A.Y.2011-12 despite the salary has increased from Rs. 35.00 lacs to Rs. 60.00 lacs .The reasons for payment of commission was not explained by the A.R in spite of huge increase in salary. The company was already paying the commission to Mr.E.K.Parthasarathy for overall management and improvement and growth of the company. In the earlier paragraphs the AR has explained in great detail how Mr. Parthasarathy has taken the company to the new heights. Any additional payment of performance based commission should be supported by the additional services rendered by the new recipient and improvement in performance and incremental benefit derived by the company but not at the whims and fancies of the management of the company. Tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and restore the order of the AO. The revenue's appeal on this ground is allowed. Assessee's Appeals in ITA No. 2259,2260 & 2261/Mds./2015 14. The common ground in all these three Assessee's appeal are related to disallowance made by the AO U/s.40A(2)(a) of the Act as payments of rent in respect of accommodation leased from Mr.Sriram Sivaram son in Law of Mr.E.K.Parthasarathy CMD of the company amounting to Rs. 40,16,160 for A.Y. 2010-11, Rs. 40,16,160 for A.Y. 2011- 12 & Rs. 45,18,180 for A.Y. 2012-13, , which was confirmed by the Ld.CIT(A). 15. During assessment proceedings, the AO found that the assessee company paid rent to its executive Director Mr.Sriram Sivaram for providing a "Rent Free Accommodation" as per the agreement with Mr.Sriram Sivaram, who happens to be the son-in-law of Mr.Parthasarathy,M.D. The AO was of the view that the rent paid by the assessee company is nothing but salarry/compensation paid in another form of distributing the profits. Mr.Sriram Sivaram has already been duly compensated with a fixed salary besides perquisites, which are much higher in comparison to what has been paid to Mr.Parthasarathy, who had put in decades of service with all his ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the AO. 18. On the other hand, ld.D.R advanced argument that in a company, no other employee was paid such rent by taking leased accommodation. Even otherwise, the director would reside in the same house, which was taken on lease. Since the company is a family run unit and the directors are the family members, the payment was made in the form of rent and the rent paid is taxable perquisite in the hands of Mr.Sriram Sivaram at a lower rates. Therefore, ld.D.R argued that the Ld.CIT(A) has rightly confirmed the addition. 19. We have heard both the parties and perused the material on record. Though the assessee has argued that the rent paid is reasonable comparing the other residential premises the assessee has not made out a case for taking the accommodation on lease from the Director and leasing out to him. There is no other person, who has been paid the rent in the similar manner in the company. Mr.Sriram Sivaram is a whole time director and there are other directors but no such facility was extended to any of the other directors. The leased accommodation is a taxable perquisite in the hands of Mr.Sriram Sivaram, which is much lower in rate. Mr.Sriram Sivaram is a Directo ..... 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