M/s. Hero Honda Finlease Ltd., New Delhi V. Addl. CIT, New Delhi

ITA 4329/DEL/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61653 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 15-03-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 22-09-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: Y S KAKKAR
• Assessee Lawyers: SHIKHA SHARMA
• Keywords: Earning of tax free income; Wrong claim; Tax effect
• Section: 14A; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C: NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI A.D. JAIN, JUDICIAL MEMBER ITA NO. 4329/DEL/2010 ASSESSMENT YEAR: 2005-06 HERO HONDA FINLEASE LTD., 34, BASANT LOK, VASANT VIHAR, NEW DELHI. AAACH0157J VS. ADDL. CIT, RANGE-12, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SH. AJAY VOHRA, ADV. & SMT. SHIKHA SHARMA, CA RESPONDENT BY : MS. Y.S. KAKKAR, SR. DR O R D E R PER S.V. MEHROTRA, A.M. THIS APPEAL IS FILED BY THE ASSESSEE AND DIRECTED AGAINST THE ORDER OF LD. CIT(A) DATED 31.08.2010 FOR THE A.Y. 2005-06 . 2. BRIEF FACTS OF THE CASE ARE THAT IN THE RELEVANT ASSESSMENT YEAR THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF HIR E PURCHASE, LEASING AND FINANCING, MAINLY OF MOTORCYCLES SOLD B Y M/S HERO HONDA MOTORS LTD. IT HAD FILED ITS RETURN OF INCOME DECL ARING TOTAL INCOME OF RS. 42,62,50,140/-. THE ASSESSMENT WAS COMPLETED AT A TOTAL INCOME OF RS. 43,03,88,060/- AFTER MAKING FOLLOWING DISALLOWANCES : - ADD: DISALLOWANCE U/S 14A AS DISCUSSED ABOVE RS. 2,37,918 II) DISALLOWANCE U/S 36(1)(II) AS DISCUSSED AB OVE RS. 39,00,000 3. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) WHO WHILE PARTLY ALLOWING THE ASSESSEES APPEAL CONFIRMED THE DISALLOWANCE MADE U/S 36(1)(II) AND RESTRICTED THE DISALLOWANCE U/S 1 4A TO RS. 50,000/-. ITA NO. 4329/D/2010 2 4. BEING AGGRIEVED WITH THE ORDER OF LD. CIT(A), TH E ASSESSEE IS IN APPEAL BEFORE US AND HAS TAKEN FOLLOWING GROUNDS OF APPEAL: - 1. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN UPHOLDING DISALLOWANCE OF EXPENSES TO THE EX TENT OF RS. 50,000/- MADE BY THE AO UNDER SECTION 14A OF THE I.T. ACT, 1 961 ON THE GROUND THAT CERTAIN OVERHEAD EXPENSES MUST HAVE BEEN INCUR RED IN RELATION TO EARNING OF EXEMPT DIVIDEND INCOME. 1.1 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) E RRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT ONLY EXPENDITURE INCUR RED HAVING DIRECT RELATION WITH EARNING OF EXEMPT INCOME COULD HAVE B EEN DISALLOWED U/S 14A OF THE ACT. 2. THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED O N FACTS AND IN LAW IN UPHOLDING THE ACTION OF THE AO IN DISALLOWING COMMI SSION PAID TO DIRECTOR, AMOUNTING TO RS. 39 LACS U/S 36(1)(II) OF THE ACT ON THE ALLEGED GROUND THAT THE SAME WAS PAID IN LIEU OF DISTRIBUTI ON OF PROFITS AS DIVIDEND, RESULTING IN AVOIDANCE OF DIVIDEND DISTRI BUTION TAX. 5. BRIEF FACTS APROPOS GROUND NO. 1 AND 2 ARE THAT THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS. 6,79,767/-, WHICH HAD BEEN CLAIMED AS TAX FREE. THE AO REQUIRED THE ASSESSEE TO SUBMIT DETAI LS OF EXPENSES INCURRED WITH REGARD TO EARNING OF THE AFORESAID DI VIDEND OF RS. 6,79,767/-. THE ASSESSEE SUBMITTED THAT THE INVESTMENT IN THE S HARES WAS MADE OUT OF SURPLUS FUNDS OF THE BUSINESS AND NEITHER ANY CO ST WAS INCURRED IN MAKING THE SAID INVESTMENT, NOR COST WAS INCURRED I N EARNING THE SAID DIVIDEND. THE AO POINTED OUT THAT THIS ISSUE HAD B EEN DECIDED IN A.Y. 2002-03 AND 2003-04 AND THE FINDINGS OF A.Y. 2002-0 3 WERE FOLLOWED IN 2004-05 ALSO. FOLLOWING THE FINDINGS FOR AFORESAID ASSESSMENT YEARS, THE AO DISALLOWED AN AMOUNT OF RS. 2,37,918/- BEING THE EXPENDITURE INCURRED FOR EARNING THE DIVIDEND INCOME OF RS. 6,7 9,767/- BY APPORTIONING THE TOTAL EXPENDITURE INCURRED IN THE RATIO OF THE DIVIDEND RECEIPT TO THE TOTAL RECEIPTS OF THE ASSESSEE. 6. LD. CIT(A) AFTER CONSIDERING THE ASSESSEES SUBM ISSIONS RESTRICTED THE DISALLOWANCE TO RS. 50,000/-, INTER-ALIA, OBSER VING THAT IT COULD NOT BE DENIED THAT SOME EXPENDITURE HAD NECESSARILY TO BE ATTRIBUTED TO EARNING ITA NO. 4329/D/2010 3 SUCH DIVIDEND INCOME ON ACCOUNT OF ESTABLISHMENT CH ARGES, ADMINISTRATION EXPENSES AND OTHER EXPENSES ETC. LD . COUNSEL FOR THE ASSESSEE SUBMITTED THAT DISALLOWANCE HAS BEEN CONFI RMED TO THE EXTENT OF RS. 50,000/- PURELY ON ADHOC BASIS WITHOUT ESTABLIS HING ANY NEXUS BETWEEN EARNING OF DIVIDEND AND INCURRING OF EXPEND ITURE UNDER THE AFOREMENTIONED HEADS. 7. LD. DR SUBMITTED THAT UNDER SUCH CIRCUMSTANCES T RIBUNAL IS CONSISTENTLY RESTORING THE MATTER TO THE FILE OF AO IN VIEW OF THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF MA XOPP INVESTMENT LIMITED & OTHERS VS. CIT, 203 TAXMANN 364. 8. LD. COUNSEL IN THE REJOINDER SUBMITTED THAT EVEN IF THE MATTER IS TO BE RESTORED, THE DISALLOWANCE SHOULD NOT EXCEED RS. 50,000/- AS THE ASSESSEE CANNOT BE WORSE OFF. LD. DR, HOWEVER, SUB MITTED THAT SINCE MATTER IS TO BE RESTORED TO THE AO IN VIEW OF THE J URISDICTIONAL HIGH COURT, NO RIDER CAN BE PUT ON AO WHILE DECIDING THE ISSUE HAVING REGARD TO THE DECISION OF JURISDICTIONAL HIGH COURT. 9. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES AND HAVE PERUSED THE RECORD OF THE CASE. ADMITTEDLY, FOR TH E YEAR UNDER CONSIDERATION, RULE 8D WAS NOT APPLICABLE. WE FIND THAT UNDER SUCH CIRCUMSTANCES, TRIBUNAL, FOLLOWING THE DECISION IN THE CASE OF MAXOPP INVESTMENT LTD. (SUPRA), IS CONSISTENTLY RESTORING THE MATTER TO THE FILE OF AO FOR QUANTIFYING THE EXPENDITURE ON SOME REASONAB LE BASIS. 10. WE ARE IN AGREEMENT WITH LD. DR THAT NO RIDER C AN BE PUT ON THE AO WHILE DECIDING THE ISSUE AS HE HAS TO FOLLOW THE DE CISION OF HONBLE JURISDICTIONAL HIGH COURT. MOREOVER, ONCE THE ORDE R OF LD. CIT(A) IS SET ASIDE, HIS FINDINGS CANNOT BE GIVEN ANY CREDENCE. 11. IN VIEW OF ABOVE DISCUSSION, WE RESTORE THIS MA TTER TO THE FILE OF AO TO QUANTIFY THE EXPENDITURE INCURRED FOR EARNING DI VIDEND ON SOME REASONABLE BASIS. ITA NO. 4329/D/2010 4 12. IN THE RESULT, THIS GROUND IS ALLOWED FOR STATI STICAL PURPOSES. 13. BRIEF FACTS APROPOS GROUND NO. 3 ARE THAT ASSES SEE HAD CLAIMED EXPENSES ON ACCOUNT OF COMMISSION TO DIRECTOR AMOUN TING TO RS. 39 LACS. SINCE IN THE OPINION OF AO THIS CLAIM WAS PRIMA-FAC IE NOT ALLOWABLE AS PER THE PROVISIONS OF 36(1)(II), HE REQUIRED THE ASSESS EE TO FURNISH DETAILS OF COMMISSION TO DIRECTOR WITH THE BASIS THEREOF AND T O ALSO JUSTIFY ITS ALLOWABILITY U/S 36(1)(II). THE ASSESSEE VIDE HIS LETTER DATED 26.12.2007 SUBMITTED THAT COMMISSION AMOUNTING TO RS. 39 LACS HAD BEEN PAID @ 1% OF NET PROFIT (WRONGLY MENTIONED AS TOTAL TURNOVER IN ASSTT. ORDER). IT WAS FURTHER POINTED OUT THAT THE COMMISSION WAS PAID AS REMUNERATION FOR THE SERVICES RENDERED BY MS. RENU MUNJAL FOR RUNNING TH E BUSINESS AND THIS SUM WAS NOT OTHERWISE PAYABLE AS PROFIT OR DIVIDEND . THE AO DID NOT ACCEPT THE ASSESSEES CONTENTION FOR THE FOLLOWING REASONS: - I) COMMISSION HAD BEEN PAID TO MS. RENU MUNJAL, EM PLOYEE-DIRECTOR IN THE COMPANY WHO WAS ALSO A SHAREHOLDER. II) THE PROFIT WHICH WOULD HAVE BEEN OTHERWISE PAID TO MS. RENU MUNJAL AS DIVIDEND HAD BEEN DIVERTED IN THE FORM OF COMMISSION. III) BY DIVERTING SUM OF RS. 39 LACS AS COMMISSION TO DIRECTOR, THE ASSESSEE HAD ONLY REDUCED THE CORPUS AVAILABLE FOR DISTRIBUTION AS DIVIDEND. IV) THE COMMISSION HAD BEEN WORKED OUT AS CERTAIN P ERCENTAGE OF THE NET PROFIT AND, THEREFORE, COULD NOT BE SAID TO BE A PART OF SALARY. IN VIEW OF ABOVE FACTUAL FINDINGS, THE AO HELD THAT THE COMMISSION OF RS. 39 LACS WAS NOT ALLOWABLE AS PER THE PROVISIONS OF SEC. 36(1)(II). 14. BEFORE LD. CIT(A) THE ASSESSEE, INTER-ALIA, ADV ANCED FOLLOWING SUBMISSIONS: - I) THE AMOUNT OF COMMISSION WAS PAID IN ACCORDANCE WITH THE TERMS OF EMPLOYMENT OF MS. RENU MUNJAL AS A WHOLE TIME DI RECTOR, WHICH ITA NO. 4329/D/2010 5 WAS DULY APPROVED BY THE BOARD OF DIRECTORS AND SUB SEQUENTLY RATIFIED BY THE SHAREHOLDERS. II) THE AMOUNT OF COMMISSION WAS COMPUTED ON THE B ASIS OF 1% OF NET PROFIT TO BE ARRIVED AT IN ACCORDANCE WITH THE PROVISIONS OF SEC. 198 READ WITH SECTION 349 OF THE COMPANYS ACT, 195 6. III) MS. RENU MUNJAL HELD .1% OF SHARES IN ASSESSEE COMPANY. IV) THE COMMISSION WAS PAID IN LIEU OF SERVICES REN DERED AND NOT IN LIEU OF DISTRIBUTION OF DIVIDEND TO SHAREHOLDERS. V) DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE COMPANY PROPOSED FINAL DIVIDEND @ RS. 15 PER SHARE WHICH WA S DISTRIBUTED AMONGST ALL THE SHAREHOLDERS, INCLUDING MS. RENU MU NJAL/ WHOLE TIME DIRECTOR. THUS, THE DIVIDEND WAS ADDITIONALLY DISTRIBUTED IN PROPORTION TO SHAREHOLDING OF MS. RENU MUNJAL IN TH E COMPANY, IN LINE WITH DISTRIBUTION MADE TO OTHER SHAREHOLDERS. VI) THERE WAS NO WHISPER OR ANY EVIDENCE BEING BRO UGHT ON RECORD BY THE AO IN THE ASSESSMENT ORDER WHICH COULD SUGGEST THAT PROFITS WERE DISTRIBUTABLE TO WHOLE TIME DIRECTOR/MRS. RENU MUNJAL AS A SHAREHOLDER OF .1% SHARES IN THE ASSESSEE COMPANY I N LIEU OF WHICH COMMISSION HAD BEEN PAID. VII) SIMPLY BECAUSE THE WHOLE TIME DIRECTOR/MS. REN U MUNJAL WAS ALSO THE SHAREHOLDER OF THE ASSESSEE COMPANY, THE SAME D ID NOT IPSO FACTO LEAD TO THE CONCLUSION THAT PAYMENT MADE WAS IN LI EU OF RIGHT VESTED IN MS. RENU MUNJAL AS A SHAREHOLDER. VIII) IT IS NOT THE CASE OF THE AO THAT AGGREGATE R EMUNERATION (INCLUDING COMMISSION) PAID TO THE WHOLE TIME DIREC TOR WAS EXCESSIVE HAVING REGARD TO THE NATURE OF SERVICES R ENDERED. THE ASSESSEE PLACED RELIANCE ON THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF SHAHZADA NAND & SONS VS. CIT 1 08 ITR 358, WHEREIN IT WAS, INTER-ALIA, HELD THAT FOR ALLOWABIL ITY OF COMMISSION IT IS ITA NO. 4329/D/2010 6 NOT NECESSARY U/S 36(1)(II) THAT SOME EXTRA SERVICE S SHOULD HAVE BEEN RENDERED. IX) THE COMMISSION WAS PAID IN EARLIER YEARS ALSO IN ACCORDANCE WITH THE TERMS OF EMPLOYMENT, WITH REFERENCE TO PERCENTA GE OF PROFIT AND WAS ALLOWED. THEREFORE, IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF RADHA SWAMI SATSANG VS . CIT 193 ITR 321 THE ASSESSEES CLAIM SHOULD HAVE BEEN ALLOW ED. LD. CIT(A) DISMISSED THE ASSESSEES GROUND OF APPEA L OBSERVING IN PARA 3.3 AS UNDER: - KEEPING IN VIEW THE FACTS AND CIRCUMSTANCES OF TH E CASE, IT IS HELD THAT THE AO WAS RIGHT IN DISALLOWING THE COMMI SSION PAYMENT U/S 36(1)(II) WHICH AS PER THE AO ENSURES THAT COMPANY DID NOT RESORT TO AVOIDING PAYMENT OF TAX BY DISTRIBUTING THE PROFIT TO THEIR SPECIFIC MEMBERS/DIRECTORS/SHAREHOLDERS AS BONUS OR COMMISSI ON INSTEAD OF DIVIDEND. THE AO IS NOT WRONG IN OBSERVING THAT BY DIVERTING THE SUM OF RS. 39 LACS AS COMMISSION TO DIRECTOR THE ASSESS EE HAS RESORTED TO REDUCING THE CORPUS AVAILABLE FOR DISTRIBUTION AS D IVIDEND. ACCORDINGLY, KEEPING IN VIEW THE ENTIRE FACTS AND C IRCUMSTANCES OF THE CASE, THE ACTION OF THE AO IS UPHELD. 15. LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUB MISSIONS ADVANCED BEFORE THE LD. CIT(A) AND REFERRED TO PAGES 69 TO 7 2 OF THE PAPER BOOK, WHEREIN THE RESOLUTION CONTAINING APPOINTMENT OF MS . RENU MUNJAL IS CONTAINED. HE POINTED OUT THAT MS. RENU MUNJAL WAS RE-APPOINTED IN THE MEETING HELD ON 5 TH AUGUST, 2000 W.E.F. 1 ST SEPTEMBER, 2000 FOR A PERIOD OF 5 YEARS AND HER TERMS OF APPOINTMENT INCLUDED PA YMENT OF COMMISSION WHICH READ AS UNDER: - COMMISSION: THE APPOINTEE SHALL BE ALLOWED REMUNE RATION BY WAY OF COMMISSION IN ADDITION TO BASIC SALARY, PERQUISI TES AND ALLOWANCES, BENEFITS OR AMENITY SUBJECT TO THE COND ITION THAT THE AMOUNT OF COMMISSION SHALL NOT EXCEED 1% OF THE NET PROFITS OF THE COMPANY IN A PARTICULAR FINANCIAL YEAR AS COMPUTED IN THE MANNER REFERRED TO IN SECTION 198 OF THE COMPANIES ACT, 19 56. 16. HE POINTED OUT THAT THE TERMS OF APPOINTMENT AS SET OUT IN THE MEETING HELD ON 5 TH AUGUST, 2000 WERE PARTIALLY MODIFIED IN THE 12 TH ANNUAL GENERAL MEETING OF THE MEMBERS HELD ON 14 TH JULY, 2003 AS UNDER: ITA NO. 4329/D/2010 7 RESOLVED THAT IN PARTIAL MODIFICATION OF THE EARL IER RESOLUTION PASSED WITH RESPECT TO THE RE-APPOINTMENT OF RENU M UNJAL (MS.), WHOLE-TIME DIRECTOR OF THE COMPANY IN THE 10 TH ANNUAL GENERAL MEETING OF THE COMPANY HELD ON AUGUST 18, 2001, THE CONSENT OF THE COMPANY BE AND IS HEREBY ACCORDED UNDER SECTIONS 30 9, 310 READ WITH SCHEDULE XIII AND OTHER APPLICABLE PROVISIONS, IF A NY, OF THE COMPANIES ACT, 1956 TO INCREASE HERE BASIC SALARY AS SET OUT IN THE EXPLANATORY STATEMENT ANNEXED HERETO FOR THE REMAINING PERIOD O F HER TENURE. 17. HE, THEREFORE, SUBMITTED THAT THE COMPLETE PACK AGE OF REMUNERATION PAYABLE TO MS. RENU MUNJAL INCLUDED COMMISSION ALSO . LD. COUNSEL FURTHER REFERRED TO PAGE 6 OF THE PAPER BOOK WHICH IS PART OF 14 TH ANNUAL REPORT AND POINTED OUT THAT EXPLANATORY STATEMENT P URSUANT TO SEC. 173(2) OF THE COMPANYS ACT, 1956 READ AS UNDER: - ITEM NO. 7 THE TENURE OF MRS. RENU MUNJAL, WHOLE-TIME DIRECTOR OF THE COMPANY IS COMING TO AN END ON AUGUST 31, 2005. SH E WAS RE-APPOINTED AS WHOLE-TIME DIRECTOR IN THE 10 TH ANNUAL GENERAL MEETING HELD ON AUGUST 18, 2001. HER BASIC SALARY WAS REVISED TO RS. 1,35,000 WITH AN INCREASE OF 10% IN EACH OF THE FINANCIAL YEAR DURING THE REMAINING PERIOD O F HER TENURE IN THE 12 TH ANNUAL GENERAL MEETING HELD ON JULY 14, 2003. THEREAFTER, THE REMUNERATION COMMITTEE IN TH EIR MEETING HELD ON APRIL 18, 2005 AFTER HAVING DUE CON SIDERATION OF THE REMUNERATION POLICY OF THE COMPANY AND OF HE R INCREASED JOB RESPONSIBILITIES IN THE PRESENT BUSIN ESS SCENARIO OF THE COMPANY HAVE RECOMMENDED HER APPOINTMENT AS THE MANAGING DIRECTOR OF THE COMPANY. THEREAFTER THE B OARD OF DIRECTORS HAVE APPROVED HER APPOINTMENT FOR A PERIO D OF 5 (FIVE) YEARS FROM SEPTEMBER 1, 2005 SUBJECT TO YOUR APPROVAL ON THE FOLLOWING REMUNERATION (INCLUDING MINIMUM REMUNERATION) AND OTHER TERMS AND CONDITIONS AS STA TED BELOW: I. BASIC SALARY : RS. 2,00,000/- (RUPEES TWO LACS ONLY) PER MONTH, SUBJECT TO AN INCREASE OF 10% PER ANNUM EFFE CTIVE APRIL 1, 2006 AND THEREAFTER ON THE FIRST DAY OF EA CH FINANCIAL YEAR. II . COMMISSION : THE APPOINTEE SHALL BE ALLOWED REMUNERATION BY WAY OF COMMISSION IN ADDITION TO BASIC SALARY, P ERQUISITES AND ANY OTHER ALLOWANCES, BENEFITS OR AMENITIES SUB JECT TO THE CONDITION THAT THE AMOUNT OF COMMISSION SHALL NOT E XCEED 1% OF THE NET PROFIT OF THE COMPANY IN A PARTICULAR FI NANCIAL YEAR ITA NO. 4329/D/2010 8 AS COMPUTED IN THE MANNER REFERRED TO IN SEC. 198 O F THE COMPANIES ACT, 1956; PROVIDED THAT THE AGGREGATE AMOUNT OF REMUNERATION PAYABLE TO THE APPOINTEE IN A PARTICULAR FINANCIAL YEAR SHA LL BE SUBJECT TO THE OVERALL CEILING LIMIT LAID DOWN IN SECTION 1 98 AND 309 OF THE COMPANIES ACT, 1956. 18. LD. COUNSEL FURTHER REFERRED TO PAGE 5 OF THE P APER BOOK AND POINTED OUT THAT COMPANY HAD DECLARED DIVIDEND OF R S. 15 PER EQUITY SHARES ON 90,50,000 EQUITY SHARES OF RS. 10 EACH FO R THE F.Y. 2004-05. LD. COUNSEL FURTHER REFERRED TO PAGE 38 OF THE PAPE R BOOK, WHEREIN THE COMPUTATION OF NET PROFIT IN ACCORDANCE WITH SEC. 1 98 READ WITH SECTION 349 OF THE COMPANYS ACT IS CONTAINED WHICH IS REPR ODUCED HEREUNDER: - 14) COMPUTATION OF NET PROFIT IN ACCORDANCE WITH S EC. 198 READ WITH SEC. 349 OF THE COMPANIES ACT, 1956 PARTICULARS (RUPEES IN LACS) PROFIT BEFORE TAX AS PER PROFIT & LOSS A/C ADD: MANAGERIAL REMUNERATION LESS: PROFIT ON SALE OF FIXED ASSETS AS PER PROFIT & LOSS A/C LESS: LOSS ON SALE OF ASSETS AS PER SECTION 350 OF THE COMPANIES ACT, 1956 NET PROFIT AS PER SECTION 349 OF THE COMPANIES ACT, 1956. COMMISSION @ 1% OF THE ABOVE PROFIT FOR THE WHOLE-TIME DIRECTOR FOR THE YEAR RESTRICTED TO 2004-05 4,071.02 93.25 15.53 3,930.23 39.30 39.00 2003-04 3,427.44 69.81 57.76 3,229.26 32.29 32.00 19. WITH REFERENCE TO ABOVE COMPUTATION, LD. COUNSE L SUBMITTED THAT SINCE THE COMMISSION WAS PAID IN ACCORDANCE WITH TH E TERMS OF EMPLOYMENT AND HENCE WAS PART OF SALARY. THEREFORE , THE IMPUGNED AMOUNT WAS NOT DISTRIBUTABLE AS DIVIDEND. HE POINT ED OUT THAT COMPANIES ACT DOES NOT PROVIDE MODES FOR DETERMINATION OF COM MISSION AND, ITA NO. 4329/D/2010 9 THEREFORE, THERE WAS NO PROHIBITION ON DETERMINING THE COMMISSION ON THE BASIS OF NET PROFIT OF THE COMPANY. LD. COUNSEL RE FERRED TO THE FOLLOWING DECISIONS IN SUPPORT OF HIS CONTENTION THAT UNDER S UCH CIRCUMSTANCES IT CANNOT BE HELD THAT COMMISSION WAS PAID IN LIEU OF DIVIDEND: - I. ACIT VS. BONY POLYMERS P. LTD. 36 SOT 456 II. DCIT VS. HINDU INDUSTRIES LTD. 2010-TIOL-632 III. DCIT VS. M/S CELSIUS REFRIGERATION P. LTD.:ITA NO. 4746/DEL/2010 IV. DCIT VS. CIT SHIPBROKERS INDIA P. LTD. : LEXDOC ID 416029 V. DCIT VS. C.M.R. DESIGN AUTOMATION P. LTD. : 418792 VI. CAREER LAUNCHER INDIA LTD. VS. ACIT: ITA NO. 4924/D EL/2009 VII. MAXOPP INVESTMENT LTD. VS. CIT:203 TAXMAN 364 20. LD. COUNSEL FURTHER SUBMITTED THAT SINCE MS. RE NU MUNJAL WAS HOLDING ONLY 1% SHARE, THEREFORE, IN ANY CASE, RS. 39 LACS COULD NOT HAVE BEEN PAID AS DIVIDEND WHICH CLEARLY SHOWS THAT THE COMMISSION HAD BEEN PAID FOR SERVICES RENDERED BY HER AND NOT IN LIEU O F DIVIDEND. LD. COUNSEL FURTHER POINTED OUT THAT DECISION OF TRIBUNAL HAS B EEN UPHELD BY HONBLE DELHI HIGH COURT IN THE CASE OF BONY POLYMERS (P) L TD. VIDE ITA NO. 1298/2011 DT. 19/10/2011. 21. LD. DR SUBMITTED THAT THE BASIC QUESTION IS WHE THER THE COMMISSION WAS PAID FOR SERVICES RENDERED OR NOT. SHE REFERRE D TO PAGE 9 & 10 OF PAPER BOOK TO DEMONSTRATE THAT MS. RENU MUNJAL HAD NOT SUFFICIENT QUALIFICATIONS WHICH COULD JUSTIFY HER ALLEGED SERV ICES TO THE COMPANY. SHE POINTED OUT THAT MR. BRIJ MOHAN LAL, THE CHAIRM AN OF THE COMPANY, WAS HONORARY MEMBER OF THE INDIAN INSTITUTION OF IN DUSTRIAL ENGINEERING. SIMILARLY, SH. OM PRAKASH MUNJAL WAS CO-CHAIRMAN & CEO OF HERO CYCLES LTD. MR. PAWAN MUNJAL WAS ALSO A GRADUATE I N MECHANICAL ENGINEERING. CONSIDERING THE QUALIFICATIONS OF ALL THESE DIRECTORS, MS. RENU MUNJAL HAD NO SUCH QUALIFICATIONS. SHE REFERR ED TO PAGE 18 OF THE PAPER BOOK, WHEREIN THE POLICY REGARDING PAYMENT OF REMUNERATION TO DIRECTORS IS CONTAINED AND POINTED OUT THAT AS PER THIS POLICY, REMUNERATION WAS FIXED CONSIDERING THE VARIOUS FACTORS SUCH AS Q UALIFICATION, EXPERIENCE, ETC. IN THE CORPORATE WORLD AND THE CUR RENT FINANCIAL POSITION OF ITA NO. 4329/D/2010 10 THE COMPANY. SHE, THEREFORE, SUBMITTED THAT THE RE MUNERATION FIXED BY THE COMPANY WAS NOT COMMENSURATE WITH THE SERVICES WHICH MS. RENU MUNJAL WAS TO RENDER TO THE COMPANY. SHE POINTED O UT THAT NO EVIDENCE REGARDING MODE OF FIXATION OF COMMISSION HAD BEEN F ILED BY THE ASSESSEE SO AS TO JUSTIFY SUCH HIGH COMMISSION PAID TO HER. SHE REFERRED TO THE DECISION OF SPL. BENCH IN THE CASE OF M/S DALAL BRO ACHA STOCK BROKING P. LTD. VS. ADDL. CIT AND REFERRED TO PARA 7.12 TO 7.1 4 OF THE SAID DECISION WHICH IS REPRODUCED HEREUNDER: - 7.12 THE A.Y. 2004-05 WAS THE FIRST YEAR WHEN THE ASESSEE STARTED PAYING COMMISSION OF RS. 40.00 LACS TO EACH WORKING DIRECTOR IN ADDITION TO SALARY. IN THE IMMEDIATELY PRECEDIN G YEAR, THE DIRECTORS HAD BEEN PAID ONLY SALARY WHICH WAS RS. 6 .00 LACS PER ANNUM IN CASE OF CHAIRMAN AND RS. 12.00 LACS PE R ANNUM IN CASE OF THE OTHER TWO DIRECTORS. THE TRIBUNAL I N THE SAID ORDER HAS NOT GIVEN ANY FINDING WHETHER SUBSTANTIAL PAYMENT OF RS. 40.00 LACS WAS FOR ANY EXTRA SERVICES RENDER ED. THE TRIBUNAL BASICALLY ALLOWED THE CLAIM ON THE GROUND THAT IN THE IMMEDIATE PRECEDING YEAR, SALARY EXPENDITURE HAD BE EN ALLOWED AND PAYMENT OF COMMISSION WAS SUPPORTED BY THE BOARD RESOLUTION AND THAT THERE WAS NO TAX ADVANTAG E TO THE ASSESSEE. THE TRIBUNAL CONFIRMED THE FINDING OF TH E CIT(A) WHICH HAD BEEN REPRODUCED IN PARA 7 OF THE ORDER OF THE TRIBUNAL AS PER WHICH THE CIT(A) DELETED THE ADDITI ON MADE BY THE AO ON THE GROUND THAT THE DIRECTORS WERE COM PETENT TO UNDERTAKE THE ACTIVITIES OF THE COMPANY WHICH HAD Y IELDED HUGE PROFITS. THE EDUCATION OF THE DIRECTORS WAS O F NOT GREAT SIGNIFICANCE. CIT(A) THUS DELETED THE ADDITION ON ACCOUNT OF ESTIMATED DISALLOWANCE. THUS, EVEN CIT(A) WHOSE FIN DING HAS BEEN CONFIRMED BY THE TRIBUNAL HAS NOT GIVEN ANY FI NDING THAT HUGE PAYMENT OF COMMISSION WAS LINKED TO ANY EXTRA SERVICES. THE BOARD RESOLUTION CANNOT BE CONSIDERED AS AN EVI DENCE OF EXTRA SERVICE PARTICULARLY WHEN THE BOARD IS CONSTI TUTED BY THE DIRECTOR EMPLOYEES TO WHOM PAYMENTS HAVE BEEN MADE. THERE IS ALSO NO FINDING BY THE TRIBUNAL TO THE EFF ECT THAT PAYMENT OF COMMISSION WAS COMMENSURATE TO THE MARKE T VALUE OF THE SERVICES. THUS, THE DECISION OF THE T RIBUNAL IN A.Y. 2004-05 (SUPRA), CANNOT BE CONSIDERED AS PRECE DENT FOR THE PLEA THAT HUGE COMMISSION HAD BEEN PAID FOR EXT RA SERVICES OR THAT PAYMENT WAS COMMENSURATE TO MARKET VALUE OF SERVICES. AS POINTED OUT EARLIER, NO EVIDENCE O F ANY EXTRA ITA NO. 4329/D/2010 11 SERVICES TO JUSTIFY HUGE COMMISSION PAYMENTS HAS BE EN PRODUCED BEFORE THE LOWER AUTHORITIES OR EVEN BEFOR E US. 7.13 WE HAVE TO EVALUATE THE CASE ON BASIS OF MATER IAL AVAILABLE ON RECORD. ON CAREFUL PERUSAL OF FINANCIAL PERFORMANC E STATISTICS TABULATED EARLIER, WE NOTE THAT BOTH THE TURNOVER A ND THE PROFIT WAS EXCEPTIONALLY HIGH IN A.Y. 2000-01 COMPARED TO THE EARLIER YEAR AND SUBSEQUENT THREE YEAR PERIOD. BUT THIS WAS BECAUSE OF THE REASON THAT THERE WAS STOCK MARKET B OOM WHICH HAD PEAKED IN A.Y. 2000-01 AND THE BUBBLE HAD BURST ONLY TOWARDS THE FAG END OF THAT YEAR, WHICH WAS THE REA SON FOR EXCEPTIONAL PERFORMANCE IN THAT YEAR. THE ASSESSEE IS A SHARE BROKER WHO GETS COMMISSION ON SALE/PURCHASE OF SHAR ES BY INVESTORS/TRADERS. THE INCOME OF THE ASSESSEE IS A SSURED IRRESPECTIVE OF THE FACT WHETHER THE INVESTOR/TRADE R LOSSES OR GAINS IN THE TRANSACTION. THE COMMISSION, WILL, HO WEVER, DEPEND UPON THE MARKET CONDITIONS. IN CASE OF BOOM WHEN THE MARKET IS FLOODED WITH INVESTORS/TRADERS, INCOME WI LL RISE AS VOLUME INCREASES BUT IN CASE OF SLUMP WHEN INVESTOR S/TRADERS DESERT THE MARKET, THERE WILL BE FALL IN VOLUME AND INCOME. AFTER THE A.Y. 2000-01 TO 2003-04 THE TURNOVER FELL TO 50% OR EVEN LESS AND THE PROFIT DECLINED MORE STEEPLY. 7.14 THEREFORE, THE ONLY REASONABLE CONCLUSION WHIC H CAN BE DRAWN IS THAT THE PAYMENT OF RS. 1.05 CRORES SHOWN AS COMMISSION IN A.Y. 2000-01 WHEN THERE WAS EXCEPTION AL PROFIT WAS NOTHING BUT DIVIDEND BECAUSE HAD IT BEEN A GENU INE COMMISSION, THE ASSESSEE WOULD HAVE CONTINUED THE P AYMENT OF COMMISSION AND EVEN MAY HAVE INCREASED IN THE SU BSEQUENT THREE YEAR PERIOD TO IMPROVE PERFORMANCE BUT NO COM MISSION WAS PAID IN THESE YEARS EVEN THOUGH TURNOVER AND PR OFIT WERE BOTH DECLINING. OBVIOUSLY, SHARP FALL IN PROFITS H AD FORCED THE COMPANY MANAGEMENT NOT TO PAY DIVIDEND IN THE GARB OF COMMISSION IN THE NEXT YEARS. THE STOCK MARKET STAR TED RECOVERY FROM A.Y. 2004-05 AND HAD STEADILY GAINED TILL A.Y. 2008-09 WHICH IS REFLECTED IN STEADY INCREASE IN BO TH TURNOVER AND PROFIT. THE ASSESSEE AGAIN STARTED SHOWING PAY MENT OF COMMISSION FROM A.Y. 2004-05. THE PROFIT BEFORE TAX BUT AFTER DEDUCTION ON ACCOUNT OF COMMISSION WAS RS. 4.55 CRO RES IN A.Y. 2004-05 WHICH STEADY RISE IN PERFORMANCE WAS D UE TO IMPROVED MARKET CONDITIONS AND NOT BECAUSE OF ANY E XTRA SERVICE RENDERED BY THE DIRECTORS AS NO EVIDENCE HA S BEEN PRODUCED FOR RENDERING OF EXTRA SERVICES. THE EQUI TY CAPITAL OF THE COMPANY WHICH IS ENTIRELY OWNED BY THE THREE DIRECTORS WAS RS. 6.50 CRORES. INVESTORS IN EQUITY SHARES EX PECT A REASONABLE RETURN ON THE SHARE INVESTMENT AND IN OU R VIEW ITA NO. 4329/D/2010 12 ANY REASONABLE MANAGEMENT WOULD HAVE DECLARED AT LE AST ABOUT 20% DIVIDEND IN THE ABOVE YEARS TO THE SHARE HOLDERS WHEN THERE WERE SUBSTANTIAL PROFITS. NO DOUBT IT I S TRUE THAT DIVIDEND IS NOT MANDATORY AND IS DISCRETIONARY TO B E DECIDED BY THE MANAGEMENT AFTER CONSIDERING THE PROFITABILI TY AND OTHER FACTORS. THE MANAGEMENT MAY NOT DECLARE DIVI DEND EVEN WHEN THERE ARE SUBSTANTIAL PROFITS BECAUSE OF BUSINESS EXIGENCY SUCH AS REQUIREMENT OF FUND FOR ANY EXPANS ION OR COMPANY IS A SHARE BROKER AND ONLY EXECUTES ORDERS ON BEHALF OF INVESTORS ON COMMISSION BASIS. NO FUNDS ARE THE REFORE REQUIRED FOR ANY EXPANSION ETC. NOR ANY SUCH CASE H AS BEEN MADE. THE DIRECTORS IN THE ANNUAL REPORT HAVE NOT GIVEN ANY REASON FOR NOT DECLARING DIVIDEND. THE REASON GIVE N BEFORE US IS THAT THE ASSESSEE DID NOT DECLARE DIVIDEND TO IM PROVE NET WORTH TO ATTRACT FIIS WHO DO TRANSACTIONS ONLY THRO UGH HIGH NET WORTH BROKERS. THIS ARGUMENT IS NOT CONVINCING AT ALL BECAUSE WHETHER THE ASSESSEE PAYS COMMISSION OR DIV IDEND THE NET WORTH IS REDUCED BY THE SAME AMOUNT. IT IS ALSO TO BE NOTED THAT COMMISSION HAS BEEN PAID ONLY TO THE DIR ECTOR EMPLOYEES AND COMMISSION HAS BEEN PAID AS 10% OF PR OFITS SUBJECT TO A LIMIT OF RS. 40.00 LACS WHICH ALSO SHO WS THAT THE ASSESSEE COMPANY DISTRIBUTED PART OF THE PROFITS TO THE DIRECTOR EMPLOYEES WHO WERE THE ONLY SHAREHOLDERS. THEREFORE, ON THE FACTS AND CIRCUMSTANCES THAT DIVI DEND IN CASE OF THE ASSESSEE COMPANY WAS PAYABLE AND THAT T HE SAME HAS BEEN PAID IN THE GARB OF COMMISSION. 22. SHE FURTHER POINTED OUT THAT THE DECISION IN TH E CASE OF BONY POLYMERS P. LTD., CELSIUS REFRIGERATION P. LTD., MA NDAVI MOTORS P. LTD. & CARRIER LAUNCHER P. LTD. HAVE DULY BEEN CONSIDERED BY THE SPL. BENCH. SHE SUBMITTED THAT IN THE LIGHT OF THE DECISION OF SPL. BENCH, THE MATTER MAY BE RESTORED TO THE AO FOR DECIDING THE ISSUE DE NOVO. IN THIS REGARD SHE RELIED ON 131 ITR 451, WHEREIN IT HAS BEEN, INT ER-ALIA, HELD THAT: WHEN THE TRIBUNAL HOLDS THAT SUCH AN ASSESSMENT I S LIABLE TO BE SET ASIDE, THE DUTY OF THE TRIBUNAL DOES NOT END WITH MAKING A DECLARATION THAT THE ASSESSMENT IS ILLEGAL. THE PR OPER ORDER TO BE PASSED IN SUCH A CASE WOULD BE TO SET ASIDE THE ASS ESSMENT AND TO DIRECT THE ITO TO MAKE A FRESH ASSESSMENT IN ACCORD ANCE WITH THE PROCEDURE PRESCRIBED BY LAW. IT WOULD NOT BE CORRE CT MERELY TO UPHOLD THE ASSESSMENT AND DIRECT THE ITO TO MAKE AP PROPRIATE MODIFICATIONS. ITA NO. 4329/D/2010 13 IT IS WELL KNOWN THAT AN APPELLATE AUTHORITY HAS T HE JURISDICTIOL AS WELL AS THE DUTY TO CORRECT ALL ERRORS IN THE PR OCEEDINGS UNDER APPEAL AND TO ISSUE, IF NECESSARY, APPROPRIATE DIRE CTIONS TO THE AUTHORITY AGAINST WHOSE DECISION THE APPEAL IS PREF ERRED TO DISPOSE OF THE WHOLE OR ANY PART OF THE MATTER AFRESH, UNLESS FORBIDDEN FROM DOING SO BY STATUTE. 23. LD. DR FURTHER REFERRED TO PAGE 19 OF THE PAPER BOOK, WHEREIN THE DIRECTORS ATTENDANCE RECORD IS CONTAINED AND POINT OUT THAT MS. RENU MUNJAL WAS THE ONLY DIRECTOR TO WHOM COMMISSION HAD BEEN PAID. SHE FURTHER REFERRED TO PAGE 20 WHEREIN THE SHAREHOLDER S/INVESTORS GRIEVANCE COMMITTEE HAS BEEN CONSTITUTED IN WHICH IT HAS BEEN STATED THAT THE SHAREHOLDER BASE OF THE COMPANY IS VERY SMALL. SHE FURTHER REFERRED TO PAGE 22 WHEREIN CATEGORY OF SHAREHOLDERS AS ON 31 ST MARCH, 2005 IS GIVEN AS PER WHICH PROMOTERS HOLDING WAS 64.74% AND NON-PROMOTERS HOLDING (DEALERS ASSOCIATE EMPLOYEES ETC. WAS 35.26 %) SHE SUBMITTED THAT PERCENTAGE OF HOLDING IS NOT RELEVANT FOR SEC. 36(1)(II). 24. LD. COUNSEL IN THE REJOINDER SUBMITTED THAT NEI THER THE AO NOR LD. CIT(A) HAS DISPUTED THE REASONABLENESS OF COMMISSIO N BY INVOKING SECTION 40A(2)(B)(II). 25. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORD OF THE CASE. ADMITTEDLY THE COMMISSION PAID TO MS. RENU MUNJAL HAS BEEN DISALLOWED BY INVOKING PROVISIONS U/S 36(1 )(II) AND NOT BY INVOKING SECTION 40A(2)(B)(II) OF THE ACT. THIS IM PLIES THAT AO HAS NOT DISPUTED THE SERVICES RENDERED BY MS. RENU MUNJAL B UT HE WAS OF THE OPINION THAT DIVIDEND HAD BEEN PAID IN THE GARB OF COMMISSION BECAUSE IT ACTUALLY REDUCED THE CORPUS AVAILABLE FOR DISTRIBUT ION AS DIVIDEND. THEREFORE, THE MOOT POINT FOR CONSIDERATION, IN THE PRESENT APPEAL, IS WHETHER COMMISSION WAS PAID AS A RUSE OR DEVICE TO HOODWINK THE REVENUE. SECTION 36(1)(II) READS AS UNDER: - 36 (1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREI N, IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 ITA NO. 4329/D/2010 14 (II) ANY SUM PAID TO AN EMPLOYEE AS BONUS OR COMMI SSION FOR SERVICES RENDERED, WHERE SUCH SUM WOULD NOT HAVE BEEN PAYABL E TO HIM AS PROFITS OR DIVIDEND IF IT HAD NOT BEEN PAID AS BONUS OR COM MISSION 26. THE BASIC CONDITIONS FOR ALLOWABILITY OF DEDUCT ION U/S 36(1)(II) ARE AS UNDER: I) THE EXPENDITURE IS ON ACCOUNT OF BONUS OR COMMI SSION PAID TO AN EMPLOYEE II) THE AMOUNT IS PAID FOR SERVICES RENDERED III) THE COMMISSION IS NOT IN LIEU OF PAYMENT OF DI VIDEND. 27. AS NOTED EARLIER, THE AO HAS MERELY DISALLOWED THE COMMISSION INVOKING THE 3 RD INGREDIENT NOTED ABOVE I.E. THE COMMISSION HAS BEE N PAID IN LIEU OF DIVIDEND. IN ORDER TO ARRIVE AT A PROPE R CONCLUSION, IT IS NECESSARY TO FIND OUT THE OBJECT WITH WHICH SECTION 36(1)(II) HAS BEEN INCORPORATED IN THE ACT. THIS PROVISION HAS BEEN I NCORPORATED TO CHECK, INTER-ALIA, PRIVATE COMPANIES FROM AVOIDING TAX BY DISTRIBUTING THEIR PROFITS TO THEIR MEMBERS (SHOWING THEM TO BE THEIR EMPLOYEE S) BY WAY OF COMMISSION AND NOT BY WAY OF DIVIDEND. FOR SUCCESS FULLY CLAIMING AN ALLOWANCE UNDER THIS CLAUSE, THE SUM PAID TO THE EM PLOYEE AS COMMISSION SHOULD NOT HAVE BEEN PAYABLE TO HIM AS P ROFITS OR DIVIDEND, IN CASE IT HAD NOT BEEN PAID AS BONUS OR COMMISSION. SECTION 36(1)(II) MANDATES THAT IF COMMISSION WAS NOT PAID THE IMPUGN ED AMOUNT WOULD HAVE BEEN PAYABLE AS DIVIDEND. THIS SECTION CREATE S OVERRIDING CONDITION FOR REFUSING THE ALLOWANCE. IN THE PRESENT CASE IT IS EVIDENT THAT COMMISSION HAS BEEN PAID AS PART OF REMUNERATION PA CKAGE TO MS. RENU MUNJAL AND THUS, IT CREATED AN OVERRIDING TITLE IN FAVOUR OF MS. RENU MUNJAL BY CREATING A CHARGE AGAINST THE PROFITS OF THE COM PANY. HOWEVER, ITS ALLOWABILITY WAS SUBJECT TO SEC. 36(1)(II). THE AO S CONCLUSION THAT THE CORPUS FOR PAYING THE DIVIDEND HAD REDUCED DOES NOT REFLECT THE CORRECT LEGAL POSITION WITH REFERENCE TO SECTION 36(1)(II). WHENEVER ANY COMMISSION IS PAID TO AN EMPLOYEE IT IS BOUND TO RE DUCE THE CORPUS ITA NO. 4329/D/2010 15 AVAILABLE FOR DISTRIBUTION AS DIVIDEND. BUT THAT I PSO-FACTO CANNOT BE THE BASIS FOR HOLDING THAT COMMISSION IS IN LIEU OF DIV IDEND. ALL THE FACTS AND CIRCUMSTANCES OF THE CASE HAVE TO BE TAKEN INTO CON SIDERATION FOR ARRIVING AT RIGHT CONCLUSION. IN THE PRESENT CASE THE DECLA RED PROFITS OF THE COMPANY WERE RS. 42 CRORES AND DIVIDEND HAD ALSO BE EN PAID TO ALL THE SHAREHOLDERS INCLUDING MS. RENU MUNJAL. IT CANNO T BE DISPUTED THAT THE COMPANY AS WELL AS MS. RENU MUNJAL WERE BRACKETED I N THE HIGHEST INCOME TAX SLAB AND THE ONLY EFFECT WAS ON ACCOUNT OF SAVING DIVIDEND DISTRIBUTION TAX TO THE COMPANY WHICH WAS VERY MINI MUM KEEPING IN VIEW THE OVERALL PROFITS OF THE COMPANY. THIS CANNOT BE HELD TO BE DEVICE FOR REDUCING THE OVERALL TAX EFFECT IN THE CASE OF COMP ANY. 28. IT IS NOT DISPUTED THAT HAD THE COMMISSION NOT BEING PAID TO MRS. RENU MUNJAL, SHE WOULD NOT HAVE RECEIVED DIVIDEND T O THE EXTENT OF RS. 39 LACS BECAUSE HER HOLDING WAS ONLY .1%. THE DIVI DEND WOULD HAVE BEEN MUCH LESS THAN THE COMMISSION ACTUALLY PAID TO MRS. RENU MUNJAL. THUS, SUM OF RS. 39 LACS, IN ANY CASE, WOULD NOT HA VE BEEN PAID TO MRS. RENU MUNJAL AS PROFITS OR DIVIDEND IF IT HAD NOT BE EN PAID AS COMMISSION. WE FIND THAT THE HONBLE DELHI HIGH COURT IN THE CA SE OF CIT VS. M/S BONY POLYMERS PVT. LTD. (ITA NO. 1298/2011) VIDE ITS JUD GMENT DATED 19.10.2011 APPLYING THE RATIO LAID DOWN IN ITA NO. 1283/2011 CIT VS. CREATIVE TRAVEL PVT. LTD. DISMISSED THE REVENUES A PPEAL. HONBLE DELHI HIGH COURT IN THE CASE OF BONY POLYMERS LTD. AS NOT ED THE OBSERVATIONS OF HONBLE MUMBAI HIGH COURT IN THE CASE OF LOYAL M OTOR SERVICE COMPANY LIMITED VS. CIT, 14 ITR 647 WHICH ARE REPRO DUCED HEREUNDER: - 3. NOW THE FACTS AS SHOWN BY THE REFERENCE ARE TH AT THIS COMPANY WAS FORMED BY FOURTEEN PERSONS, THIRTEEN OF WHOM WERE ORIGINALLY OWNER DRIVERS OF MOTOR VEHICLE S, THE FOURTEENTH MEMBER CONTRIBUTING IN MONEY. THE THIRTEEN NOT ONLY CONTRIBUTED THEIR MOTOR VEHICLES BUT ALSO THEIR SERVICES AND ACCORDINGLY BECAME EMPLOYEE S OF THIS COMPANY. BESIDES THE THIRTEEN THERE ARE TWENT Y-EIGHT OTHER EMPLOYEES MAKING A TOTAL OF FORTY-ONE. IN TH E YEAR ITA NO. 4329/D/2010 16 IN QUESTION THE COMPANY GRANTED A BONUS AT THE RATE OF TWO MONTHS SALARY TO ITS FORTY-ONE EMPLOYEES AND T HE TOTAL SUM REQUIRED TO PAY THIS BONUS WAS RS. 6,084/ - OF WHICH RS. 1,954/- WENT TO THE TWENTY-EIGHT OTHER EMPLOYEES AND RS. 4,130/- TO THE THIRTEEN SHAREHOLD ER EMPLOYEES WAS BY REFERENCE TO THEIR SALARIES AND NO T TO THEIR STAKES IN THE COMPANY. A TABULATED RESULT IS SET OUT IN THE APPLICATION FOR THIS REFERENCE AND IS PRINTE D ON PAGE 12 OF THE RECORD. IT IS THERE SHOWN THAT OF T HE THIRTEEN SHAREHOLDERS EMPLOYEES SIX EMPLOYEES GOT L ESS BONUS THAN THEY WOULD HAVE GOT AS DIVIDENDS IF THE SUM OF RS. 4,130 HAD BEEN DISTRIBUTED BY WAY OF ADDITIONAL DIVIDENDS. FIVE OF THEM GOT MORE BONUS THAN SUCH DIVIDENDS AND IN THE CASE OF TWO OF THEM THE FIGURE WORKS OUT THE SAME. THAT IS AN ACCIDENT IN THE SENSE THA T THE BONUS PAYMENTS BEING REFERENTIAL TO THEIR WAGES AND THE DIVIDENDS BEING REFERENTIAL TO THEIR SHARES HAVE NO RELATION TO EACH OTHER . NOW THE ANSWER TO THE QUESTION REFERRED TO US DEPENDS ON THE CONSTRUCTION THAT IS TO BE PLACED UPON PARA (X) OF SUB-SECTIN (2) OF SEC. 10. IT SHOULD BE NOTED THAT THE BODY OF THIS SUB-SECTION P ROVIDES AN ALLOWANCE AND THE QUALIFYING PART OF IT IS BY WA Y OF EXCEPTION TO THAT ALLOWANCE. WHAT IS TO BE ALLOWED IS ANY SUM PAID TO AN EMPLOYEE AS BONUS OR COMMISSIO N FOR SERVICES RENDERED AND THE EXCEPTION IS, WHERE SUCH SUM WOULD NOT HAVE BEEN PAID TO HIM AS PROFITS OR DIVIDENDS IF IT HAD NOT BEEN PAID AS BONUS OR COMMI SSION. IN THE EXCEPTION THE WORDS SUCH SUM CAN, IN MY OPI NION, ONLY REFER TO THE LAST AND THE ONLY ANTECEDENT, WHI CH IS ANY SUM PAID AS COMMISSION OR BONUS. THEREFORE, UNLESS THE COMMISSION OR BONUS WOULD BE PAID TO THE ASSESSEE AS PROFITS OR DIVIDENDS THE EXCEPTION TO T HE ALLOWANCE DOES NOT OPERATE. MR. SETALVAD ON BEHALF OF THE CIT HAS POINTED OUT WITH CONSIDERABLE FORCE THA T STRICTLY CONSTRUED THERE CAN HARDLY EVER BE A CASE WHICH COMES WITHIN THE AMBIT OF THE EXCEPTION. SIR JAMSH EDJI KANGA ON BEHALF OF THE ASSESSEE COMPANY SUGGESTS TW O SUCH CASES, VIZ, IN THE CASE OF WHAT IS GENERALLY C ALLED A ONE-MAN-COMPANY WHICH IS NOT UNLAWFUL UNDER THE INDIAN COMPANIES ACT, AND ALSO IN A CASE IN WHICH A COMPANY, IN DECLARING A DIVIDEND, OR A PARTNERSHIP, IN DECLARING DIVISION OF THEIR PROFITS, SAY THAT INSTE AD OF DISTRIBUTING THEIR PROFITS BY WAY OF DIVIDENDS, OR SHARES OF PROFITS, THEY WILL DISTRIBUTE THE AMOUNT TO THEMSEL VES, AS ITA NO. 4329/D/2010 17 SALARIED EMPLOYEES IN THEIR OWN COMPANY OR PARTNERS HIP, AS BONUS. WE ARE CONSTRUING A TAXATION STATUTE AND THE SUBJECT IS ENTITLED TO HAVE SUCH A STATUTE STRICTLY CONSTRUED IN HIS FAVOUR. IN MY OPINION IN PLACING A STRICT CONSTRUCTION ON THIS SUB-SECTION, THE SUM EXCEPTED UNDER THE EXPRESSION SUCH SUM MUST BE THE SAME SUM AS I S DESCRIBED BY THE EXPRESSION ANY SUM PAID AS BONUS OR COMMISSION , AND THAT AN EQUIVALENT SUM EVEN IN THE TWO CASES WHERE BY ACCIDENT THE BONUS AND THE PROSPECTI VE DIVIDEND ARE THE SAME, IS NOT INCLUDED IN THAT CONSTRUCTION. IF THAT IS THE CONSTRUCTION WHICH IS TO BE PLACED UPON THIS SUB-SECTION, THEN THE ANSWER TO TH E QUESTION IS, THAT THE WHOLE OF THE SUM OF RS. 4,130 PAID AS BONUS TO THE SHAREHOLDER EMPLOYEES IS ALLOWABLE AS DEDUCTION UNDER THE PROVISIONS OF S. 10(2)(X). I A NSWER THE QUESTION REFERRED TO US IN THE AFFIRMATIVE. TH E CIT MUST PAY THE COSTS OF THIS REFERENCE. (EMPHASIS SUPPLIED) 10. IN THE SAME DECISION, KANIA. J. HAD OBSERVED: 7. IN MY OPINION, THAT CONSTRUCTION OF THE CLAUSE IS NOT CORRECT. THE WORD SUCH MUST REFER TO WHAT HA D BEEN PREVIOUSLY MENTIONED IN THE SAME CLAUSE IN CONNECTION WITH THE WORD SUM. TO FIND THAT OUT W E MUST LOOK TO THE FIRST PART OF THE CLAUSE. THAT RE FERS TO ANY SUM. READING THE CLAUSE IN THAT WAY THE PLAI N MEANING APPEARS TO BE THAT WHEN A PARTICULAR AMOUNT WAS PAID BY WAY OF BONUS TO ANY EMPLOYEE, IF THE SA ME AMOUNT WOULD HAVE BEEN PAID TO HIM AS A SHAREHOLDER AS DIVIDEND OR PROFIT, THE COMPANY CANNOT BE ALLOWED A DEDUCTION ON THE GROUND OF PAYMENT OF BONUS. TO PUT IT IN OTHER WORDS THE CLAUSE IS INTENDED TO PREVENT AN ES CAPE FROM TAXATION BY DESCRIBING A PAYMENT AS BONUS, WHE N IN FACT ORDINARILY IT SHOULD HAVE REACHED THE SHAREHOL DER AS PROFIT OR DIVIDEND. THE ARGUMENT WOULD BE EQUALLY APPLICABLE IN THE CASE OF A PARTNERSHIP AS IN THE C ASE OF A LIMITED COMPANY. THIS CONSTRUCTION LEADS TO NO HAR DSHIP. IT DOES NOT ALLOW A WRONG PAYMENT OF BONUS TO ESCAP E TAXATION . IN THE FIRST INSTANCE THE BONUS IN THE HANDS OF THE EMPLOYEE IS LIABLE TO BE TAXED, UNLESS EXEMPTED BY A SPECIAL NOTIFICATION. MOREOVER, THE PROVISO CONTAI NS CONDITIONS UNDER WHICH IF A WRONG CLAIM IS MADE, TH E SAME CAN BE INVESTIGATED AND DISALLOWED. AN ILLUST RATION WILL PERHAPS MAKE THE POSITION CLEAR. FIVE PERSONS IN A FIRM REALIZING THAT THE PROFITS OF THE YEAR WERE RS . 50,000 ITA NO. 4329/D/2010 18 AND THEY HAD AN EQUAL SHARE IN THE PROFITS OF THE B USINESS DECIDE THAT INSTEAD OF RECEIVING RS. 10,000 EACH AS THE SHARE OF PROFITS EACH OF THEM WILL BE PAID RS. 10,0 00 AS BONUS OR COMMISSION. IN SUCH A CASE THE FIRM, WHEN SOUGHT TO BE ASSESSED, MAY CONTEND THAT RS. 10,000 WERE PAID AS BONUS. THE CONTENTION WILL BE CLEARLY REJE CTED. BUT THE SAFEGUARDS DO NOT END THERE. THE FIRM WILL HAVE TO PROVIDE TO THE SATISFACTION OF THE TAXING AUTHOR ITY THAT THE FIVE PARTNERS WERE EMPLOYEES, IN THE FIRST INST ANCE. SECONDLY, THAT THE BONUS WAS A REASONABLE AMOUNT HAVING REGARD TO THE PAY OF THE EMPLOYEE AND THE CONDITIONS OF HIS SERVICE. THIRDLY, THAT THE PROFI TS OF THE BUSINESS FOR THE YEAR IN QUESTION MADE IT REASONABL E TO PAY THE AMOUNT GRANTED AS ALLOWANCE, AND LASTLY, TH E GENERAL PRACTICE IN SIMILAR BUSINESSES OR TRADE JUS TIFIED THE PAYMENT OF THE AMOUNT AS BONUS. IT SEEMS TO ME THAT THE PLAIN READING OF THE CLAUSE MEANS THAT THE PROF ITS OF A BUSINESS WILL NOT BE ALLOWED TO BE DWINDLED BY MERE LY DESCRIBING THE PAYMENT AS BONUS, IF THE PAYMENT IS IN LIEU OF DIVIDEND OR PROFIT. I DO NOT SEE ANY REASON WHY ANY STRAINED CONSTRUCTION SHOULD BE PUT ON THE PLAIN ME ANING OF THE WORDS OF THE CLAUSE. I, THEREFORE, AGREE WI TH THE LD. CHIEF JUSTICE WITH REGARD TO THE ANSWER TO BE GIVEN TO THE QUESTION REFERRED TO US. (EMPHASIS SUPPLIED) 29. LD. DR HAS RELIED ON THE DECISION IN THE CASE O F DALAL BROACHA STOCK BROKING P. LTD. IN THIS CASE THE ASSESSEE C OMPANY HAD PAID COMMISSION OF RS. 40 LACS EACH TO THE THREE WORKING DIRECTORS WHO OWNED THE ENTIRE CAPITAL OF THE COMPANY. THE TRIBUNAL H AS RECORDED A FINDING AS UNDER: - IT IS ALSO TO BE NOTED THAT COMMISSION HAS BEEN PA ID ONLY TO THE DIRECTOR EMPLOYEES AND COMMISSION HAS BEEN PAID AS 10% OF PROFITS SUBJECT TO A LIMIT OF RS. 40.00 LACS WHICH ALSO SHO WS THAT THE ASSESSEE COMPANY DISTRIBUTED PART OF THE PROFITS TO THE DIRECTOR EMPLOYEES WHO WERE THE ONLY SHAREHOLDERS. THEREFOR E, ON THE FACTS AND CIRCUMSTANCES THAT DIVIDEND IN CASE OF THE ASSE SSEE COMPANY WAS PAYABLE AND THAT THE SAME HAS BEEN PAID IN THE GARB OF COMMISSION. ITA NO. 4329/D/2010 19 HOWEVER, IN THE PRESENT CASE, MS. RENU MUNJAL HELD ONLY .1% OF THE SHARE CAPITAL AND, THEREFORE, IN ANY VIEW OF THE MA TTER, RS. 39 LACS COULD NOT BE PAYABLE AS DIVIDEND TO MS. RENU MUNJAL. 30. THEREFORE, THIS DECISION CANNOT BE APPLIED TO T HE FACTS OF THE PRESENT CASE AND, THEREFORE, WE DO NOT CONSIDER IT NECESSAR Y TO RESTORE THE MATTER TO THE FILE OF AO TO DECIDE THE ISSUE DENOVO IN THE LIGHT OF SPECIAL BENCH DECISION, AS PLEADED BY LD. DR. 31. IN VIEW OF ABOVE DISCUSSION, WE ARE OF THE OPIN ION THAT THE ASSESEE DESERVES TO SUCCEED. 32. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 27.04.2012 SD/- SD/- (A.D. JAIN) JUDICIAL MEMBER (S.V. MEHROTRA) ACCOUNTANT MEMBER DATED: 27.4.2012 *KAVITA COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. TRUE COPY BY ORDER DEPUTY REGISTRAR