M/s. Ranadey Micronutrients Pvt. Ltd., Pune V. Assistant Commissioner of Income-tax,

ITA 137/PUN/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 7331 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 8 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-10-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 11-10-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 30-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR VIVEK AGGARWAL
• Assessee Lawyers: ARVIND SHONDE
• Keywords: Maximum Marginal Rate; Earning of tax free income
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . , , BEFORE SHRI D.KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.137/PUN/2015 / ASSESSMENT YEAR : 2010-11 M/S. RANADEY MICRONUTRIENTS PVT. LTD., SHRIKRISHNA, KRISHNAKEVAL TOWNSHIP, KONDHWA KHURD, PUNE 411 048 PAN : AAACR8134R . /APPELLANT VS. ACIT, CIRCLE-6, PUNE . / RESPONDENT . / ITA NO.217/PUN/2015 / ASSESSMENT YEAR : 2010-11 DCIT, CIRCLE-5, PUNE . /APPELLANT VS. M/S. RANADEY MICRONUTRIENTS PVT. LTD., SHRIKRISHNA, KRISHNAKEVAL TOWNSHIP, KONDHWA KHURD, PUNE 411 048 PAN : AAACR8134R . / RESPONDENT ASSESSEE BY : SHRI ARVIND SHONDE REVENUE BY : DR. VIVEK AGGARWAL / DATE OF HEARING : 11.10.2017 / DATE OF PRONOUNCEMENT: 18.10.2017 / ORDER PER D. KARUNAKARA RAO, AM : THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND T HE REVENUE AGAINST THE ORDER OF CIT(A)-4, PUNE DATED 16-12-2014 FOR TH E A.Y. 2010-11. 2. BACKGROUND FACTS ARE THAT THE ASSESSEE IS A PRIV ATE COMPANY AND ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF ORGANI C INORGANIC AND MICRONUTRIENT FERTILIZERS. ASSESSEE FILED THE ORIGINAL RETURN OF INCOME ON 29-09-2010 DECLARING ITA NOS.137 & 217/PUN/2013 M/S.RANADEY MICRONUTRIENTS PVT. LTD., 2 TOTAL INCOME OF RS.1,16,41,403/-. IN THE SCRUTINY ASSESSMENT MADE U/S.143(3) OF THE ACT, THE AO DETERMINED THE ASSESSED INCOME AT R S.2,01,61,000/-. AMONG MANY, THE AO MADE ADDITION OF RS.27,79,911/- ON ACC OUNT OF DISALLOWANCE U/S.14A OF THE ACT AND DISALLOWANCE OF COMMISSION U /S.40A(2)(B)(IV) R.W.S. 36(1)(II) AMOUNTING TO RS.41,33,000/-. AO REJECTED THE ASSESSEES SUBMISSION THAT REVOLVES AROUND THE SETTLED PRESUMPTION OF MAK ING INVESTMENT OUT OF THE INTEREST FREE FUNDS IN THE EXEMPT INCOME YIELDING I NVESTMENTS. IN THE PROCESS, THE AO STRICTLY FOLLOWED THE COMPUTATION PROVIDED I N RULE 8D(2) OF THE INCOME TAX RULES, 1962 AND DISALLOWED SUM OF RS.27,79,911/ -. WITH REGARD TO THE DISALLOWANCE OF COMMISSION PAID TO DIRECTORS AND EM PLOYEE RELATIVES, THE AO ANALYSED THE COMMISSION PAID BY THE ASSESSEE OVER T HE PREVIOUS YEARS AND LINKED IT TO THE TURNOVER/NET PROFITS AND HELD THE COMMISS ION PAID IS EXCESSIVE AND EFFECTIVELY, RESTRICTED THE COMMISSION PAYMENT OF. 3. DURING THE FIRST APPELLATE PROCEEDINGS, ON THE I SSUE OF DISALLOWANCE OF COMMISSION, THE CIT(A) CONSIDERED VARIOUS FACTS, I. E. BOARD RESOLUTION GRANTING COMMISSION AS CLAIMED IN THE RETURN OF INCOME, MAXI MUM MARGINAL RATE OF TAX PAID BY THE RECIPIENTS OF THE COMMISSION (COMPANY E MPLOYEES) ETC. AND ALLOWED THE CLAIM OF THE ASSESSEE AS PER THE DISCUSSION GIV EN IN PARA 6.2.4 OF THE IMPUGNED ORDER. WITH REGARD TO THE DISALLOWANCE RS .27,79,911/- U/S.14A, THE CIT(A) UPHELD THE COMPUTATION OF THE AO AND CONFIRM ED THE ADDITION. ASSESSEE SUO MOTO DISALLOWED AN AMOUNT OF RS.84,967/- UNDER CLAUSE (II) OF RULE 8D(2) OF THE I.T. RULES, 1962. 4. AGGRIEVED WITH THE CONFIRMATION OF THE ADDITION BY THE CIT(A) ON ACCOUNT OF DISALLOWANCE OF RS.27,79,911/- U/S.14A R.W. RULE 8D OF THE ACT, THE ASSESSEE IS IN APPEAL BEFORE US. FURTHER, AGGRIEVED WITH TH E RELIEF GRANTED BY THE CIT(A) IN CONNECTION WITH THE PAYMENT OF COMMISSION TO THE DIRECTORS/EMPLOYEES, THE REVENUE IS IN APPEAL BEFORE US WITH THE GROUNDS MEN TIONED HEREINUNDER. ITA NOS.137 & 217/PUN/2013 M/S.RANADEY MICRONUTRIENTS PVT. LTD., 3 ITA NO.217/PUN/2015 (BY REVENUE) : 5. WE SHALL NOW TAKE UP THE APPEAL OF THE REVENUE. GROUNDS RAISED BY THE REVENUE READ AS UNDER : 1. THE ORDER OF THE LD.CIT(A) IS CONTRARY TO LAW A ND TO THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF EXPENDITURE OF RS.41,33,000/- U/S.36(1)(III) R.W.S. 40A(2)(B)(IV) OF THE I.T. ACT MADE BY THE ASSESSING OFFICER ON ACCOUNT OF COMMISSION PAID TO WORKING DIRECTORS AND OTHER EMPLOYEES. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.CIT(A) HAS FAILED TO APPRECIATE THE FACT THAT TH ERE WAS ABNORMAL INCREASE IN PAYMENT OF COMMISSION DURING THE CURRENT YEAR AS CO MPARED TO PRECEDING YEAR ALTHOUGH THERE WAS REDUCTION IN PROFIT COMPARED TO PRECEDING YEAR. 4. FOR THIS AND SUCH OTHER REASONS AS MAY BE URGED AT THE TIME OF HEARING, THE ORDER OF THE LD.CIT(A) MAY BE VACATED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 5. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER OR DELETE ANY OF THE ABOVE GROUNDS OF APPEAL DURING THE COURSE OF APPELL ATE PROCEEDINGS BEFORE THE HONBLE TRIBUNAL. 6. FROM THE ABOVE, IT IS EVIDENT THAT THE SOLITARY ISSUE RAISED BY THE REVENUE RELATES TO THE RELIEF GRANTED BY THE CIT(A) WITH RE GARD TO THE PAYMENT OF COMMISSION TO THE DIRECTORS/EMPLOYEES. IN THE RET URN OF INCOME, THE AO NOTICED THAT AN AMOUNT OF RS.60,08,070/- WAS PAID A S COMMISSION TO THE DIRECTORS AND OTHER EMPLOYEES OF THE COMPANY. THE SAID CLAIM WAS CONSIDERED HIGHER BY THE AO CONSIDERING THE FACT THAT THE COMM ISSION PAID WAS ONLY RS.18.75 LAKHS IN THE PRECEDING YEAR. ON DOING ANA LYSIS OF THE NET PROFIT AND TURNOVER FIGURES, THE AO DISALLOWED THE CLAIM TO TH E EXTENT OF RS.4,130/- U/S.36(I)(III) R.W.S. 40A(2)(B)(IV) OF THE ACT. SO ME OF THE COMMISSION RECIPIENTS ARE COVERED BY THE DEFINITION OF SPECIFIED PERSONS PROVIDED U/S.40A(2)(B) OF THE ACT. DETAILS ARE GIVEN IN PARA NO.6 OF THE IMPUGNE D ORDER. 7. CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE CONTENTS OF WHICH ARE EXTRACTED IN PARA 6.1 OF THE IMPUGNED ORDER, THE CI T(A) DISMISSED THE CONCLUSIONS DRAWN BY THE AO AND DELETED THE ADDITIO N MADE BY THE AO. ITA NOS.137 & 217/PUN/2013 M/S.RANADEY MICRONUTRIENTS PVT. LTD., 4 8. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE READ OUT THE SAID WRITTEN SUBMISSIONS AND EXPLAINED THE ARGUMENTS ON THE FACT UAL MATRIX RELATING TO THIS ISSUE. HE FURTHER MENTIONED THAT THE AO MUST NOT S TEP INTO THE SHOES OF THE ASSESSEE WHEN IT COMES TO RUNNING OF THE BUSINESS A ND REQUIREMENT OF MAKING PAYMENT OF COMMISSION ETC. HE ALSO SUBMITTED THAT THE RECIPIENTS OF THE COMMISSION WERE TAXED INDEPENDENTLY AT THE MAXIMUM MARGINAL RATE. THEREFORE, THERE IS NO LOSS OF REVENUE ON THIS ACCO UNT. 9. THE LD. DR FOR THE REVENUE RELIED HEAVILY ON THE ORDER OF THE AO AND SUBMITTED FOR CONFIRMING THE ADDITION. 10. ON HEARING BOTH THE SIDES, WE HAVE GONE THROUGH THE PAPER BOOK FILED BEFORE US. WE HAVE ALSO ANALYSED THE REASONING GIV EN BY THE CIT(A) IN PARA 6.2.4 OF THE ORDER. WE FIND THE SAID PARA CONTAINS THE REASONING WHICH LED THE CIT(A) TO THE CONCLUSION OF GRANTING RELIEF. THE S AID PARA IS EXTRACTED AS UNDER : 6.2.4 APPLY THE RATIO OF THESE DECISIONS TO THE FA CTS OF THE PRESENT CASE, AS STATED HEREIN ABOVE, IT IS SEEN THAT THE COMMISSION HAS BEEN AUTHORIZED BY THE BOARD OF DIRECTORS KEEPING IN VIEW THE ACTIVE INVOL VEMENT BY THE DIRECTORS AND THE SERVICES RENDERED IN IMPROVING THE PROFITABILIT Y OF THE COMPANY. THE COMMISSION IS PART OF THE OVERALL COMPENSATION PACK AGE PAID TO THE DIRECTORS. COPIES OF THE INCOME-TAX RETURN AND FORM 16 OF THE FOUR DIRECTORS AND SHRI S.B. SHIRVALE, PRODUCTION MANAGER TO WHOM COMMISSION HAS BEEN PAID, REVEAL THAT ALL OF THEM HAVE DISCLOSED THE COMMISSION AMOUNTS IN TH EIR RESPECTIVE RETURNS AND PAID TAX AT THE HIGHEST RATE. AS IS EVIDENT, DIVIDE ND PAID BY THE APPELLANT COMPANY IN THE PREVIOUS YEAR AND SUBSEQUENT YEAR VI S-A-VIS THE YEAR UNDER CONSIDERATION IS NOT SIGNIFICANTLY DIFFERENT IN ORD ER TO SAY THAT THE PROFITS HAVE BEEN PAID AS COMMISSION. SO FAR AS THE CONTENTION O F THE ASSESSING OFFICER THAT THE COMMISSION PAID IS DISALLOWANCE U/S.40A(2)(A) I S CONCERNED, I FIND THAT THIS CONTENTION IS NOT SUPPORTED BY ANY COMPARABLE INSTA NCE TO SAY THAT THE COMMISSION PAYMENTS WERE UNREASONABLE. KEEPING IN V IEW ALL THESE ASPECTS, THE DISALLOWANCE IS HELD TO BE NOT JUSTIFIED AND THE GR OUND NO. 4 IS ALLOWED. 11. FROM THE ABOVE, WE FIND THAT THE CIT(A) CONSIDE RED THE FACT THAT THE COMMISSION WAS PAID AS PER THE BOARD RESOLUTION AND AUTHORISATION OF THE BOARD OF DIRECTORS. THE CIT(A) ALSO HELD THAT THE SERVIC ES RENDERED ARE PROPORTIONATE TO THE COMMISSION PAID BY THE ASSESSEE. SHE ALSO D ISCUSSED THE FACT THAT RECIPIENTS OF THE COMMISSION HAVE PAID THE TAXES ON THE SAID COMMISSION AT THE HIGHEST TAX RATE. SO FAR AS THE CONTENTION OF THE AO ON THE COMMISSION ISSUE ITA NOS.137 & 217/PUN/2013 M/S.RANADEY MICRONUTRIENTS PVT. LTD., 5 PAID TO RELATIVES, SHE MENTIONED ABOUT NOT BRINGING ANY COMPARABLE CASES TO DEMONSTRATE THE UNREASONABLENESS OR EXCESSIVENESS O F THE SAME. THEREFORE, IN OUR VIEW, THE VIEW TAKEN BY THE CIT(A) ON THIS ISSU E IS ONE OF THE POSSIBLE CONCLUSIONS. THE ORDER OF THE CIT(A) IS FAIR AND R EASONABLE ON THIS ISSUE AND IT DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, T HE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 12. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ITA NO.137/PUN/2015 (BY ASSESSEE) : 13. THE ONLY GROUND RAISED BY THE ASSESSEE READS AS UNDER : THE HONBLE CIT(A) ERRED IN UPHOLDING THE DISALLOW ANCE MADE BY THE ASSESSING OFFICER OF RS.27,79,911/-. THIS WAS IN EXCESS OF R S.84,967/- ALREADY ADDED BY THE ASSESSEE IN THE RETURN FILED. 14. RELEVANT FACTS RELATING TO THE ABOVE ISSUE INCL UDE THAT THE ASSESSEE HAS CLAIMED EXEMPT INCOME OF RS.17,78,000/- AND DISALLO WED AN AMOUNT OF RS.84,967/- U/S. 14A R.W.RULE 8D(2)(IV) OF THE ACT. ON FINDING THAT THE ASSESSEE MADE A CLAIM OF INTEREST EXPENDITURE IGNORING THE F ACT THAT THE ASSESSEE MAINTAINED MIXED FINANCES CONSISTING OF INTEREST BE ARING AS WELL AS INTEREST FREE FUNDS, THE AO QUANTIFIED THE DISALLOWANCE UNDER CLA USE 2(II) OF RULE 8D OF THE I.T. RULES, 1962 AND MADE ADDITION OF RS.27,29,202/ -. CIT(A) CONFIRMED THE SAME AS PER THE DISCUSSION GIVEN IN PARA 7 OF HIS O RDER. IN PARA 7.2 THE CIT(A) HELD THAT THE SAID INDIRECT EXPENDITURE HAVE PROXIM ITY TO THE EXEMPT INCOME. CIT(A) ALSO DISCUSSED THE JURISDICTIONAL HONBLE BO MBAY HIGH COURT JUDGMENT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. REPOR TED IN 313 ITR 340 AND HELD THAT THE SAME HAS NO MERIT. NO REASONS ARE GIVEN F OR GIVING SUCH CATEGORICAL FINDING CONSIDERING THE FACTS OF THE PRESENT CASE. CIT(A) ALSO REFERRED TO THE SPECIAL BENCH DECISION IN THE CASE OF ACIT VS. CHEM INVEST LIMITED VS. CIT REPORTED IN 124 TTJ 577 BEFORE CONFIRMING THE ADDIT ION MADE BY THE AO. 15. AGGRIEVED WITH THE ORDER OF CIT(A) THE ASSESSEE IS IN APPEAL BEFORE US. ITA NOS.137 & 217/PUN/2013 M/S.RANADEY MICRONUTRIENTS PVT. LTD., 6 16. BEFORE US, LD. COUNSEL FOR THE ASSESSEE SUBMITT ED THAT THE EXEMPT INCOME IS ONLY RS.17,8,000/- WHEREAS THE DISALLOWANCE MADE BY THE AO IS TO THE TUNE OF RS.27,29,202/-. ON THE FACES OF IT AND CONSIDERING THE SETTLED LEGAL PROPOSITIONS, THE SAME IS NOT LEGALLY SUSTAINABLE. VARIOUS DECIS IONS ARE IN EXISTENCE FOR THE PROPOSITION THAT DISALLOWANCE IF ANY U/S.14A OF THE ACT SHOULD NOT EXCEED THE EXEMPT INCOME WHICH FORM PART OF THE TOTAL INCOME. FURTHER, BRINGING OUR ATTENTION TO THE COPY OF BALANCE SHEET PLACED AT PA GE 9 OF THE PAPER BOOK, LD. COUNSEL SUBMITTED THAT THE ASSESSEE HAS INTEREST FR EE FUNDS AMOUNTING TO RS.5.99 CRORES (SHARE CAPITAL + RESERVES AND SURPLU S) AND THE INVESTMENTS IS ONLY TO THE TUNE OF RS.5.43 CRORES. HE ALSO SUBMITTED T HAT THE INTEREST BEARING FUNDS HAVE SHOWN DECLINING TREND WHEN COMPARED WITH THE U NSECURED LOANS OF EARLIER YEAR (RS.6.24 CRORES). HE ALSO SUBMITTED THAT THE PROFITS FOR THE YEAR WORKS OUT TO RS.62 LAKHS IS ALSO AVAILABLE FOR THE PURPOSE OF ACQUIRING THE SAID INVESTMENTS. REFERRING TO THE INCREASE IN INVESTMENT HE SUBMITTE D THAT THE SAID INCREASE IS ALSO TAKEN CARE BY THE CURRENT YEARS PROFIT AND IN TEREST FREE LOANS AVAILABLE IN THE MIXED FUNDS. CONSIDERING THESE FACTS AND RELYING O N THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER L TD. (SUPRA) AS WELL AS THE JUDGMENT IN THE CASE OF CIT VS. HDFC BANK LTD., 366 ITR 505 LD. COUNSEL SUBMITTED THAT DISALLOWANCE MADE ON ACCOUNT OF INDI RECT EXPENDITURE U/S.14A R.W. RULE 8D(2) THE ADDITION IS UNSUSTAINABLE. 17. ON THE OTHER HAND, THE LD. DR FOR THE REVENUE S UBMITTED THAT THE SAID INTEREST FREE FUNDS SINCE UTILIZED TOWARDS THE ASSE TS OF THE COMPANY, IT IS OBVIOUS INFERENCE THAT THE ASSESSEE DIVERTED THE SAME TOWAR DS THE INVESTMENTS. THEREFORE, THE DISALLOWANCE IS WARRANTED UNDER THE SAID SECTION. HE PLEADED FOR CONFIRMING THE ADDITION MADE BY THE AO. 18. WE HEARD BOTH THE SIDES. WE FIND IT IS OBVIOUS INFERENCE THAT ASSESSEE HAS ADEQUATE INTEREST FREE FUNDS AND ASSESSEE ALSO EARNED PROFITS IN THE CURRENT ITA NOS.137 & 217/PUN/2013 M/S.RANADEY MICRONUTRIENTS PVT. LTD., 7 YEAR. ALL THESE FUNDS ARE SUFFICIENT ENOUGH TO TAK E CARE OF THE INVESTMENTS CONSIDERING THE PRINCIPLE OF PRESUMPTION, LAID DOWN BY THE JURISDICTIONAL HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD., (SUPRA). THEREFORE, IN OUR VIEW, THE ORDER OF THE CIT(A) ON THIS ISSUE REQUIRES REVERSAL ON THIS ISSUE. ACCORDINGLY, THE GROUND RAISED BY THE ASSESSEE TO THE EXTENT OF DISALLOWANCE OF RS.27,29,202/- STANDS DELETED. 19. REGARDING THE ADDITION OF RS.50,909/- (RS.1,35, 676 RS.84,967) THE DISALLOWANCE MADE UNDER SECTION 36(1)(III) READ WIT H RULE 8D(2) OF THE I.T. RULES, 1962, WE ARE OF THE OPINION THAT THE SAME RE QUIRES TO BE CONFIRMED IN THE ABSENCE OF ANY SPECIFIC ARGUMENTS ON THIS ISSUE. A CCORDINGLY, GROUND RAISED BY THE ASSESSEE TO THIS EXTENT IS PARTLY ALLOWED. 20. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. 21. TO SUM UP, THE APPEAL OF THE REVENUE IS DISMISS ED AND THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 18 TH DAY OF OCTOBER, 2017. SD/- SD/- (VIKAS AWASTHY) (D. KARUNAKARA RAO) /JUDICIAL MEMBER / ACCOUNTANT MEMBER PUNE; DATED : 18 TH OCTOBER, 2017. / COPY OF THE ORDER FORWARDED TO : BY ORDER // TRUE COPY // //TRUE COPY// SENIOR PRIVATE SECRETARY , / ITAT, PUNE THE APPELLANT THE RESPONDENT THE CIT(A)-4, PUNE CIT-4, PUNE % , , B BENCH PUNE; / GUARD FILE.