DCIT, New Delhi V. M/s Bony Polymers Pvt. Ltd., New Delhi

ITA 4744/DEL/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 0573 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-01-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 30-12-2010
• Assessment Year: 2007-2008
• Appeal Filed On: 29-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R P SINGH
• Keywords: Maximum Marginal Rate; Commercial expediency

Judgement Text

I.T.A. NO.4744 /DEL/2010 1/4 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 A NEW DELHI, BENCH A NEW DELHI, BENCH A NEW DELHI, BENCH A BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI K. D. RANJAN, ACCOUTANT MEMBER ITA NO. 4744 /DEL/2010 (ASSESSMENT YEAR 2007-08) DCIT, CIRCLE 3(1), VS. M/S. BONY POLYMERS P.LTD., NEW DELHI S-44, PANCHSHEEL PARK, NEW DELHI. (APPELLANTS) (RESPONDENTS) PAN / GIR NO. AABCB1594N APPELLANT BY: SHRI R P SINGH, SR. DR RESPONDENT BY: SHRI TARUN KUMAR, ADV. 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 REVENUE FOR THE ASSESSMENT YE AR 2007-08 ARISES OUT OF THE ORDER OF LD. CIT(A) VI, NEW DELHI . THE ONLY GROUND OF APPEAL RAISED BY THE REVENUE IS REPRODUCED AS UN DER: THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DE LETING ADDITION OF ` 1,84,66,307/- ON ACCOUNT OF COMMISSIO N PAID TO TWO DIRECTORS OF THE COMPANY IGNORING THAT THE ASSE SSEE FAILED TO FURNISH ANY EVIDENCE WITH RESPECTS TO THE SERVIC ES RENDERED FOR WHICH THE COMMISSION IS PAID, AND THAT THESE AM OUNTS WERE PART OF PROFITS OR DIVIDEND PAYABLE AND HENCE NOT ALLOWABLE AS DEDUCTION TO THE ASSESSEE. 2. THE ONLY ISSUE FOR CONSIDERATION RELATES TO DELE TION OF ADDITION OF ` 1,84,66,307 ON ACCOUNT OF COMMISSION PAID TO T WO DIRECTORS OF THE COMPANY. THE FACTS STATED IN BRIEF ARE THAT TH E ASSESSEE COMPANY HAD PAID SALARY AND OTHER ALLOWANCES TO ITS DIRECTORS AS PER BOARDS RESOLUTION. THE PAYMENT ALSO INCLUDED COMMISSION PAID TO ITS MANAGING DIRECTOR NAMELY SHRI RAJ KUMAR BHAT IA AND MS. KAVITA BHATIA OF ` 1,10,79,604/- AND ` 73,86,703/- RESPECTIVELY WHO ARE ALSO THE MAJOR SHAREHOLDERS IN THE COMPANY. TH E A.O. WAS OF THE VIEW THAT THE AMOUNT WAS NOT ALLOWABLE U/S 36(1 )(II) OF THE ACT. EH A.O. WHILE DISALLOWING THE AMOUNT, HELD THAT THE ASSESSEE HAD DECLARED PROFITS OF ` 2,38,61,362/-. HOWEVER, NO D IVIDEND HAS BEEN I.T.A. NO.4744 /DEL/2010 2/4 PROPOSED OR DISTRIBUTED AMONG THE SHAREHOLDERS, WHI CH ALSO INCLUDES DIRECTORS OF THE COMPANY. THE A.O. PLACE D RELIANCE ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F LOYAL MOTORS SERVICE CO. LTD. 14 ITR 647. 3. ON APPEAL, LD. CIT(A) FOLLOWING THE DECISION OF ITAT IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2005-06 AND 2006-07 IN I.T.A. NO. 507/DEL/2009 AND 4866/DEL/2009, DELET E4D THE ADDITION. 4. AT THE OUTSET, THE LD. COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF ITAT WHEREIN SIMILAR ADDITION HA S BEEN DELETED. BEFORE US, LD. SR. D.R. COULD NOT BRING ON RECORD A NY MATERIAL DISTINGUISHING THE FACTS OF THE CASE FROM EARLIER Y EAR. THEREFORE, THE ASSESSEES CASE IS SQUARELY COVERED BY THE DECISION OF ITAT FOR THE ASSESSMENT YEAR 2005-06 AND 2006-07 DATED 23.07.201 0. ITAT DELHI BENCH A IN ASSESSMENT YEAR 2003-04 IN I.T.A . NO. 867/DEL/2008 IN THE ORDER DATED 27.11.2009 HAVE CON FIRMED THE ORDER OF LD. CIT(A) ON IDENTICAL FACTS. ITAT DELHI BENCH A IN ITS ORDER DATED 23.07.2010 WHILE CONFIRMING THE ORDER O F LD. CIT(A) HAS OBSERVED AS UNDER: 7. WE HAVE GONE THROUGH THE MATERIAL PLACED ON RECORD AND THE ORDER OF HONBLE ITAT A BENCH, NEW DELHI DATED 27.11.2009 IN ASSESSEES OWN CASE FOR A.Y. 20 04-05 IN ITA 867/DEL/2008. WE FIND THAT IDENTICAL ISSUE HAS BEEN DECIDED BY THIS TRIBUNAL IN FAVOUR OF ASSESSEE. T HE ITAT WHILE ALLOWING THE CLAIM OF ASSESSEE HELD AS UNDER. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE HAVE ALSO GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE DECISIONS RELIED UPON BY THE LEARNED AR BEFORE US. WE HAVE ALSO GONE THROUGH THE WRITTEN SYNOPSIS AND PAPER BOOK FILED AND RELIED ON BY THE ASSESEE. WE NOTED THAT THERE ARE TWO WHOLE TIME WORKING DIRECTO RS NAMELY MR.RAJ BHATIA AND MRS. KAVITA BHATIA WITH TH E ASSESEE COMPANY WHO WERE PAID REMUNERATION. APART FROM THE FIXED REMUNERATION, REMUNERATION WAS ALSO PAID IN THE FORM OF COMMISSION ON TURNOVER @ 0.5%. THE TOTAL AMOUNT SO PAID IS RS. 30 LACS. THIS REMUNERATION INCLUDING COMMISSION WAS APPROVED IN T HE GENERAL MEETING OF THE SHARE HOLDERS AS IS CLEAR FR OM THE RESOLUTION PLACED IN THE PAPER BOOK. WE ALSO PERUS ED THE RELEVANT PROVISION OF THE COMPANIES ACT AND NOT ED THAT UNDER THE SAID ACT THE REMUNERATION CAN BE PAI D TO THE DIRECTORS BY WAY OF COMMISSION ALSO. WE FIND T HAT I.T.A. NO.4744 /DEL/2010 3/4 THE PLEADING MADE BY ASSESSEE (PAPER BOOK PAGES 1,2,6,7 AND 68) BEFORE THE AUTHORITIES BELOW WAS TH AT REMUNERATION INCLUDING COMMISSION IN QUESTION WAS P AID TO THE WHOLE TIME WORKING DIRECTORS AND SALES OF TH E ASSESSEE COMPANY HAVE INCREASED BY 20%. THIS FACT HAS NOT BEEN DENIED BY THE REVENUE. WE FURTHER FIN D FROM THE FINDING AS REPRODUCED IN THE PRECEDING PARAGRAPH OF THE CIT(A) THAT THE SAID DIRECTORS HAV E PAID TAX ON SUCH COMMISSION INCOME AT THE MAXIMUM MARGINAL RATE AND THUS NO TAX AVOIDANCE MOTIVE COUL D BE ATTACHED FROM THIS PAYMENT OF COMMISSION. THE ASSESSEE HAS RETURNED INCOME EVEN AFTER PAYING THE COMMISSION TO THE WHOLE TIME WORKING DIRECTORS TO T HE TUNE OF RS. 22682259/-. INCOME RETURNED BY MR.RAJ KUMAR BHATIA WAS RS.6877967/- AND BY MRS.KAVITA BHATIA WAS RS. 7815380/- AFTER INCLUDING THE COMMIS SION INCOME OF RS.15 LACS EACH. WE ALSO NOTED THAT THE COMMISSION, THOUGH AT THE LESSER AMOUNT, HAS BEEN P AID TO THE DIRECTOR IN THE EARLIER YEARS ALSO AS IS CL EAR FROM THE CHART OF COMMISSION PLACED IN THE PAPER BOOK PA GE 31 AND IT WAS ALLOWED AS A DEDUCTION IN THE ASSESSM ENT OF THE ASSESSEE COMPANY. ON SPECIFIC QUERY FROM TH E BENCH, LD.A.R. POINTED OUT THAT THE COMMISSION BASE D AS PERCENTAGE OF TURNOVER HAS BEEN PAID TO BOTH THE DIRECTORS IN A.Y. 2004-05 ALSO WHICH HAS BEEN ALLOW ED IN ASSESSMENT OF THE ASSESSEE COMPANY. ALL THESE FACT S SHOW THAT COMMISSION PAYMENT HAS BEEN ACCEPTED BY REVENUE ITSELF FOR THE PURPOSE OF BUSINESS OF ASSES SEE COMPANY AND THUS THERE WAS NO QUESTION OF DISALLOWANCE OF COMMISSION IN THE YEAR UNDER APPEAL . IT IS CARDINAL PRINCIPLE OF LAW THAT WHILE JUDGING THE COMMERCIAL EXPEDIENCY OF AN EXPANSE, THE MATTER NEEDS TO BE LOOKED INTO FROM THE POINT OF VIEW OF ASSESSEE AND NOT FROM THE POINT OF VIEW OF REVENUE ONLY. THIS WAS SO HELD BY SUPREME COURT IN THE DECISION O F CIT VS. WALCHAND & CO.P.LTD. 65 ITR 381 AND JK WOOLEN MANUFACTURERS VS CIT 72 ITR 612. REVENUE HAS RAISE D IN ITS GROUNDS OF APPEAL THAT THE EXPENSES IN QUESTION WAS HIT BY SEC. 36(1)(II) ALSO. WE DO NOT AGREE WITH TH IS. SEC. 36(1)(II) PROVIDES THAT COMMISSION WILL NOT BE ALLO WED AS DEDUCTION IF, HAD IT NOT BEEN PAID SO, IT WOULD BE PAID AS PROFITS OR DIVIDEND. THERE IS NO BASIS OR MATERIAL OR EVIDENCE BROUGHT ON RECORD BY AO TO SUPPORT THIS CONTENTION THAT THE COMMISSION WOULD HAVE BEEN PAID AS DIVIDEND TO THE SHAREHOLDERS. COMPANIES ACT 195 6 CONTAINS THE LIMITATIONS AND RESTRICTION IN THE MAT TER OF PAYMENT OF DIVIDEND AND SUCH DISCRETION OF THE COMPANY EITHER TO PAY OR NOT TO PAY DIVIDEND CAN NO T BE ASSUMED. AO CANNOT PRESUME THAT HAD THIS COMMISSIO N NOT BEEN PAID, THIS WOULD HAVE NECESSARILY BEEN PAI D AS DIVIDEND TO THE SHAREHOLDERS. THERE IS NO BASIS FO R THIS I.T.A. NO.4744 /DEL/2010 4/4 ASSUMPTION. IT CANNOT BE IGNORED THAT THE ASSESSEE COMPANY HAD SUBSTANTIAL PROFITS OUT OF WHICH DIVIDE ND COULD BE DECLARED IF ASSESSEE COMPANY SO WANTED. THUS, THERE IS NO BASIS FOR APPLICABILITY OF S.36(1 )(II). CBDT CIRCULAR NO.551 RELIED UPON BY LDAR CLEARLY ST ATES THAT AFTER AMENDMENT OF 1989, FACT OF COMMISSION PAYMENT ALONE IS ESSENTIAL AND ITS EXCESSIVENESS CA N BE SEEN U/S 40A(2) ONLY. WE FIND THAT APPLICABILITY O F S.40A(2) IS NOT THE CASE OF AO. EVEN OTHERWISE, COMMISSION PAID TO DIRECTORS WAS PART OF REMUNERATI ON OF DIRECTORS AS SUPREME COURT HAS HELD IN THE CASE REPORTED AT 117 ITR 1 THAT COMMISSION PAID AS FIXED PERCENTAGE OF TURNOVER IS NOTHING BUT ASSESSABLE AS SALARY. THUS SECTION 36(1)(II) HAS GOT NO APPLICAT ION. FURTHER THE CONTENTION OF ASSESSEE IS ALSO DULY SUPPORTED BY THE DECISION OF S.C. IN THE CASE OF SHAHJADA NAND & SONS 108 ITR 358 (SC) IN WHICH THE APEX COURT HELD THAT COMMISSION PAID TO EMPLOYEES I S ALLOWABLE AND THERE IS NO NEED FOR ANY CONTRACTUAL OBLIGATION OR EXTRA SERVICES PERFORMED BY ASSESSEE. WE THEREFORE ARE OF THE OPINION THAT THE COMMISSION PAYMENT OF RS.30 LACS TO THE WHOLE TIME WORKING DIRECTORS OF ASSESSEE COMPANY DISALLOWED BY AO WAS RIGHTLY DELETED BY CIT(A) AND ACCORDINGLY, WE DO NO T FIND ANY INFIRMITY IN THE ORDER OF CIT(A). WE, THEREFOR E, CONFIRM THE ORDER OF CIT(A). SINCE THE ISSUE IS SQUARELY COVERED BY THE DECISION OF ITAT IN ASSESSEES OWN CASE, RESPECTFULLY FOLLOWING THE PR ECEDENT WE DECIDE THE MATTER IN FAVOUR OF ASSESSEE. 5. SINCE THE ISSUE IS SQUARELY COVERED BY THE DECIS ION OF ITAT IN ASSESSEES OWN CASE, RESPECTFULLY FOLLOWING THE PRE CEDENT WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. 6. IN THE RESULT, APPEAL FILED BY THE REVENUE STAND S DISMISSED. 7. PRONOUNCED IN THE OPEN COURT ON 21 ST JAN.,2011. SD./- SD./- (RAJPAL YADAV) (K. D. RANJAN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 21 ST JAN., 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