NASHIK METALS P.LTD, Nashik V. ITO, Pune

ITA 1538/PUN/2013

• Counselvise Citation: 153824514 RSA 2013
• Duration Of Justice: 1 year(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 02-08-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Salary income
• Section: 201(1); 6; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 1538/PN/2013 (ASSESSMENT YEAR : 2010-11) NASHIK METALS PVT. LTD., H19-20 MIDC, AMBAD, NASHIK-422010 PAN NO. AABCN8698P .. APPELLANT VS. ITO, WARD-2(3), PUNE .. RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK REVENUE BY : SHRI RAJESH DAMOR DATE OF HEARING : 20-08-2014 DATE OF PRONOUNCEMENT : 28-08-2014 ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 03-07-2013 OF THE CIT(A)-II, NASHIK RELATING TO ASS ESSMENT YEAR 2010-11. 2. AT THE TIME OF HEARING THE LD. COUNSEL FOR THE A SSESSEE DID NOT PRESS GROUNDS OF APPEAL NO.2 & 3 FOR WHICH THE LD. DEPART MENTAL REPRESENTATIVE HAS NO OBJECTION. ACCORDINGLY, THE ABOVE 2 GROUNDS ARE DISMISSED AS NOT PRESSED. 3. IN GROUND OF APPEAL NO.1 THE ASSESSEE HAS CHALLE NGED THE ORDER OF THE CIT(A) IN CONFIRMING THE ADDITION OF RS.18,75,0 00/- ON ACCOUNT OF DISALLOWANCE U/S.40(A)(IA) OF THE I.T. ACT. 2 3.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF STEEL RE-ROLLING . IT FILED ITS RETURN OF INCOME ON 08-09-2010 DECLARING TOTAL INCOME OF RS.9 ,50,360/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS.18,75,000/- ON ACCOUNT OF COMMISSION PAID TO 4 DIRECTORS OF THE COMPANY, THE DETAILS OF WHICH ARE AS UNDER : SR.NO. NAME NATURE OF PAYMENT AMOUNT PAID (IN RS.) 1 ANISHA D. TANK COMMISSION 1,25,000/- 2 DEEPAK SOHANLAL TANK COMMISSION 1,25,000/- 3 DEVENDRALAL TANK COMMISSION 1,25,000/- 4 MAHENDRAPAL TANK COMMISSION 15,00,000/- 18,75,000/- 3.2 THE ASSESSING OFFICER NOTED FROM THE DETAILS FU RNISHED BY THE ASSESSEE THAT THE ASSESSEE COMPANY HAS NOT DEDUCTED TDS FROM THE COMMISSION SO PAID AS PER THE PROVISIONS OF SECTION 40(A)(IA) OF THE I.T. ACT. HE, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE SAME SHOULD NOT BE DISALLOWED U/S.40(A)(IA) OF THE I.T. ACT. IT WAS EXPLAINED BY THE ASSESSEE THAT OUT OF THE TOTAL COMMISSION OF RS.18,75,000/- AN AMOUNT OF RS.18,03,229/- HAS BEEN PAID DURING THE Y EAR AND ONLY RS.71,771/- IS OUTSTANDING AT THE YEAR END. IT WAS ACCORDINGLY SUBMITTED THAT THE PROVISIONS OF SECTION 40(A)(IA) WILL BE AP PLICABLE ONLY TO THE TUNE OF THE AMOUNT PAYABLE AT THE YEAR END AND NOT TO TH E WHOLE AMOUNT. FOR THE ABOVE PROPOSITION, HE RELIED ON THE DECISION OF THE VISAKHAPATNAM SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MERIL YN SHIPPING AND TRANSPORT VS. ADDL.CIT REPORTED IN 136 ITD 23 (SB). HOWEVER, THE ASSESSING OFFICER REJECTED THE ABOVE CONTENTION OF THE ASSESSEE AND 3 DISALLOWED RS.18,75,000/- U/S.40(A)(IA) OF THE I.T. ACT. 4. BEFORE THE CIT(A) THE ASSESSEE ARGUED THAT THE C OMMISSION HAS BEEN PAID TO THE DIRECTORS IN ADDITION TO THE SALAR Y. IT WAS SUBMITTED THAT AS PER THE PROVISIONS OF SECTION 17(1)(IV) SALARY I NCLUDES COMMISSION. IT WAS SUBMITTED THAT THE DIRECTORS WERE PAID INCENTIV E ON ADHOC BASIS AND NOMENCLATURE GIVEN IS COMMISSION WHICH IS FACTUALLY AN INCENTIVE FORMED PART OF THE SALARY OF THE DIRECTORS. THEREFORE, TH E ADDITION MADE BY THE ASSESSING OFFICER U/S.40(A)(IA) IS NOT JUSTIFIED. THE COPY OF THE RESOLUTION PASSED BY THE COMPANY ON 28-03-2010 WAS ALSO FILED BEFORE THE CIT(A). 4.1 HOWEVER, THE CIT(A) WAS ALSO NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE AND UPHELD THE DISALLOWANCE M ADE BY THE ASSESSING OFFICER. WHILE DOING SO, HE NOTED THAT ALTHOUGH TH E BOARD HAS RESOLVED THAT THE COMMISSION OF RS.18,75,000/- WAS TO BE PAI D IN ADDITION TO THE REGULAR SALARY OF THE DIRECTORS, HOWEVER, THIS ARRA NGEMENT WAS APPLICABLE ONLY FOR THIS A.Y. 2010-11. HE FURTHER OBSERVED TH AT THE DIRECTORS IN THEIR INCOME TAX RETURNS HAVE SHOWN THE SAID COMMISSION U NDER THE HEAD INCOME FROM OTHER SOURCES. THEREFORE, THE COMPUT ATION OF THE INCOME BY THE DIRECTORS AS WELL AS THE RESOLUTION OF THE B OARD OF DIRECTORS CLEARLY ESTABLISH THAT THE COMMISSION WAS NOT PART OF THE D IRECTORS SALARY AS CLAIMED BY THE ASSESSEE. FURTHER, THE COMPUTATION OF THE INCOME OF THE 4 DIRECTORS ALSO REFLECT TDS U/S.194 ON COMMISSION RE CEIVED FROM THE ASSESSEE COMPANY. FURTHER, ONE OF THE DIRECTOR SHR I MAHENDRAPAL TANK HAS CLAIMED AN EXPENDITURE OF RS.6.25 LAKHS AGAINST THE RECEIPT OF COMMISSION OF RS.15 LAKHS FROM THE ASSESSEE COMPANY . HOWEVER, THE OTHER 3 DIRECTORS DID NOT CLAIM ANY EXPENSES OUT OF THE COMMISSION RECEIPTS 4 FROM THE ASSESSEE COMPANY. THEREFORE, HE HELD THAT THE CONTENTION OF THE ASSESSEE THAT THE COMMISSION WAS PART OF THE SALARY IS INCORRECT AND HAS NO BASIS. HE FURTHER OBSERVED THAT WHILE TDS ON SALAR Y WAS DEDUCTED U/S.192B OF THE I.T. ACT AND PAID IN A.Y. 2009-10 A ND 2010-11, THE TDS ON COMMISSION OF RS.18,75,000/- WAS DEDUCTED U/S.194 O F THE I.T. ACT AND PAID ON 16-02-2012. THE DETAILS OF DEDUCTION OF TD S ON SALARY AND COMMISSION THEMSELVES SHOW THAT THE ASSESSEE NEVER CONSIDERED COMMISSION AS PART OF DIRECTORS SALARY. OTHERWISE IT WOULD HAVE DEDUCTED TDS ON SALARY AND COMMISSION U/S.192B AND DEPOSITED THE SAME IN THE A.Y. 2010-11 ITSELF AS IS THE CASE WITH TDS ON SALA RY. HE ACCORDINGLY REJECTED THE SUBMISSIONS MADE BY THE ASSESSEE ON TH IS ISSUE AND UPHELD THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 4.2 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 5. THE LD. COUNSEL FOR THE ASSESSEE STRONGLY CHALLE NGED THE ORDER OF THE CIT(A). HE REITERATED THE SAME SUBMISSIONS AS MADE BEFORE THE CIT(A) AND SUBMITTED THAT AS PER PROVISIONS OF SECT ION 17(1)(IV) THE TERM SALARY INCLUDES ANY FEES, COMMISSION, PERQUISITE S OR PROFITS IN LIEU OF OR IN ADDITION TO ANY SALARY OR WAGES. THEREFORE, IN VIEW OF THE ABOVE CLEAR PROVISIONS ANY PAYMENT MADE TO THE DIRECTOR/EMPLOYE E OF THE COMPANY IN ADDITION TO SALARY WOULD CONSTITUTE SALARY IN THE H ANDS OF THE SAID DIRECTOR/EMPLOYEE. THEREFORE, EVEN THE COMMISSION PAID TO THE DIRECTORS OF THE ASSESSEE COMPANY IN ADDITION TO SALARY WOULD BE TAXABLE AS SALARY IN THE HANDS OF THE DIRECTORS AND NOT AS COMMISSION. 5 5.1 REFERRING TO THE DECISION OF THE KOLKATA BENCH OF THE TRIBUNAL IN THE CASE OF JAHANGIR BIRI FACTORY PVT. LTD. VS. DCI T REPORTED IN 126 TTJ 567 HE SUBMITTED THAT IN THAT CASE THE ASSESSEE HAD MADE PAYMENT TO ITS WHOLETIME DIRECTORS IN ADDITION TO SALARY AND THE S AME WAS DEBITED UNDER THE HEAD COMMISSION. THE ASSESSING OFFICER HELD TH AT THE ASSESSEE SHOULD HAVE DEDUCTED TAX U/S.194H ON SUCH COMMISSION PAID TO THE DIRECTORS. THE TRIBUNAL HELD THAT ALTHOUGH THE SAID AMOUNT WAS PAI D TO THE DIRECTORS BY THE ASSESSEE IN THE COURSE OF EMPLOYMENT FOR THE WORK D ONE IN THEIR CAPACITY AS WHOLETIME DIRECTORS, HOWEVER, THE SAID PAYMENT WAS TO BE TREATED AS PART OF SALARY OF THE DIRECTORS AND THE SAME COULD NOT BE T REATED AS COMMISSION AS ENVISAGED U/S.194H. ACCORDINGLY, THE DISALLOWANCE MADE U/S.40(A)(IA) WAS DELETED. SIMILAR VIEW HAS BEEN TAKEN IN THE CA SE OF ACIT VS. BLUE STAR CIVIL ENGINEERING CO. PVT. LTD. VIDE ITA NO.16 91/KOL/2011 ORDER DATED 11-06-2013. 5.2 REGARDING THE OBSERVATION OF THE ASSESSING OFFI CER THAT THE ASSESSEE SHOULD HAVE DEDUCTED TDS U/S.194H, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT AS PER THE PROVISIONS OF SE CTION 194H, THE ASSESSEE HAS TO DEDUCT TDS ON PAYMENT OF ANY COMMISSION/BROK ERAGE. HE SUBMITTED THAT PROVISIONS OF SECTION 194H DEFINE TH E WORDS COMMISSION/BROKERAGE WHICH READS AS UNDER : ( I ) COMMISSION OR BROKERAGE INCLUDES ANY PAYMENT REC EIVED OR RECEIVABLE, DIRECTLY OR INDIRECTLY, BY A PERSON ACTI NG ON BEHALF OF ANOTHER PERSON FOR SERVICES RENDERED (NOT BEING PROFESSIONAL SER VICES) OR FOR ANY SERVICES IN THE COURSE OF BUYING OR SELLING OF GOODS OR IN RELATION TO ANY TRANSACTION RELATING TO ANY ASSET, VALUABLE ARTICLE OR THING, NOT BEING SECURITIES; 6 5.3 REFERRING TO THE ABOVE DEFINITION HE SUBMITTED THAT WHEN ANY PAYMENT IS MADE TO ANY PERSON FOR RENDERING ANY SER VICES IN THE COURSE OF BUYING OR SELLING OF GOODS OR ANY ASSET OR VALUABLE THING, THEN THE SAID PAYMENT IS TO BE TREATED AS COMMISSION/BROKERAGE. HOWEVER, IN THE PRESENT CASE, THE ASSESSEE HAS MADE PAYMENTS TO ITS EMPLOYEE DIRECTORS NOT FOR SELLING ANY GOODS OR ARTICLES BUT FOR MANAGING THE AFFAIRS OF THE ASSESSEE COMPANY. THE AMOUNT HAS NOT BEEN PAID FOR SELLING ANY PARTICULAR GOODS/ARTICLES AND THEREFORE THE AMOUNT PAID BY THE ASSESSEE COMPANY TO ITS DIRECTORS DOES NOT COME WITHIN THE AMBIT OF PROVISI ONS OF SECTION 194H. HE SUBMITTED THAT MERELY BECAUSE DIRECTORS HAD SHOW N THE SAID COMMISSION UNDER THE HEAD INCOME FROM OTHER SOURCES THAT CAN NOT BE A GROUND TO TREAT THE SAID AMOUNT AS COMMISSION AS ENVISAGED U/S.19 4H IN VIEW OF THE CLEAR PROVISIONS OF SECTION 17(1)(IV) OF THE I.T. A CT. HE ACCORDINGLY SUBMITTED THAT THE LD.CIT(A) WAS NOT JUSTIFIED IN U PHOLDING THE ADDITION MADE BY THE ASSESSING OFFICER U/S.40(A)(IA) OF THE I.T. ACT. 5.4 WITHOUT PREJUDICE TO THE ABOVE, HE SUBMITTED TH AT THE DIRECTORS HAVE SHOWN THE ABOVE AMOUNT AS THEIR INCOME IN THE RETURNS FILED BY THEM AND HAVE PAID THE DUE TAXES THEREON. THEREFORE, TH E ASSESSEE IS NOT DEEMED TO BE AN ASSESSEE IN DEFAULT UNDER THE FIRST PROVIS O TO SECTION 201(1) OF THE I.T. ACT. HE SUBMITTED THAT THE SECOND PROVISO TO SECTION 40(A)(IA) INTRODUCED BY THE FINANCE ACT, 2012 IS RETROSPECTIV E IN NATURE AND IS APPLICABLE W.E.F. 01-04-2005. HE ACCORDINGLY SUBMI TTED THAT THE DISALLOWANCE U/S.40(A)(IA) IS NOT ATTRACTED IN THE CASE OF THE ASSESSEE. 6. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A). 7 7. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE HAS PAID COMMISSION OF RS.18,75,000/- TO THE 4 DIRE CTORS ON WHICH NO TDS HAS BEEN DEDUCTED FOR WHICH THE ASSESSING OFFICER D ISALLOWED THE SAME U/S.40(A)(IA) OF THE I.T. ACT WHICH HAS BEEN UPHELD BY THE CIT(A). IT IS THE CASE OF THE LD. COUNSEL FOR THE ASSESSEE THAT IN VI EW OF THE CLEAR CUT PROVISIONS OF SECTION 17(1)(IV) THE COMMISSION PAID TO THE DIRECTORS PARTAKES THE CHARACTER OF THE SALARY AND THEREFORE THE PROVISIONS OF SECTION 194H ARE NOT APPLICABLE FOR SUCH PAYMENT AND THEREF ORE THE AUTHORITIES ARE NOT JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 40(A)(IA) TO DISALLOW THE SAME. WE FIND MERIT IN THE ABOVE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE. THE PROVISIONS OF SECTION 17(1)(IV) READ S AS UNDER : 17. FOR THE PURPOSES OF SECTION 15 AND 16 AND OF THIS SECTION 1. SALARY INCLUDES :- (I) . . . (II) . . . (III) . . . (IV) ANY FEES, COMMISSIONS, PERQUISITES OR PROFITS IN LIEU OF OR IN ADDITION TO ANY SALARY OR WAGES. (V) . . . 7.1 SIMILARLY, EXPLANATION (I) TO SECTION 194H READ S AS UNDER: ( I ) COMMISSION OR BROKERAGE INCLUDES ANY PAYMENT REC EIVED OR RECEIVABLE, DIRECTLY OR INDIRECTLY, BY A PERSON ACTI NG ON BEHALF OF ANOTHER PERSON FOR SERVICES RENDERED (NOT BEING PROFESSIONAL SER VICES) OR FOR ANY SERVICES IN THE COURSE OF BUYING OR SELLING OF GOODS OR IN RELATION TO ANY TRANSACTION RELATING TO ANY ASSET, VALUABLE ARTICLE OR THING, NOT BEING SECURITIES; 8 7.2 WE THEREFORE FIND MERIT IN THE SUBMISSION OF TH E LD. COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE HAS MADE PAYMENT TO ITS EMPLOYEE DIRECTORS NOT FOR SELLING ANY GOODS OR ARTICLES BUT FOR MANAGING THE AFFAIRS OF THE ASSESSEE COMPANY. THE AMOUNT IS NOT PAID FOR SELLING ANY PA RTICULAR GOODS/ARTICLES AND THEREFORE THE AMOUNT PAID BY THE ASSESSEE COMPA NY TO ITS DIRECTORS DOES NOT COME WITHIN THE AMBIT OF PROVISIONS OF SECTION 194H. MERELY BECAUSE THE DIRECTORS HAVE SHOWN THE SAID COMMISSION INCOME IN THEIR HANDS AS INCOME FROM OTHER SOURCES, THE SAME, IN OUR OPINI ON, CANNOT BE A GROUND TO EXCLUDE THE COMMISSION PAID TO THE DIRECTORS FRO M THE AMBIT OF SALARY. WE, THEREFORE, HOLD THAT THE COMMISSION PAID TO THE DIRECTORS SHOULD BE TREATED AS SALARY IN THEIR HANDS AND TREATED ACCORD INGLY AND THE PROVISIONS OF SECTION 40(A)(IA) ARE NOT APPLICABLE. 7.3 WE FIND THE KOLKATA BENCH OF THE TRIBUNAL IN TH E CASE OF JAHANGIR BIRI FACTORY PVT. LTD. (SUPRA) HAS HELD THAT COMMIS SION PAID TO DIRECTORS AS PER TERMS OF EMPLOYMENT FOR THE WORK DONE IN THEIR CAPACITY AS WHOLETIME DIRECTORS IS TO BE TREATED AS INCENTIVE IN ADDITION TO SALARY ETC. AND DID NOT COME WITHIN THE PURVIEW OF COMMISSION AND BROKERAGE AS DEFINED IN SECTION 194H OR FEE FOR PROFESSIONAL OR TECHNICAL S ERVICES AS DEFINED IN SECTION 194J AND THEREFORE THE SAME CANNOT BE DISAL LOWED U/S.40(A)(IA) OF THE I.T. ACT. SIMILAR VIEW HAS BEEN TAKEN BY THE K OLKATA BENCH OF THE TRIBUNAL IN THE CASE OF BLUE STAR CIVIL ENGG. CO. P VT. LTD. (SUPRA) FOR A.Y. 2006-07. RESPECTFULLY FOLLOWING THE ABOVE DECISION S AND IN VIEW OF OUR REASONINGS GIVEN IN THE PRECEDING PARAGRAPHS, WE HO LD THAT THE PROVISIONS OF SECTION 40(A)(IA) ARE NOT APPLICABLE TO THE COMM ISSION PAID TO THE DIRECTORS AND SAID COMMISSION WILL PARTAKE THE CHAR ACTER OF SALARY IN VIEW 9 OF THE PROVISIONS OF SECTION 17(1)(IV) OF THE I.T. ACT. 7.4 FROM THE ORDER OF THE CIT(A) WE FIND THAT ONE O F THE DIRECTOR SHRI MAHENDRAPAL TANK HAS CLAIMED AN EXPENDITURE OF RS.6 .25 LAKHS AGAINST THE RECEIPT OF COMMISSION OF RS.25 LAKHS. ONCE THE COM MISSION PAID TO THE DIRECTORS IS HELD AS PART OF SALARY INCOME, THE DIR ECTOR IS NOT ENTITLED TO CLAIM ANY EXPENDITURE FROM SUCH SALARY INCOME. THE REFORE, THE ASSESSING OFFICER IS DIRECTED TO TAKE NECESSARY RECTIFICATION PROCEEDINGS AS PER LAW TO DISALLOW SUCH CLAIM OF EXPENDITURE IN THE HANDS OF THE DIRECTOR. WE HOLD AND DIRECT ACCORDINGLY. GROUND OF APPEAL NO.1 BY T HE ASSESSEE IS ACCORDINGLY ALLOWED. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 28-08-2014. SD/- SD/- (SHAILENDRA KUMAR YADAV) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE DATED: 28 TH AUGUST, 2014 SATISH COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. THE CIT(A)-II, NASHIK 4. THE CIT-II, NASHIK 5. THE D.R, A PUNE BENCH 6. GUARD FILE BY ORDER // TRUE COPY // ASSISTANT REGISTRAR ITAT, PUNE BENCHES, PUNE