G.B Morrison Travels Private Limited, New Delhi V. DCIT, New Delhi

ITA 318/DEL/2011

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 9995 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 23-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 19-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MONA MOHANTY
• Assessee Lawyers: GOPAL NATHANI
• Keywords: Commercial expediency; Set aside
• Section: 37(1); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, IN THE INCOME TAX APPELLATE TRIBUNAL, IN THE INCOME TAX APPELLATE TRIBUNAL, IN THE INCOME TAX APPELLATE TRIBUNAL, NEW DELHI, BENCH NEW DELHI, BENCH NEW DELHI, BENCH NEW DELHI, BENCH C CC C BEFORE SHRI C. L. SETHI, JUDICIAL MEMBER AND SHRI K. D. RANJAN, ACCOUTANT MEMBER ITA NO. 318 /DEL/2011 (ASSESSMENT YEAR 2005-06) G B MORRISON TRAVELS PVT. LTD., VS. DCIT, CIRCLE 1 2(1), 11, COMMUNITY CENTRE, EAST OF KAILASH, NEW DELHI. NEW DELHI. (APPELLANTS) (RESPONDENTS) PAN / GIR NO. AAACG0264D APPELLANT BY: SHRI GOPAL NATHANI, CA RESPONDENT BY: SMT. MONA MOHANTY, SR. DR ORDER ORDER ORDER ORDER PER K. D. RANJAN, AM: PER K. D. RANJAN, AM: PER K. D. RANJAN, AM: PER K. D. RANJAN, AM: 1. THIS APPEAL BY THE ASSESSES FOR THE ASSESSMENT Y EAR 2005-06 ARISES OUT OF THE ORDER OF CIT(A) XV, NEW DELHI. T HE GROUNDS OF APPEAL ARE REPRODUCED AS UNDER: 1) THAT THE CIT(A) XV, NEW DELHI HAS GROSSLY ERRED ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN CONFIRMING THE ADDITION OF ` 2,06,872/- ON ACCOUNT OF SECURITY DEP OSIT CREDIT BALANCE AS ON MARCH 31, 2005 HELD IN THE NAME OF MS . AMANDA JANE FISHER WITHOUT APPRECIATING THE FACT TH AT THE CREDITOR HOLD CONTINUING BUSINESS DEALINGS WITH THE APPELLANT COMPANY. 2) THAT THE CIT(A) XV, NEW DELHI HAS GROSSLY ERRED ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN CONFIRMING THE ADDITION OF ` 1,56,581/- ON ACCOUNT OF SUNDRY CREDI T BALANCE AS ON MARCH 31, 2005 HELD IN THE NAME OF M/S. TRANS WO RLD TRAVELS PRIVATE LIMITED WITHOUT APPRECIATING THE FA CT THAT SUCH SUM IS SUBSEQUENTLY SUO MOTU CONSIDERED AS INCOME I N THE BALANCE SHEET MADE FOR THE YEAR ENDED 31 ST MARCH 2007 RELEVANT TO ASSESSMENT YEAR 2007-08 AND ALSO CONSID ERED AS INCOME IN THE RETURN FURNISHED FOR ASSESSMENT YEAR 2007-08. I.T.A.NO. 318/DEL/2011 2 3) THAT THE CIT(A) XV, NEW DELHI HAS GROSSLY ERRED ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW IN HOLDING THE BONUS / COMMISSION PAYMENT OF ` 3,54,895/- TO THE M ANAGING DIRECTOR AS UNREASONABLE. 2. GROUNDS NO. 1 & 2 RELATE TO CONFIRMATION OF ADDI TION ON ACCOUNT OF CESSATION OF LIABILITY. THE ASSESSING O FFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT ASSESSE E HAD BEEN SHOWING CREDITORS NAMELY MS. AMANDA JANE FISHER; FO R ` 2,06,872/- AND M/S. TRANS WORLD TRAVELS PVT. LTD. AT ` 1,56,58 1/- FOR 2002. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE AMOUNT SHOWN PAYABLE TO THESE CREDITORS SHOULD NOT BE HELD AS CESSATION OF LIABILITY. SINCE ASSESSEE DID NOT GIVE ANY REPLY NOR FURNISHED ANY C ONFIRMATION FROM THE CREDITORS, THE ASSESSING OFFICER ADDED THE AMOU NT OF ` 3,63,453/- (` 2,06,872/- + 1,56,581/-) ON ACCOUNT OF CESSATION OF LIABILITY. 3. ON APPEAL, IT WAS SUBMITTED THAT MS. AMANDA JANE FISHER, AN AUSTRALIAN NATIONAL WAS ARRANGING BUSINESS FOR THE ASSESSEE AND HAD DEPOSITED SAID AMOUNT WITH THE ASSESSEE TOWARDS REF UNDABLE SECURITY DEPOSITS IN THE YEAR 2001. THE ASSESSEE H AD NEVER CLAIMED THIS SECURITY AS EXPENDITURE. SINCE THE SECURITY W AS REFUNDABLE AS AND WHEN DEMANDED BY THE PARTY IT COULD NOT BE ADDE D IN THE INCOME OF THE ASSESSEE. IT WAS ALSO SUBMITTED THA T SHE HAD GIVEN BUSINESS TO THE ASSESSEE WHICH WAS EVIDENT FROM THE LEDGER ACCOUNT PRODUCED BEFORE THE CIT(A). AS REGARDS THE CREDIT BALANCE OF ` 1,56,581/- IN RESPECT OF M/S. TRANS WORLD TRAVELS P VT. LTD. IT WAS SUBMITTED THAT THIS AMOUNT REMAINED UNPAID SINCE 20 02 AND THE MANAGEMENT OF THE COMPANY HAD TREATED IT AS CESSATI ON OF LIABILITY IN ASSESSMENT YEAR 2007-08 AND ACCORDINGLY, WAS TAK EN AS INCOME IN THAT YEAR. THEREFORE, THIS ADDITION COULD NOT B E MADE IN ASSESSMENT YEAR 2005-06. CIT(A) HOWEVER, REJECTED THE CONTENTION I.T.A.NO. 318/DEL/2011 3 OF THE ASSESSEE. HE OBSERVED THAT ASSESSEE HAD NOT FILED ANY EVIDENCE IN SUPPORT OF THE CLAIM OF THE LIABILITY. THERE WAS NOT EVEN A CONFIRMATION LETTER ON RECORD WHICH COULD SHOW TH AT LIABILITIES WERE EXISTING. IT WAS ALSO OBSERVED THAT IN THE CASE OF M/S. TRANS WORLD TRAVELS PVT. LTD., THE ASSESSEE HAD HIMSELF TREATE D THE AMOUNT OF ` 1,56,581/- AS CESSATION OF LIABILITY IN ASSESSMENT YEAR 2007-08. THEREFORE, THE ASSESSEE HAS FAILED TO ESTABLISH THE EXISTENCE OF GENUINENESS OF LIABILITY AT THE END OF THE PREVIOUS YEAR AND ALSO IN VIEW OF THE FACT THAT LIABILITY HAD BEEN WRITTEN BA CK IN THE SUBSEQUENT YEAR, THE DISALLOWANCE MADE BY THE ASSES SING OFFICER WAS IN ORDER. 4. BEFORE US, LD. A.R. OF THE ASSESSEE SUBMITTED TH AT MS. AMANDA JANE FISHER IS AGENT OF THE ASSESSEE WHO HAD DEPOSI TED ` 2,06,872/- AS SECURITY DEPOSIT. THE ASSESSEE HAD BEEN RECEIV ING BUSINESS THROUGH HER, WHICH CAN BE VERIFIED FROM THE COPY OF THE ACCOUNTS OF THE PARTIES. MOREOVER THE AMOUNT WAS NOT CHARGED T O PROFIT & LOSS ACCOUNT AND THEREFORE, CANNOT BE TREATED AS CESSATI ON OF LIABILITY U/S 41(1) OF THE ACT. AS REGARDS THE OTHER AMOUNT, HE HAS SUBMITTED THAT THE ASSESSEE HAD TAKEN A DECISION IN FINANCIAL YEAR ENDED ON 31.03.2007 TO WRITE BACK THE AMOUNT AND HAS ADMITTE D THE SAME AS INCOME FOR THE ASSESSMENT YEAR 2007-08. THEREFORE, THE AMOUNT CANNOT BE ADDED IN ASSESSMENT YEAR 2005-06 WHICH WO ULD AMOUNT TO DOUBLE ADDITION. 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO GONE TH ROUGH THE COPY OF THE ACCOUNTS OF MS. AMANDA JANE FISHER. WE FIND THAT IN THE WAS RECEIVING BUSINESS FROM M/S. AMANDA JANE FISHER IN THE SUBSEQUENT YEARS. THE COMMISSION HAD BEEN PAID FOR THE SERVIC ES RENDERED BY HER. THE AMOUNT OF ` 2,06,872/- REPRESENTS THE REF UNDABLE SECURITY I.T.A.NO. 318/DEL/2011 4 DEPOSIT. SINCE THE AMOUNT OF ` 2,06,872/- HAS NOT BEEN CLAIMED AS DEDUCTION IN ANY OF THE YEAR AND REPRESENTS REFUNDA BLE SECURITY DEPOSIT, PROVISIONS OF SECTION 41(1) WILL NOT BE AP PLICABLE. MOREOVER, THE ASSESSEE IS HAVING BUSINESS WITH THE PARTY AND THEREFORE, THERE IS NO CESSATION OF LIABILITY. ACC ORDINGLY, NO ADDITION CAN BE MADE IN THE HANDS OF THE ASSESSEE IN RESPECT OF REFUNDABLE SECURITY DEPOSIT RECEIVED BY THE ASSESSEE IN THE YE AR 2001 FROM MS. AMANDA JANE FISHER. 7. AS REGARDS ADDITION OF ` 1,56,581/-, THE ASSESSE E HIMSELF HAD ADDED THIS AMOUNT IN ASSESSMENT YEAR 2007-08 AS CE SSATION OF LIABILITY. AS ON 31.03.2005, THE ASSESSEE HAD NOT WRITTEN OFF THE AMOUNT IN THE BOOKS OF ACCOUNT. THEREFORE, IT CANN OT BE TREATED THAT LIABILITY TO PAY HAD SEIZED TO EXIST AS ON 31. 03.2005. THE ASSESSEE HAD TAKEN DECISION ON 31.03.2007 TO WRITE BACK THE AMOUNT AND HAD ADMITTED THE SAME AS INCOME FOR THAT YEAR AND HENCE, NO ADDITION CAN BE MADE IN ASSESSMENT YEAR 2 005-06. WE, THEREFORE, SET ASIDE THE ORDER OF LD. CIT(A) AND DI RECT THE ASSESSING OFFICER TO DELETE THE ADDITION. 8. THE NEXT ISSUE FOR CONSIDERATION RELATES TO DISA LLOWANCE OF ` 3,59,895/- ON ACCOUNT OF BONUS/COMMISSION PAID TO M D. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT U /S 143(3), HAD DISALLOWED THE AMOUNT PAID TO THE MD AS BONUS AND C OMMISSION U/S 36(1)(II) OF HT ACT. WHILE MAKING DISALLOWANCE, TH E ASSESSING OFFICER HAD HELD THAT SECTION 36(1)(II) HAS BEEN SPECIFICAL LY INSERTED TO ENSURE THAT COMPANY DOES NOT AVOID TAX BY DISTRIBUT ING THEIR PROFITS TO THEIR MEMBERS/SHAREHOLDERS AS BONUS OR COMMISSIO N INSTEAD OF DIVIDEND. IN THE CASE OF THE ASSESSEE, THE PROFITS WHICH WOULD HAVE BEEN OTHERWISE PAYABLE TO THE DIRECTORS AS DIVIDEND HAVE BEEN DIVERTED IN THE FORM OF BONUS/COMMISSION. BY DIVER TING THE AMOUNT I.T.A.NO. 318/DEL/2011 5 OF ` 6,000/- AS BONUS AND ` 3,48,895/- AS COMMISSIO N TO THE DIRECTOR, THE ASSESSEE HAD ONLY REDUCED THE CORPUS AVAILABLE FOR DISTRIBUTION OF DIVIDEND. THEREFORE, THE AMOUNT OF ` 3,54,895/- WAS NOT ALLOWABLE AS DEDUCTION. 9. ON APPEAL, IT WAS SUBMITTED THAT BONUS AND COMMI SSION HAS BEEN PAID TO MD IN TERMS OF RESOLUTION PASSED IN TH E BOARD MEETING. THE MD WAS HOLDING 17.5% OF SHARES OF THE ASSESSEE COMPANY. THE COMMISSION AND BONUS HAS BEEN PAID FOR THE SERVICES RENDERED AND THEREFORE, IT WAS ALLOWABLE IN THE HANDS OF THE ASS ESSEE COMPANY. LD. CIT(A) REJECTED THE CONTENTION OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE HAD NOT BEEN ABLE TO BRING ON REC ORD ANY FACTS REGARDING THE REASONABLENESS OF PAYMENT MADE ON ACC OUNT OF BONUS AND COMMISSION. NO COMMERCIAL EXPEDIENCY FO R THE ABOVE PAYMENT HAS BEEN BROUGHT OUT ON RECORD. THE TAX AUDITOR IN HIS REPORT HAS STATED THAT AMOUNT WAS NOT ALLOWABLE. H E, THEREFORE, UPHELD THE ORDER OF THE ASSESSING OFFICER. 10. BEFORE US, LD. A.R. FOR THE ASSESSEE SUBMITTED THAT SHRI KAPIL GOSWAMI, THE MANAGING DIRECTOR WAS HOLDING 17.5% OF THE SHARES OF THE COMPANY. THE COMMISSION AND BONUS HAVE BEEN PA ID TO THE SERVICES RENDERED AS PER THE RESOLUTION OF THE BOAR D. THE MD HAS PAID TAX ON BONUS AND COMMISSION AND, THEREFORE, IT IS NOT A CASE WHERE PAYMENT OF TAX HAS BEEN AVOIDED. HE PLACED R ELIANCE ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF SA HJADA NAND & SONS VS CIT 108 ITR 358 AND THE DECISION OF HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF LOYAL MOTOR SERVICES CO. LTD. VS CIT 14 ITR 647. THE LD. A.R. FOR THE ASSESSEE ALSO SUBMITTED THAT THE ASSESSING OFFICER HAD SIMPLY RELIED ON TAX AUDIT RE PORT AND NO MATERIAL HAS BEEN BROUGHT ON RECORD TO SUGGEST THAT THE AMOUNT PAID AS COMMISSION AND BONUS WAS PAYABLE AS DIVIDEN D. THE TAX I.T.A.NO. 318/DEL/2011 6 AUDITOR IN THE TAX AUDIT REPORT IS TO STATE THE FAC T AND IS NOT EMPOWERED TO COMMENT WHETHER A PARTICULAR AMOUNT IS ALLOWABLE OR NOT. THEREFORE, DISALLOWANCE MADE BY THE ASSESSING OFFICER AND CIT(A) MERELY RELYING ON THE TAX AUDIT REPORT, IS N OT SUSTAINABLE IN LAW. 11. ON THE OTHER HAND LD. SR. D R SUBMITTED THAT TH E AMOUNT IS NOT ALLOWABLE AS DEDUCTION U/S 361)(II) OF THE ACT AS SHRI KAPIL GOSWAMI IS A SHARE HOLDER AS WELL AS EMPLOYEE OF TH E COMPANY. THE AMOUNT PAID AS COMMISSION AND BONUS IS PAYABLE AS DIVIDEND AND THEREFORE, CANNOT BE ALLOWED DEDUCTION U/S 36(1 )(II) OF THE ACT. THEREFORE, LD. CIT(A) IS JUSTIFIED IN UPHOLDING THE ORDER OF THE ASSESSING OFFICER. 12. WE HAVE HARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. U/S 36(1)(II) ANY SUM PAID TO AN EMPLOYEE AS BONUS AND COMMISSION FOR THE SERVICES RENDERED, WHE RE SUCH SUM WAS NOT PAYABLE TO HIM AS PROFIT OR DIVIDEND IF IT HAD NOT BEEN PAID AS BONUS OR COMMISSION, SHALL BE ALLOWED IN COMPUTA TION OF INCOME U/S 28 OF THE ACT. IN THE INSTANT CASE, THERE IS N O DISPUTE THAT ASSESSEE HAD EARNED PROFITS AND DIVIDEND IS PAYABLE TO THE SHAREHOLDERS. AS PER THE PROVISIONS OF SECTION 36 (1)(II) ANY SUM PAID TO AN EMPLOYEE BY WAY OF BONUS OR COMMISSION F OR THE SERVICES RENDERED WILL BE ALLOWABLE AS DEDUCTION BUT WHERE S UCH SUM WOULD HAVE BEEN PAYABLE TO HIM AS PROFITS OR DIVIDEND, TH E AMOUNT WILL NOT BE ALLOWABLE AS DEDUCTION. ITAT DELHI BENCH IN TH E CASE OF AMD METPLAST LTD (I.T.A. NO. 3934(DEL.) OF 2009) IN ORD ER DATED 31.08.2010 HAS HELD THAT TO THE EXTENT OF AMOUNT OF DIVIDEND PAYABLE WILL NOT BE ALLOWABLE AS DEDUCTION U/S 36(1 )(II) OF THE ACT. HOWEVER, THE DIFFERENCE BETWEEN AMOUNT OF COMMISSIO N OR BONUS AND AMOUNT WHICH WOULD HAVE BEEN PAID AS DIVIDEND W OULD BE I.T.A.NO. 318/DEL/2011 7 ALLOWABLE AS DEDUCTION U/S 37(1) OF THE ACT IF ON I NVESTIGATION IT IS FOUND THAT THE DIRECTORS HAVE RENDERED SERVICES. I N THE INSTANT CASE, THE LD. CIT(A) HAS RECORDED A FINDING OF FACT THAT ASSESSEE HAD NOT BROUGHT ON RECORD ANY MATERIAL FOR REASONABLENESS O F PAYMENT OF COMMISSION OR BONUS. THE ASSESSEE HAD ALSO NOT PRO VED WITH EVIDENCE THE COMMERCIAL EXPEDIENCY OF SUCH PAYMENT. HOWEVER, ASSESSING OFFICER HAD NOT WORKED OUT DIVIDEND PAYAB LE AS PER C COMPANYS ACT. WE THEREFORE FEEL IT PROPER TO SET ASIDE THE ISSUE TO THE FILE OF ASSESSING OFFICER WITH THE DIRECTIONS T O WORK OUT DIVIDEND PAYABLE AS PER COMPANYS ACT. IF THE DIVIDEND PAYA BLE EXCEEDS THE AMOUNT OF BONUS AND COMMISSION THE ASSESSEE WILL NO T BE ELIGIBLE FOR DEDUCTION U/S 36(1)(II) OF THE ACT. IF ON THE OTHER HAND THE BONUS AND COMMISSION PAID EXCEEDS THE AMOUNT OF DIVIDEND PAYABLE, THE DIFFERENCE BETWEEN AMOUNT OF BONUS AND COMMISSION P AID AND DIVIDEND PAYABLE AS PER LAW WILL BE ALLOWABLE AS DE DUCTION. THE ASSESSING OFFICER IS DIRECTED ACCORDINGLY. 13. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 14. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST MARCH, 2011. SD./- SD./- (C. L. SETHI) (K. D. RANJAN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED:31 ST MAR., 2011 SP. COPY FORWARDED TO 1. APPELLANT 2. RESPONDENT 3. CIT TRUE COPY: BY ORDER 4. CIT(A) 5. DR DY. REGISTRAR, ITAT, NEW DELHI