M/s. Spirotech Heat Exchangers Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 5224/DEL/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2780 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Assessment Year: 2011-2012
• Appeal Filed On: 24-09-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: LALITA AGRAWAL
• Assessee Lawyers: S S RANA CIT DR APPLICANT
• Keywords: Principle of natural justice
• Section: 142(1)

Judgement Text

1 ITA NOS. 5952 & 5224/DEL/2014 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: G NEW DELHI BEFORE SHRI N. K. SAINI, ACCOUNTANT MEM BER AND MS SUCHITRA KAMBLE, JUDI CIAL MEMBER ITA NO. 5952/DEL/201 4 ( A.Y 2011-12) DCIT CIRCLE-9(1) NEW DELHI (APPELLANT) VS SPIROTECH HEAT EXCHANGERS (P) LTD. B-13, IIND FLOOR, KAILASH COLONY NEW DELHI AABCS3931J (RESPONDENT) C.O NO. 5224/DEL/201 4 ( A.Y 2011-12) SPIROTECH HEAT EXCHANGERS (P) LTD. B-13, IIND FLOOR, KAILASH COLONY NEW DELHI AABCS3931J (APPLICANT) VS DCIT CIRCLE-9(1) NEW DELHI (RESPONDENT) APPELLANT/ RESPONDENT BY SH. S. S. RANA, CIT DR APPLICANT/ RESPONDENT BY MS. LALITA AGRAWAL, CA ORDER PER SUCHITRA KAMBLE THE APPEAL AND CROSS OBJECTION HAVE BEEN FILED BY T HE REVENUE AS WELL AS ASSESSEE AGAINST THE ORDER DATED 11/08/2014 PASSED BY CIT(A)-XII, NEW DELHI FOR ASSESSMENT YEAR 2011-12. 2. THE GROUNDS OF APPEAL ARE AS UNDER:- DATE OF HEARING 11.01.2018 DATE OF PRONOUNCEMENT 22.03.2018 2 ITA NOS. 5952 & 5224/DEL/2014 ITA NO. 5952/DEL/2014 1. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.1,53,95,399/- MADE BY THE A.O ON ACCOUNT OF DISA LLOWANCE OF COMMISSION PAID TO THE MANAGING DIRECTOR U/S 36(1)( II) OF THE INCOME TAX ACT, 1961. C.O NO. 5224/DEL/2014 1. THE LD.CIT(A) ERRED IN LAW AND ON FACTS IN UPHOL DING AD-HOC DISALLOWANCE OF RS.92,125 OUT OF FOREIGN TRAVEL EXP ENSES OF DIRECTORS AS PERSONAL IN NATURE. 2. THE LD.CIT(A) ERRED IN LAW AND ON FACTS IN UPHOL DING THE AD-HOC DISALLOWANCE OF RS.3,00,000/- OUT OF THE HRA OF RS. 12,00,000/- PAID TO MANAGING DIRECTOR AS EXCESSIVE IN NATURE. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUF ACTURING OF FIN AND TUBE TYPE COOLING & CONDENSING COIL FOR ALL TYPES O F AIR-CONDITIONERS AND REFRIGERATION'S. ASSESSEE FILED RETURN OF INCOME DE CLARING AN INCOME OF RS. 16,34,23,706/- ON 27/09/2011. THE SAME WAS PROCESSE D U/S 143(1). CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S 143(2) WAS ISS UED ON 20/09/2012. THEREAFTER NOTICE UNDER SECTION 143(2) ALONG WITH Q UESTIONNAIRE UNDER SECTION 142(1) WAS SENT ON 02/07/20L3. THE ASSESSEE CLAIMED IN ITS P/L ACCOUNT EXPENSES ON ACCOUNT OF COMMISSION TO MANAGING DIREC TOR AND TO A WHOLE TIME DIRECTOR AMOUNTING TO RS. 1,53,95,399/-. DURING THE ASSESSMENT PROCEEDINGS AR PRODUCED DETAILS. THE ASSESSING OFFICER OBSERVE D THAT THIS CLAIM IS NOT ALLOWABLE AS PER THE PROVISION OF SECTION 36(L)(II) OF INCOME TAX ACT, 1961. VIDE OVER SHEET ENTRY DATED 31/12/2013, ASSESSEE WAS ASK ED TO GIVE THE EXPLANATION ON ADDITION MADE IN EARLIER YEARS ON COMMISSION TO DIRECTOR AND ALSO TO JUSTIFY AS TO HOW THE SAID CLAIM IS ALLOWABLE UNDER SECTION 36(L)(II). THE ASSESSEE SUBMITTED A REPLY ON 09/01/20L4. THE ASSESSING OFFI CER OBSERVED THAT COMMISSION WAS PAID TO THE DIRECTORS WHO WERE ALSO SHAREHOLDERS. THE ASSESSING OFFICER FURTHER OBSERVED THAT SECTION 36( 1) (II) OF THE INCOME TAX ACT,1961 IS SPECIALLY INSERTED TO ENSURE THAT THE C OMPANIES DO NOT AVOID TAX BY 3 ITA NOS. 5952 & 5224/DEL/2014 DISTRIBUTING THEIR PROFITS TO THEIR SPECIFIC MEMBER S/ SHAREHOLDERS AS BONUS OR COMMISSION INSTEAD OF DIVIDEND. THE ASSESSING OFFIC ER OBSERVED THAT IN THIS CASE, PROFIT WHICH WOULD HAVE BEEN OTHERWISE PAID T O THE DIRECTOR AS DIVIDEND IS DIVERTED IN THE FORM OF COMMISSION. BY DIVERTING THE SUM OF RS.1,53,95,399/- AS COMMISSION TO DIRECTOR AND ASSESSEE ONLY REDUCED THE CORPUS AVAILABLE FOR DISTRIBUTION AS DIVIDEND. SINCE THE COMMISSION WORK ED OUT AS A CERTAIN PERCENTAGE OF THE NET PROFIT /TURNOVER AND SO IT CA NNOT BE SAID TO BE A PART OF A SALARY. THE ASSESSING OFFICER HELD THAT IT IS PARTI CIPATION IN THE PROFITS OF THE COMPANY. THUS, THE ASSESSING OFFICER HELD THAT THE COMMISSION PAID TO THE DIRECTORS WAS OTHERWISE PAYABLE TO THEM AS PROFIT O R DIVIDEND AND THIS COMMISSION OF RS. 1,53,95,399/- AND THE SAME IS NOT ALLOWABLE AS PER THE PROVISIONS OF SECTION 36(L)(II) OF THE INCOME TAX A CT, 1961 AND DISALLOWED THE SUM OF RS. 1,53,95,399/- AND ADDED BACK TO THE TOTA L INCOME OF THE ASSESSEE. THE ASSESSING OFFICER ALSO MADE ADDITION OF RS.92,1 25/- IE. OF 20% OF TOTAL FOREIGN TRAVEL EXPENSES AND ALSO MADE AN ADDITION O F RS.89,793/- TOWARDS THE WRITING OF TRADING LIABILITIES WHICH HAS TO BE DEEM ED INCOME OF THE ASSESSEE U/S 41(1) TO BE THE PROFIT AND GAINS OF THE BUSINESS AN D PROFESSION. THE ASSESSING OFFICER FURTHER MADE ADDITION OF RS. 3 LACS AS RELA TES TO DISALLOWANCE OF HRA TO THE DIRECTOR. 4. BEING AGGRIEVED BY THE SAID, THE ASSESSEE FILED APPEAL BEFORE THE CIT (A). THE CIT(A) PARTLY ALLOWED THE APPEAL OF THE ASSESSE E. 5. THE LD. DR SUBMITTED THAT THE CIT(A) ERRED IN DE LETING THE ADDITION OF RS.1,53,95,399/- MADE BY THE ASSESSING OFFICER ON A CCOUNT OF DISALLOWANCE OF COMMISSION PAID TO THE MANAGING DIRECTOR U/S 36(1)( II) OF THE ACT. THE ASSESSING OFFICER RIGHTLY HELD THAT THE COMMISSION PAID TO THE DIRECTORS WAS OTHERWISE PAYABLE TO THEM AS PROFIT OR DIVIDEND AND THIS COMMISSION OF RS. 1,53,95,399/- IS NOT ALLOWABLE AS PER THE PROVISION S OF SECTION 36(L)(II) OF THE INCOME TAX ACT, 1961. AS RELATES TO ASSESSEES CROS S OBJECTION THE LD. DR RELIED UPON THE ORDERS OF THE ASSESSING OFFICER AND CIT(A) . 4 ITA NOS. 5952 & 5224/DEL/2014 6. THE LD. AR SUBMITTED THAT THE ISSUE OF COMMISSIO N PAID TO MANAGING DIRECTOR U/S 36(1)(II) IS ALREADY DECIDED IN FAVOUR OF THE ASSESSEE BY THE HONBLE DELHI HIGH COURT FOR A.Y. 2008-09 AND 2009-10 BEING ITA NO.341/2013 DATED 19.07.2013. AS RELATES TO ISSUES REGARDING FOREIGN TRAVEL EXPENSES AND DISALLOWANCE OF HRA PAID TO MANAGING DIRECTOR CONSI DERED AS EXCESSIVE AGITATED BY THE ASSESSEE IN CROSS OBJECTIONS THE SA ME ARE ALSO DECIDED BY THE ITAT IN ASSESSEES OWN CASE FOR A.Y. 2010-11. THE L D. AR FURTHER SUBMITTED THAT DURING THE PRESENT ASSESSMENT YEAR, THERE WAS NO TRAVEL WITH THE FAMILY. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. THE REVENUE HAS FILED APPEAL IN RESPECT OF ADDITION OF RS.1,53,95,399/- ON ACCOUNT OF COMMISSION PAID TO THE MANAGING DIREC TOR U/S 36(1) (II) OF THE INCOME TAX ACT. THE CIT(A) ALLOWED THE SAID DISALL OWANCE AS SIMILAR DISALLOWANCE WERE ALLOWED IN ASSESSMENT YEAR 2008-0 9, 2009-10 AND 2010-11 BY THE HONBLE DELHI HIGH COURT IN ASSESSEES OWN C ASE. THE HONBLE HIGH COURT HELD THAT THE DISALLOWANCE MADE ON ACCOUNT OF COMMISSION TO MANAGING DIRECTOR AND TO A WHOLE TIME DIRECTOR UNDER SECTION 36(1)(II) OF THE ACT WAS CORRECTLY DELETED BY THE ITAT. THUS, THE REVENUES APPEAL IN THE PRESENT ASSESSMENT YEAR IS DISMISSED. AS RELATES TO CROSS O BJECTION, THE LD. AR RELIED UPON THE ORDER OF THE ITAT FOR A.Y. 2010-11 (ITA NO . 650/DEL/2014 ORDER DATED 23.02.2017), THE LD. AR MADE SUBMISSION THAT DURING THE PRESENT ASSESSMENT YEAR, THERE WAS NO TRAVEL WITH THE FAMILY. THUS, TH E CIT(A) WHILE GIVING ITS FINDING HAS IGNORED THIS FACT IN TOTO. THEREFORE, T HE GROUND NO. 1 OF THE CROSS OBJECTION FILED BY THE ASSESSEE IS ALLOWED. GROUND NO. 2 OF THE CROSS OBJECTION IN RESPECT OF DISALLOWANCE OF EXCESS HRA PAID TO MA NAGING DIRECTOR, THE SAME IS ALSO DECIDED BY THE ITAT FOR A.Y. 2010-11. IN PR ESENT ASSESSMENT YEAR ALSO THE ASSESSING OFFICER MADE ASSUMPTION THAT THE ASSE SSEE IS PROVIDING UNDUE BENEFIT TO THE DIRECTORS IN THE SHAPE OF HIGH RENTA LS AND THERE WAS NO ADVERSE MATERIAL/FINDING/EVIDENCE POINTED OUT BY THE ASSESS ING OFFICER. IN FACT, THE HRA PAID TO THE DIRECTORS HAVE TO CONSIDERED AS PER QUISITES IN THE HANDS OF THE DIRECTORS. THEREFORE, FOLLOWING THE EARLIER DECISIO N OF THE ITAT WE SET ASIDE THIS 5 ITA NOS. 5952 & 5224/DEL/2014 ISSUE TO ASSESSING OFFICER TO VERIFY WHETHER SUCH I NCOME HAS BEEN TREATED AS PERQUISITES IN THE HANDS OF THE MANAGING DIRECTOR A ND DECIDE THE ISSUE ACCORDINGLY. NEEDLESS TO SAY, THE ASSESSEE BE GIVEN OPPORTUNITY OF HEARING BY FOLLOWING PRINCIPLES OF NATURAL JUSTICE. THUS, GROU ND NO. 2 OF THE CROSS OBJECTION FILED BY THE ASSESSEE IS PARTLY ALLOWED F OR STATISTICAL PURPOSE. 8. IN RESULT, APPEAL OF THE REVENUE IS DISMISSED AN D CROSS OBJECTION OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 22ND MARCH, 2018 . SD/- SD/- (N. K. SAINI) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 22/03/2018 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 6 ITA NOS. 5952 & 5224/DEL/2014 DATE 1. DRAFT DICTATED ON 11/01/2018 PS 2. DRAFT PLACED BEFORE AUTHOR 11/01/2018 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .2018 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 22.03.2018 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 2 2 .03.2018 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER. 7 ITA NOS. 5952 & 5224/DEL/2014