M/s. Creative Travel Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 190/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3947 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 09-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 13-01-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: Y KAKKAR
• Assessee Lawyers: R P MALL; SSH SALIL AGGARWAL
• Keywords: Question of law
• Section: 14A; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `B: NEW DELHI BEFORE SHRI C.L.SETHI, JUDICIAL MEMBER AND SHRI K.G. BANSAL, ACCOUNTANT MEMBER I.T. A. NO.190/DEL/2010 ASSESSMENT YEAR: 2006-07 M/S. CREATIVE TRAVEL PVT. LTD., ASSTT. COMMISSIONE R OF INCOME-TAX, 27-30, CREATIVE PLAZA, VS. CIRCLE 3(1), NEW DELHI . NANAKPURA, MOTI BAGH, NEW DELHI. PAN: AAACC0874D (APPELLANT) (RESPONDENT) APPELLANT BY: S/SH. SALIL AGGARWAL & R.P. MALL, ADVOCATE. RESPONDENT BY: MS. Y. KAKKAR, SR. DR. O R D E R PER C.L. SETHI, JUDICIAL MEMBER: THE ASSESSEE IS IN APPEAL AGAINST THE ORDER DATED 0 1.10.2009 PASSED BY THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) FO R THE ASSESSMENT YEAR 2006-07. 2. GROUND NOS. 1 TO 4 REVOLVE AROUND THE ISSUE REGA RDING THE DISALLOWANCE OF A SUM OF RS.77,37,965/- BEING COMMI SSION AND BONUS PAID TO THE DIRECTORS OF THE ASSESSEE COMPANY. 3. THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME ON 27.11.2006 FOR THE RELEVANT ASSESSMENT YEAR 2006-07 DECLARING TOTAL IN COME AT 2 RS.1,85,42,920/-. THE ASSESSING OFFICER THEN COMPL ETED THE ASSESSMENT UNDER SEC. 143(3), DATED 12.11.2008. IN THE ASSESS MENT, THE ASSESSING OFFICER DISALLOWED THE COMMISSION AND BONUS AMOUNTI NG TO RS.77,37,965/- PAID TO THE MANAGING DIRECTOR AND TWO DIRECTORS OF THE COMPANY AS HE WAS OF THE VIEW THAT THE SAME WAS NOT ALLOWABLE AS PER THE PROVISIONS OF SEC. 36(1)(II) OF THE ACT. THE AOS OBSERVATIONS IN THI S REGARD ARE AS UNDER:- THE REPLY OF THE ASSESSEE HAS BEEN CONSIDERED CARE FULLY BUT CANNOT BE ACCEPTED. THE ISSUE HERE IS THE ALLO WABILITY OF BONUS/COMMISSION PAID TO AN EMPLOYEE (DIRECTORS WHO ARE ALSO SHARE HOLDERS) AS PER THE PROVISIONS OF SECTIO N OF 36(1)(II). IT IS A WELL LAID DOWN LAW THAT WHERE THE LANGUAGE OF THE SECTION IS PLAIN, CLEAR AND UNAMBIGUOUS, IT HAS TO BE UNDER STOOD IN THE SENSE, WHAT IT LITERALLY MEANS. NO INTERPRETATIONS /OUTSIDE MEANINGS SHOULD BE ATTACHED TO IT. IN THIS CASE TH E PROVISIONS OF SECTION 36(1)(II) SIMPLY SAYS THAT BONUS/COMMISSIO N PAID TO AN EMPLOYEE IS NOT ALLOWABLE AS DEDUCTION, IF IT COULD HAVE BEEN PAID AS PROFIT OR DIVIDEND. THE ASSESSEE COMPANY C OULD HAVE PAID THE AMOUNT AS PROFIT/DIVIDEND INSTEAD OF BONUS/COMMISSION SINCE THE PAYMENT IS BEING MADE TO DIRECTORS OF THE COMPANY WHO ARE ALSO SHARE-HOLDERS . HOWEVER IN THE INSTANT CASE DIVIDEND OF ONLY RS.20,00,000/- HAS BEEN DECLARED BY THE ASSESSEE COMPANY AND ON THE OTHER H AND IT HAS PAID BONUS AND COMMISSION TO THE MANAGING DIRECTOR AND TWO DIRECTORS OF RS.77,37,965/-. IF THE CO. WANTED TO COMPENSATE THE DIRECTOR OF THE CO. FOR WORK/CONTRIBUTION BY HIM, I T SHOULD HAVE DECLARED DIVIDEND INSTEAD OF PAYING COMMISSION/BONU S WHICH IS NOT ALLOWABLE. HERE IT IS ALSO PERTINENT TO MENTION THE VIEWS EXPR ESSED BY HONBLE BOMBAY HIGH COURT IN LOYAL MOTOR SERVICE CO. LTD. VS. CIT (1946), 14 ITR 647;- THE RESTRICTION THAT SUCH BONUS OR COMMISSION SHOULD NOT HAVE BEEN PAYABLE TO 3 EMPLOYEE AS PROFITS OR DIVIDEND HAS BEEN OBVIOUSLY DESIGNED TO CHECK, INTER ALIA, PRIVATE COMPANIES FROM AVOIDING TAX BY DISTRIBUTING THEIR PROFITS TO THEIR MEMBERS AS BONUS OR COMMISSION INSTEAD OF DIVIDEND. IN THE INSTANT CASE THE COMPANY IS AVOIDING TAX TO THE EXTENT OF 13.5% AS DIVIDEND DISTRIBUTION TAX EVEN A FTER ACCEPTING THE ARGUMENT OF THE ASSESSEE THAT DIRECTO RS ARE PAYING TAX ON COMMISSION RECEIVED BY THEM, BY RESOR TING TO SUCH MEANS. THE PERUSAL OF DETAILS OF P&L ACCOUNT REVELS THAT COMMISSION AND BONUS OF RS.77,37,965/- WAS PAID TO THE MANAGING DIRECTOR AND TWO DIRECTORS OF THE COMPANY WHICH IS NOT ALLOWABLE AS PER THE PROVISION OF SECTION 36(1) (II) OF THE I.T. ACT, AND HENCE THE SAME IS ADDED TO THE TOTAL INCOM E OF THE ASSESSEE. (ADDITION OF RS:-77,37,965/-). 4. BEING AGGRIEVED, THE ASSESSEE PREFERRED APPEAL B EFORE THE LEARNED CIT(A). 5. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E AND THE AOS ORDER, THE LEARNED CIT(A) CONFIRMED THE AOS ACTION IN THE LIGHT OF HIS ORDER IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2005-06 , WHERE, IN VIEW OF THE FACTS OF THE CASE, SIMILAR DISALLOWANCE MADE BY THE AO WAS UPHELD. 6. HENCE, THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. 4 8. IN THE COURSE OF HEARING OF THIS APPEAL, THE LEA RNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT THE ORDER OF THE CIT(A) P ASSED FOR ASSESSMENT YEAR 2005-06 HAS BEEN REVERSED BY THE TRIBUNAL VIDE ORDER DATED 11.112.2009 PASSED BY ITAT, DELHI BENCH `B NEW DEL HI ITA NO.394/DEL/2009. HE FURTHER POINTED OUT THAT THE T RIBUNALS ORDER PASSED IN ASSESSMENT YEAR 2005-06 HAS BEEN UPHELD BY THE HON BLE HIGH COURT OF DELHI IN ITA NO. 1672/2010 VIDE ORDER DATED JANUARY 28, 2011. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER POINTED OUT THAT T HE ORDER OF THE TRIBUNAL PASSED IN ASSESSMENT YEAR 2005-06 HAS BEEN FOLLOWED BY THE TRIBUNAL IN ASSESSMENT YEARS 2002-03 AND 2007-08 IN ITA NOS.323 8 & 3239/DEL/2010 VIDE ORDER DATED 15.09.2010. HE, THEREFORE, SUBMIT TED THAT THE CASE IS SQUARELY COVERED BY THE EARLIER DECISION OF THE TRI BUNAL. 9. THE LEARNED DR ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 10. IN THIS CASE, THE LEARNED CIT(A) HAS UPHELD THE ORDER OF THE AO BY RELYING UPON HIS OWN DECISION PASSED IN ASSESSMENT YEAR 2005-06. WE FIND THAT THE CIT(A)S ORDER DATED 4.12.2008 PASSED IN A SSESSMENT YEAR 2005-06 WAS APPEALED AGAINST BY THE ASSESSEE BEFORE THE TRI BUNAL, AND THE TRIBUNAL VIDE ORDER DATED 11.12.2009 IN ITA NO.394/DEL/2009 REVERSED THE CIT(A)S 5 ORDER AND DECIDED THE ISSUE IN FAVOUR OF THE ASSESS EE BY OBSERVING AND HOLDING AS UNDER:- 6. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND GON E THROUGH THE RECORD CAREFULLY. SEC.36(1)(II) OF THE ACT HAS A DIRECT BEARING ON THE CONTROVERSY. THEREFORE, IT IS SALUTARY UPON US TO TAKE NOTE OF THIS CLAUSE. IT READS AS UNDER: THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTER DEALT WITH THEREIN IN COMPUTING THE INCOME REFERRED TO IN SEC. 28 OF THE ACT. SECTION 36(1) (I) X X X X X (IA) X X X X X (IB)X X X X X ANY SUM PAID TO AN EMPLOYEE AS BONUS OR COMMISSION FOR SERVICES RENDERED, WHERE SUCH SUM WOULD NOT HAVE BEEN PAYABLE TO HIM AS PROFITS OR DIVIDEND IF IT HAD NOT BEEN PAID AS BONUS OR COMMISSION. 7. THE PLAIN READING OF SEC. 36(1)(II) CONTEMPLATES TWO SITUATIONS. ACCORDING TO THE FIRST SITUATION, ANY S UM PAID TO AN EMPLOYEE AS A BONUS OR COMMISSION FOR SERVICES REND ERED WOULD BE ALLOWED TO THE ASSESSEE. THE SECOND PART E XHIBITING THE OTHER CONDITION THAT THE DEDUCTION MENTIONED IN THE FIRST SITUATION COULD BE ALLOWED, IF SUCH SUM WOULD HAVE NOT BEEN PAYABLE TO AN EMPLOYEE AS A PROFIT OR DIVIDEND MEAN ING THEREBY IF THE AMOUNT OF COMMISSION OR BONUS IS RECEIVABLE BY AN EMPLOYEE IN THE SHAPE OF PROFIT/DIVIDEND THEN SUCH COMMISSION PAID TO SUCH EMPLOYEE WOULD NOT BE ALLOWED AS A DED UCTION. WE HAVE ALREADY NOTICED THE SHAREHOLDING PATTERN OF TH E ASSESSEE IN PARAGRAPH 4 OF THIS ORDER. NO DOUBT, IT INDICATES T HAT MOST OF THE SHARES ARE HELD BY THE FAMILY MEMBERS I.E. MR. RAM KOHLI 6 HIS WIFE AND TWO SONS. BEING A PRIVATE LIMITED COMP ANY CONTROLLED BY THE FAMILY MEMBERS, A RESOLUTION APPR OVING THE PAYMENT OF COMMISSION TO THE WORKING DIRECTORS MAY NOT BE A VERY DIFFICULT TASK BUT WHETHER THIS ARRANGEMENT IN DICATES THAT IF THIS COMMISSION WAS NOT PAID TO THE WORKING DIRECTO RS THEN IT WOULD BE RECEIVED IN THE SHAPE OF PROFIT/DIVIDEND. IN OUR OPINION, THE REPLY WOULD BE SIMPLY NO BECAUSE NO COMMISSION WAS PAID TO MRS. KOHLI. IF THIS AMOUNT O F RS.59 LACS WAS DISTRIBUTED ON ACCOUNT OF SHAREHOLDING PATTERN THEN SHE WOULD GET A SUBSTANTIAL SHARE WHEREAS SHE WAS NOT P LAYING ANY ACTIVE ROLE IN THE DAY TO DAY BUSINESS OF THE ASSES SEE COMPANY. THE TWO OTHER DIRECTORS WHO HAD RECEIVED THE COMMIS SION HAD A VERY SMALL SHAREHOLDING PATTERN WOULD NOT BE ABLE T O GET THE AMOUNT EQUIVALENT TO THE COMMISSION IN THE SHAPE OF DIVIDEND. THUS, EXACTLY THE COMMISSION AMOUNT WOULD NOT BE RE CEIVABLE BY THE DIRECTORS IN THE SHAPE OF DIVIDEND. THE DIRE CTORS TO WHOM COMMISSION WAS PAID IS NOT WITH RESPECT TO THEIR SH AREHOLDING PATTERN RATHER IT IS LINKED WITH THE SALES TURNOVER OF THE ASSESSEE AND TO THE PERFORMANCE OF THE DIRECTORS. IT HAS NOT HING TO DO WITH THE SHAREHOLDING PATTERN. THE NEXT REASON WEIG HED IN OUR MIND IS THAT IN THE PAST SIMILAR COMMISSION WAS PAI D TO THE WORKING DIRECTORS AS INFORMED BY THE LEARNED COUNSE L, BUT IT WAS NEVER DISALLOWED. THEREFORE, IN OUR OPINION, AS SESSING OFFICER HAS FAILED TO CONSTRUE THE FACTS AND CIRCUM STANCES AND FAILED TO INTERPRET THE LAW IN RIGHT PERSPECTIVE. W E ALLOW THIS GROUND OF APPEAL AND DELETE THE DISALLOWANCE. 11. WE FURTHER OBSERVE THAT THE ORDER OF THE TRIBUN AL DECIDING THE ISSUE IN FAVOUR OF THE ASSESSEE HAS BEEN UPHELD BY THE HONB LE HIGH COURT OF DELHI IN ITA NO.1672/2010 BY REJECTING THE APPEAL FILED B Y THE REVENUE. THE HONBLE HIGH COURT IN THAT APPEAL HAS OBSERVED AS U NDER:- ON THE FACTS OF THIS CASE, THE INCOME TAX APPELLAT E TRIBUNAL AHS ALLOWED THE PAYMENT OF BONUS AND COMMISSION TO THE EMPLOYEE-DIRECTORS OF THE ASSESSEE COMPANY UNDER SE CTION 36(1)(II) OF THE INCOME TAX ACT AND ONE OF THE REAS ONS GIVEN BY THE TRIBUNAL, WHICH HAS SPECIFICALLY WEIGHED WITH I T, IS THAT IN 7 THE PAST SIMILAR COMMISSION WAS PAID TO THE WORKING DIRECTORS AND IT WAS NEVER DISALLOWED. MR. AGGARWAL, LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT SUCH A DEDUCTION IS ALLOWED UNDER SECTION 36(1 )(II) OF THE ACT FOR THE PAST 30 YEARS. IN VIEW OF THIS, WE ARE OF THE OPINION THAT NO QUESTION OF LAW ARISES. THE APPEAL IS DISM ISSED. 12. IT IS ALSO SEEN THAT THE TRIBUNALS ORDER PASSE D IN ASSESSMENT YEAR 2005-06 HAS BEEN FOLLOWED BY THE TRIBUNAL IN ASSESS MENT YEARS 2002-03 AND 2007-08 VIDE ORDER DATED 15.09.2010 IN ITA NOS. 3238 & 3239/DEL./2010 BY CONCLUDING AS UNDER:- 7. SINCE THE ISSUE IS SQUARELY COVERED BY THE DECI SION OF I.T.A.T IN ASSESSEES OWN CASE AND REVENUE HAS NOT BROUGHT ON RECORD ANY MATERIAL TO DISTINGUISH THE FACTS OF THE CASE IN THE YEAR UNDER CONSIDERATION WITH REFERENCE TO ASSESSME NT YEAR 2005-06, WE DO NOT FIND ANY REASON TO DIFFER WITH T HE ORDER PASSED BY I.T.A.T. DELHI BENCH `B FOR ASSESSMENT Y EAR 2005- 06. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN T HE ORDER PASSED BY THE LD. CIT(A) DELETING THE ADDITION. 13. IN THE LIGHT OF THE DISCUSSIONS MADE ABOVE, IT IS THUS CLEAR THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF TRIBUN AL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2005-06, WHICH HAS BEEN FOLLOWED IN ASSESSMENT YEARS 2002-03 AND 2007-08. IT IS ALSO SEEN THAT THE TRIB UNALS ORDER PASSED IN ASSESSMENT YEAR 2005-06 HAS BEEN UPHELD BY THE HON BLE HIGH COURT. WE, THEREFORE, ALLOW THIS ISSUE IN FAVOUR OF THE ASSESS EE AND DELETE THE DISALLOWANCE. THUS, THE ISSUE INVOLVED IN GROUND N OS. 1 TO 4 IS DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 8 14. GROUND NO.5 REGARDING DISALLOWANCE OF RS.48,357 /- UNDER SEC. 14A WAS NOT PRESSED BY THE LEARNED COUNSEL FOR THE ASSE SSEE AND HENCE, THE SAME STANDS DISMISSED. 15. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. 16. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 13 TH MAY, 2011. SD/- SD/- (K.G. BANSAL) (C.L. SETHI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 13 TH MAY, 2011. COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR, ITAT.