9911796707
TMI Blog2024 (7) TMI 1481X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) and 142(1) of the Act were issued to the assessee. In response to the same, the assessee submitted the details called for. During the course of assessment proceedings, the AO observed that the assessee had paid a commission of Rs. 52,34,373/- to Shri Girish Chovatia, Director of the company. 2.1. The AO called for details of commission paid to Shri Girish Chovatia. It was also observed by the AO that Shri Girish Chovatia is holding 32.78 percentage shares of the company. In response to notice, the assessee submitted documentary evidences of contribution of Shri Girish Chovatia with supporting case laws in the matter, where it was held that in case payment is made against services provided by the directors, the disallowance cannot be made under section 36(1)(ii) of the Act. 2.2. During the course of assessment proceedings assessee submitted that - 1. Shri Girish Chovatia is a qualified MBA (Marketing) and responsible for the product development and sales into domestic as well as export market. 2. The pharma industry itself is highly competitive in nature. The monopoly phase of a new product gets rapidly eroded. Therefore, besides the regenerative demand there is a requireme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2AB) of the Act against total claim of Rs. 181.79 Lakhs claimed by the assessee. Based on report of DSIR, the AO restricted claim of the assessee to Rs. 310.92 Lakhs disallowing Rs. 26.33 Lacs. The AO allowed revenue expenditure of Rs. 26.33 Lakhs and disallowed weighted deduction amount of Rs. 26.33 Lakhs. 3. Aggrieved by the order of AO, the assessee filed an appeal before the Ld.CIT(A). 4. During the course of appellate proceedings, the assessee submitted that the facts of the case relied upon by the AO and assessee's facts are completely different. In the case referred by the AO, the Special Bench had observed that no evidence on record was available to support the fact that the Director had rendered extra services for the payment of commission or remuneration. 4.1. The assessee submitted that there are subsequent judgment of Mumbai Tribunal allowing payment of commission to Directors for extra services. These relied on the judgements are M/s.Nat Steel Equipment Pvt. Ltd. Versus DCIT-7 (171 ITD 482) (Mumbai) (2018). This judgment was passed by Mumbai tribunal on 13.05.2018, after considering the judgment of Special Bench in case of Dalai Broacha Stock Broking Pvt. Ltd., whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paras of the order are reproduced for the sake of clarity: "5. Decision: In this case, the appellant has raised two grounds of appeal. They are adjudicated as under: 4.1 Ground No.1: The Assessing Officer made the addition of Rs. 52,34,373/- on the ground that the appellant has made commission payment amounting to Rs. 52,34,373/- to the Director of the company Shri Girish Chovatia. During the course of assessment, the assessee submitted the details like board resolution authorizing such payment, proof of various meeting held by Shri Girish Chovatia at various exhibition/fairs/conference in last six years, country wise export sales arid various countries visited by Sri Chovatia in last 6 years. The Assessing Officer made the addition u/s. 36(1)(ii) of the Income tax Act, relying upon the judgement of Hon'ble Mumbai ITAT Special Judge judgement in the case of M/s Dalal Broacha Stock Broking Pvt Ltd vs Addl. Commissioner of Income tax. The Assessing Officer came to the conclusion that the appellant has adopted device to avoid payment of full taxes. Hence, made the addition u/s 36(i)(ii) of the I.T. Act. Now before me in the appellate proceedings, written submission has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. The Assessing Officer has relied upon Form 3CL issued by DSIR. It quantifies the allowable expenditure on scientific research (not being expenditure in the nature of cost of any land on building). The Assessing Officer has further mentioned that once DSIR in its Form 3CL has quantified the eligible expenditure, any expenditure so claimed by assessee would not fall under expenditure on scientific research. Hence, the Assessing Officer has clearly made out the case of excess deduction claimed by the appellant u/s 35(2AB) of the I.T. Act. I agree with the contention of the Assessing Officer. The appeal of the appellant is dismissed on this ground. 6. In the result, the appeal of the appellant is dismissed." 5. Not satisfied with the order of the Ld.CIT(A), the assessee is in appeal before us with following grounds: "1. Ld. CIT (A) (NFAC) erred in law and on facts in confirming disallowance made by AO of Rs. 52, 34, 373/- commission paid to Managing Director of the assessee company under the provisions of Sec. 36(1)(ii) of the Act. 2. Ld. CIT (A) (NFAC) erred in law and on facts in confirming action of AO without appreciating that commission was paid to the Director for rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s declared his total income (including commission) of Rs. 2,74,82,370/- and paid tax of Rs. 94,13,654/-. This shows that the payment of commission cannot be said to avoid the tax. 7.1. We have carefully examined the submissions and evidence provided by the assessee, as well as the relevant judicial precedents. It is observed that the AO primarily relied on the case of Dalal and Broacha Stock Broking Pvt. Ltd., which is factually distinguishable. In the present case, the assessee has provided substantial evidence demonstrating the services rendered by Shri Girish Chovatia and the resultant benefits to the company. 7.2. The case laws cited by the assessee before the Ld.CIT(A), particularly M/s Nat Steel Equipment Pvt. Ltd. and M/s.Marks Shipping Pvt. Ltd., support the view that commission paid for actual services rendered cannot be disallowed merely on the presumption of tax avoidance. The AO did not provide concrete evidence to show that the payment was made to avoid DDT. The assessee has clearly distinguished the judgement relied upon by the AO and the Ld.CIT(A). 7.3. Based on the facts and judicial precedents, we hold that the commission paid to Shri Girish Chovatia is an allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the Hon'ble High Court held that - "The impugned order is thus clearly hit by the vice of non-compliance of the principles of natural justice or audi alterm partem, the applicability of which even to the taxing statute cannot be ruled out. The competent authority passed this order under these provisions certainly exercising a quast-judicial function when he passed this order approving the expenditure incurred by the assessee on scientific research. No such unilateral action or determination could have been taken by the respondent secretary particularly when he chose to reduce the amount of expenditure incurred on scientific research as against the amount claimed by the assessee, to the detriment of the assessee company resulting in an adverse double tax effect as per the provisions of the Act." 8.4. We find merit in the assessee's contention. The AO's reliance solely on the DSIR report, without considering the detailed books of accounts and certification by a Chartered Accountant, is not justified. The principles of natural justice require that any reduction in the claim should be substantiated with clear reasons and the assessee should be given an opportunity to r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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