M/s. Adventure World (India) Pvt. Ltd, New Delhi V. ACIT, New Delhi

ITA 3171/DEL/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53097 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 3 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 31-10-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 10-07-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MRS SRUJANI MOHANTY
• Assessee Lawyers: S K AGARWAL
• Keywords: Avoidance of tax
• Section: 37(1); 37

Judgement Text

ITA NO. 3171/DEL/2009 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A, NEW DELHI BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 3171/DEL/2009 A.Y.: 2005-06 M/S ADVENTURE WORLD (INDIA) PVT. LTD., 108, PRAGATI TOWER, 26, RAJENDRA PLACE, NEW DELHI 110 008 (PAN: AAACA0109R) VS. ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-1(1), CENTRAL REVENUE BUILDING, NEW DELHI 110 002 (APPELLANT ) (APPELLANT ) (APPELLANT ) (APPELLANT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) ASSEESSEE BY : SH. S.K. AGARWAL, ADVOCATE DEPARTMENT BY : MRS. SRUJANI MOHANTY, SR. D.R. ORDER ORDER ORDER ORDER PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) DATED 08.5. 2009. 2. THE ISSUE RAISED IS THAT LD. COMMISSIONER OF INCOM E TAX (APPEALS) ERRED IN UPHOLDING THE DISALLOWANCE OF ` 5,22,770/- BEING THE ADDITIONAL REMUNERATION PAID TO THE DIRECTORS. 3. IN THIS CASE THE ASSESSING OFFICER DISALLOWED A SUM OF ` 582770/- BEING EX-GRATIA BONUS AND COMMISSION PAID TO WORKING DIRECTORS. THE ASSESSING OFFICER IN THE ASSESSMENT ORDER FOR MAKIN G THIS DISALLOWANCE HAS BASICALLY OBSERVED THAT AN AMOUNT OF ` 60,000/- BEING EX-GRATIA BONUS AND ` 5,22,770/- BEING COMMISSION PAID TO TWO DIRECTORS NAMELY SHRI RAJ BAJAJ AND SMT. UMA BAJAJ WHO ARE THE ONLY TWO SHAREHOLDERS OF THE ASSESSEE COMPANY HAS BEEN DEBITED IN THE PROFIT AND LOSS ACCOUNT. ITA NO. 3171/DEL/2009 2 HE ALSO OBSERVED THAT THE AMOUNT OF COMMISSION IS JUS T 10% OF NET PROFIT OF THE ASSESSEE COMPANY COMPUTED BEFORE ALLOW ING THE ABOVE COMMISSION. ACCORDING TO ASSESSING OFFICER AS PE R PROVISIONS OF SECTION 36(1)(II) OF THE ACT, ANY PAYMENT IN THE NAT URE OF BONUS OR COMMISSION TO AN EMPLOYEE OF THE COMPANY CAN BE ALLOWE D AS A DEDUCTION ONLY IF IT WAS NOT PAYABLE BY WAY OF DIVI DEND. IN THE CASE OF ASSESSEE BOTH THESE SHAREHOLDERS ARE ALSO WORKI NG DIRECTORS AND THEY ARE GETTING REMUNERATION FROM THE COMPANY. THUS BOTH ARE EMPLOYEES OF THE COMPANY ALSO. EVEN AFTER DECLARAT ION OF DIVIDEND OF ` 1,50,000/- AND PROVISIONS FOR TAXATION, THE ASSE SSEE IS LEFT WITH SUFFICIENT PROFIT TO PAY THE ABOVE AMOUNT BY WAY OF DIVIDEND TO THEM. THUS ACCORDING TO ASSESSING OFFICER ALL THE RIDERS POSED BY THE PROVISIONS OF SEC. 36(1)(II) OF THE ACT FOR ALLOWAN CE OF ANY SUCH AMOUNT ARE DEFAULTED. HE FURTHER OBSERVED THAT THIS AMO UNT CANNOT BE ALLOWED U/S 37(1) ALSO AS THE PROVISIONS OF SECTION 37(1) ARE GENERAL IN NATURE WHEREAS PROVISIONS OF SECTION 36 ARE SPECIFI C IN NATURE AND SPECIFIC PROVISIONS OF LAW ALWAYS HAVE AN EDGE OVER ANY GENERAL PROVISION. HER FURTHER OBSERVED THAT WHEN THE BOA RD OF DIRECTORS CONSISTING OF ONLY TWO MEMBERS, DECLARED THAT 10% O F NET PROFIT HAS TO BE DISTRIBUTED BETWEEN BOTH OF THEM, THE SOLE PURPOS E OF THE ENTIRE ARRANGEMENT BECOMES A DEVISE TO DIVERT THE PROFIT OF THE COMPANY AS A MEANS OF AVOIDANCE OF TAX. HAD THIS AMOUNT BEING PAID AS DIVIDEND, TOTAL TAX ON THE ABOVE AMOUNT WOULD HAVE BEEN 50.6% OF INCOME (TAX ON COMPANY + DIVIDEND TAX). IN PLACE OF THE ABOVE, THE DIRECTORS OF THEIR INDIVIDUAL CAPACITIES ARE PAYING MERELY 30.6% AS TAX. THE ASSESSING OFFICER CONCLUDED THAT IN THE INSTANCE C ASE IT WAS CLEAR THAT THE PROFIT OF THE ASSESSEE COMPANY WAS DWINDLED BY P AYING THE SAME ITA NO. 3171/DEL/2009 3 AS BONUS AND COMMISSION IN LIEU OF DIVIDEND. ACCORD INGLY, HE HELD THE ENTIRE AMOUNT OF ` 5,82,770/- AS INADMISSIBLE AND DI SALLOWED THE SAME. 4. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCOME TAX (APPEALS) ELABORATELY CONSIDERED THE ISSUE AND HELD AS UNDER:- IF THE FACTS OF THE INSTANT CASE ARE EXAMINED IN LI GHT OF THE RATIO OF THIS DECISION, IT WILL BE SEEN THAT THE EX -GRATIA BONUS, AS ALREADY DISCUSSED, IS BASED ON THE FIXED PERCENTAGE OF THE SALARY AND THE SAME IS GIVEN NOT ONLY TO THE DIRECTORS SHAREHOLDERS BUT TO OTHER SENIOR EXEC UTIVES ALSO. THE SAME IS NOT LINKED WITH THE NET PROFIT OF THE COMPANY ALSO. THEREFORE, AS FAR AS THE PAYMENT OF EX- GRATIA BONUS IS CONCERNED, PAYMENT WILL NOT BE SUCH WHICH CAN BE DISALLOWED U/S 36(1)(II) IN THE LIGHT OF TH E ABOVE DECISION OF THE APEX COURT AS IT CANNOT BE SAID TH AT SAME IS PAYMENT IN LIEU OF DIVIDEND OR PROFIT. THIS FINDIN G IS IN LINE WITH THE GUIDELINES GIVEN IN THE DECISION OF HONBL E SUPREME COURT IN THE CASE OF GESTETNER DUPLICATORS 117 ITR 1 AND SHAHZADA NAND & SONS 108 ITR 358 (SC) ALSO U PON WHICH THE APPELLANT HAS PLACED RELIANCE. THEREFORE , THE DISALLOWANCE OF ` 60,000/- AS EX-GRATIA BONUS IS NO T JUSTIFIED AND THEREFORE DIRECTED TO BE DELETED. BUT THE SAME IS NOT TRUE ABOUT THE COMMISSION. TH E COMMISSION PAYMENT IS MADE ONLY TO TWO DIRECTORS WHO ARE HUSBAND AND WIFE AND THEY ARE ONLY TWO SHAREHOLDERS OF THE COMPANY AS HAS BEEN STATED BY THE APPELLANT ALSO. T HE COMMISSION PAYMENT IS ALSO LINKED WITH THE NET PROFI T OF THE COMPANY BEING 10% OF NET PROFIT AND THIS COMMISSION I S ITA NO. 3171/DEL/2009 4 ALSO MADE EQUAL TO BOTH THE DIRECTORS IRRESPECTIVE O F THE SERVICES RENDERED BY THEM. AS REPRODUCED HEREINABO VE, JUSTICE STONE HAS OBSERVED THAT IN PLACING A STRICT CONSTRUCTION ON THIS SUB-SECTION, THE SUM EXCEPTED U NDER THE EXPRESSION SUCH SUM MUST BE THE SAME SUM AS IS DESCRIBED BY THE EXPRESSION ANY SUM PAID AS BONUS O R COMMISSION. IN THE INSTANT CASE IF COMMISSION TO THE EXTENT OF 10% OF PROFIT IS NOT GIVEN TO THESE DIREC TOR SHAREHOLDERS THEN TO THAT EXTENT NET PROFIT OF THE COMPANY WOULD HAVE INCREASED AND IF COMPANY DECIDES TO DECL ARE DIVIDEND WHICH THEY HAVE DONE THEN THIS AMOUNT CAN BE DISTRIBUTED AS DIVIDEND TO THESE TWO DIRECTOR SHAREH OLDERS. AS THERE ARE NO OTHER SHAREHOLDERS, THE AMOUNT OF D IVIDEND RECEIVED WILL BE SAME AS THE AMOUNT OF COMMISSION WHIC H THEY HAVE RECEIVED. THEREFORE, IN MY OPINION, AMOUN T PAID AS COMMISSION AMOUNTING TO ` 5,22,770/- CAN BE SAID AS A SUM WHICH WOULD HAVE BEEN PAYABLE TO THE DIRECTORS AS PROFITS OR DIVIDEND IF IT HAD NOT BEEN PAID AS COMMI SSION. THE PROVISIONS OF SECTION 2(22)(A) IS REPRODUCED A S UNDER:- DIVIDEND INCLUDES- (A) ANY DISTRIBUTION BY A COMPANY OF ACCUMULATED PROFITS, WHETHER CAPITALIZED OR NOT, IF SUCH DISTRIBUTION ENTAILS THE RELEASE BY THE COMPANY TO ITS SHAREHOLDERS OF ALL OR ANY PART OF THE ASSET S OF THE COMPANY. ITA NO. 3171/DEL/2009 5 IN THE INSTANT CASE, IF THE COMMISSION WOULD NOT HAVE BEEN PAID THEN PROFITS / ACCUMULATED PROFITS TO THAT EXTENT WOULD HAVE BEEN INCREASED AND THE PAYMENT SO MADE IN THE NAME OF COMMISSION IS NOTHING BUT DISTRIBUTION OF THE PROFIT/ ACCUMULATE D PROFIT TO THE SHAREHOLDERS AND THEREFORE IT WILL FA LL WITHIN THE DEFINITION OF DIVIDEND ALSO U/S 2(22)(A) ALSO. THUS THE ASSESSING OFFICER HAS RIGHTLY OBSERVED TH AT THE DIVIDEND TAX WOULD ALSO HAVE BEEN APPLICABLE WHICH WOULD HAVE LED TO THE IMPOSITION OF TAX AS WEL L AS DIVIDEND DISTRIBUTION TAX AND ONCE IT IS DONE TH EN IT WILL BE NOTICED THAT THE OBSERVATION OF THE ASSESSI NG OFFICER THAT THE OBJECTIVE OF THIS TREATMENT OF DISTRIBUTION OF THE ACCUMULATED PROFITS IN THE NAME OF COMMISSION WAS ONLY TO AVOID THE PAYMENT OF TAX TO THE EXTENT OF DIFFERENCE BETWEEN TOTAL TAX LIABILI TY ON THE COMPANY AND TOTAL TAX LIABILITY ON THE SAME AMOUNT BY THESE TWO DIRECTORS IS ALSO ESTABLISHED. BASED ON THESE DISCUSSIONS, AS PER LAW SETTLED BY THE APEX COURT, THIS AMOUNT OF COMMISSION PAYMENT WILL NOT BE ALLOWABLE U/S 36(1)(II) OF THE ACT. I ALSO AGREE WITH THE ASSESSING OFFICERS OBSERVATION THAT ONCE AN AMOUNT IS SPECIFICALLY PROHIBITED TO BE ALLOWED UNDER SPECIAL PROVISION TH EN SPECIAL PROVISION WILL PREVAIL OVER GENERAL PROVISI ON AND SAME AMOUNT CANNOT BE CLAIMED AND ALLOWED U/S 37(1). THEREFORE, THE AMOUNT WHICH IS FOUND TO BE ITA NO. 3171/DEL/2009 6 DISALLOWABLE U/S 36(1)(II) CANNOT BE ALLOWED U/S 37 (1) ALSO. THEREFORE, THE ACTION OF THE ASSESSING OFFI CER IS HELD JUSTIFIED IN DISALLOWING THE COMMISSION OF ` 5,22,770/-. 5. AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APPEA L BEFORE US. 6. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT OF THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. WE FIND THAT T HE COMMISSION PAYMENT IN THIS CASE HAS BEEN MADE TO THE TWO DIRECT ORS WHO ARE ONLY THE SHAREHOLDERS OF THE COMPANY. THE COMMISSION PAYMENT IS ALSO LINKED WITH THE NET PROFIT OF THE COMPANY BEING 10% OF NET PROFIT AND THIS COMMISSION IS ALSO PAID EQUAL TO BOTH THE DI RECTORS IRRESPECTIVE OF THE SERVICES RENDERED BY THEM. W E AGREE WITH THE FINDING OF THE LOWER AUTHORITIES THAT IF THE COMMISSI ON WOULD NOT HAVE BEEN PAID THEN PROFIT / ACCUMULATED PROFIT WOULD HAV E BEEN INCREASED AND THE PAYMENT SO MADE IN THE NAME OF THE COMMISSION IS NOTHING BUT DISTRIBUTION OF THE PROFIT/ ACCUMULATED PROFIT TO THE SHAREHOLDERS. THE LOWER AUTHORITIES HAVE RIGHTLY OBSERVED IN THA T SITUATION DIVIDEND TAX WOULD HAVE BEEN APPLICABLE WHICH WOULD HAVE LE D TO IMPOSITION OF TAX AS WELL AS DIVIDEND DISTRIBUTION TAX. THUS, WE AGREE WITH THE FINDING OF THE LOWER AUTHORITIES THAT THE OBJECTIVE OF THIS TREATMENT OF DISTRIBUTION OF THE ACCUMULATED PROFITS IN THE NAME OF COMMISSION WAS ONLY TO AVOID THE PAYMENT OF TAX TO THE EXTENT OF DI FFERENCE BETWEEN ITA NO. 3171/DEL/2009 7 TOTAL TAX LIABILITY ON THE COMPANY AND TOTAL TAX LIA BILITY ON THE SAME AMOUNT BY THESE TWO DIRECTORS. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. COMMISSIONER OF INC OME TAX (APPEALS), HENCE, WE UPHOLD THE SAME. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 04/11/2011. SD/- SD/- [RAJPAL YADAV] [RAJPAL YADAV] [RAJPAL YADAV] [RAJPAL YADAV] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 04/11/2011 SRB COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES