BRANDON & CO.P. LTD, MUMBAI V. ACIT (OSD) 2(1), MUMBAI

ITA 5446/MUM/2010

• Counselvise Citation: 544619914 RSA 2010
• Duration Of Justice: 1 year(s) 6 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 23-01-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 02-07-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P C MAURYA
• Assessee Lawyers: M M GOLVALA; ANEY WAGLE
• Keywords: Diversion of income
• Section: 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI B.R. MITTAL (JUDICIAL MEMBER) AND SHRI RAJENDRA SINGH (ACCOUNTANT MEMBER) ITA NO.5446/MUM/2010 ASSESSMENT YEAR-2007-08 M/S. BRANDON & CO. PVT. LTD., C/O KALYANIWALLA & MISTRY, ARMY & NAVY BLDG., 3 RD FLOOR, 148, MAHATMA GANDHI ROAD, FORT, MUMBAI-400 001 PAN-AACCBO419M VS. THE ACUIT (OSD) 2(1), AAYAKAR BHAVAN, MUMBAI-400 020 (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI M.M. GOLVALA & ANEY WAGLE RESPONDENT BY: SHRI P.C. MAURYA DATE OF HEARING :23 .01.2012 DATE OF PRONOUNCEMENT: 25.01.2012 O R D E R PER B.R. MITTAL, JM : THE ASSESSEE HAS FILED THIS APPEAL FOR ASSESSMENT YEAR 2007-08 AGAINST ORDER OF LD. CIT(A) DT. 3.5.2010. 2. IN GROUND NO. 1 & 2 OF APPEAL OF ASSESSEE HAS DIS PUTED ORDER OF LD. CIT(A) IN CONFIRMING DISALLOWANCE MADE BY AO U/S. 1 4A R.W. RULE 8D OF I.T. RULE. 3. WE HAVE HEARD LD. REPRESENTATIVES OF THE PARTIES AND HAVE PERUSED THE ORDERS OF AUTHORITIES BELOW. WE FIND THAT RULE 8D OF I.T. RULES IS NOT APPLICABLE TO ASSESSMENT YEAR UNDER CONSIDERATION I N VIEW OF DECISION OF HONBLE BOMBAY HIGH COURT DECISION IN THE CASE OF GODREJ & BOYCE MFG. CO. ITA NO. 5446/M/10 2 LTD. VS DCIT 328 ITR 81, WHEREIN IT IS HELD THAT RU LE 8D IS PROSPECTIVE IN NATURE AND IS APPLICABLE FROM ASSESSMENT YEAR 2008- 09. IN VIEW OF ABOVE, WE SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND RE STORE THE ISSUE TO FILE OF AO WITH A DIRECTION TO RE-DECIDE THE ISSUE AFTER GI VING DUE OPPORTUNITY OF HEARING TO ASSESSEE IN ACCORDANCE WITH LAW AND ALSO CONSIDERING SUCH EVIDENCES AS MAY BE PLACED BEFORE HIM. HENCE GROUND NOS. 1 & 2 OF APPEAL TAKEN BY ASSESSEE IS ALLOWED FOR STATISTICAL PURPOS ES. 4. IN GROUND NOS. 3,4 & 5 OF APPEAL OF ASSESSEE HAS DISPUTED ORDER OF LD. CIT(A) IN CONFIRMING THE DISALLOWANCE OF DIRECTORS COMMISSION AMOUNTING TO RS. 22,71,543/-. 5. THE RELEVANT FACTS GIVING RISE TO THESE GROUNDS ARE THAT ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF TRADING IN SH ARES, SUB-LETTING OF PROPERTIES AND CONSULTANCY SERVICES. ASSESSEE CLAI MED TO HAVE PAID DIRECTORS COMMISSION AGGREGATING RS. 22,71,543/- AS UNDER: NAME COMMISSION PAID TDS DEDUCTED MS S.R. VATCH 1,55,000/ - NIL MR. Y. KATHPALIA 6,543/ - NIL MR. F. DADABHOY 35,000/ - NIL H.C. BHABHA 20,75,000/ - 6. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS EXPLAINED THAT DIRECTORS HAVE RENDERED VARIOUS SERVICES IN TERMS OF PORTFOLIO MANAGEMENT SERVICES AGREEMENT ENTERED WITH M/S. ENAM. IT WAS C ONTENDED THAT ASSESSEE HAVE BEEN PAYING COMMISSION TO ITS DIRECTORS FOR MO RE THAN 15 T0 20 YEARS. ALL THE ABOVE NAMED DIRECTORS ARE NON-EXECUTIVE DIR ECTORS. THAT ASSESSEE COMPANY HAS NO MANAGERIAL LEVEL EMPLOYEE. IT WAS A LSO CONTENDED THAT SHRI BHABHA TO WHOM THE SUBSTANTIAL AMOUNT OF COMMISSIO N HAD BEEN PAID WAS IN REGULAR CONTACT WITH ENAM TO HOLD DISCUSSIONS REGAR DING MARKED CONDITIONS, MARKET OUTLOOK, TO MONITOR THE PORTFOLIO OF INVESTM ENTS WITH REGARD TO PROFITABILITY OF INVESTMENTS, RELATIVE TO THEIR IMP LIED RISK AND VOLATILITY AND THE EXPOSURE OF THE COMPANY TO VARIOUS SECTORS IN ORDER TO REDUCE THE RISK OF THE ITA NO. 5446/M/10 3 COMPANY BEING OVERLY EXPOSED TO ANY ONE PARTICULAR INDUSTRY GROUP ETC. HOWEVER, AO DID NOT ACCEPT THE CONTENTION OF ASSESS EE. 7. THE AO STATED THAT ASSESSEE COMPANY FAILED TO SU BSTANTIATE THAT COMMISSION WAS PAID TO DIRECTORS WHOLLY AND EXCLUSI VELY FOR THE PURPOSE OF BUSINESS AND ACCORDINGLY, DISALLOWED AN AMOUNT OF R S. 22,71,543/-. 8. BEING AGGRIEVED, ASSESSEE FILED APPEAL BEFORE FI RST APPELLATE AUTHORITY. LD. CIT(A) ALSO CONFIRMED ACTION OF AO. HENCE ASSE SSEE IS IN FURTHER APPEAL BEFORE TRIBUNAL. 9. DURING THE COURSE OF HEARING, LD. AR BESIDES, MA KING SUBMISSIONS AS MADE BEFORE AUTHORITIES BELOW FURTHER SUBMITTED THA T ASSESSEE PAID COMMISSION TO NON WHOLE DIRECTORS NOT EXCEEDING 10% OF ITS NET PROFIT. IT WAS SUBMITTED THAT SINCE 1988, ASSESSEE-COMPANY IS PAYING COMMISSION TO ITS NON-WHOLE TIME DIRECTORS AS THEY LOOK AFTER THE AFF AIRS OF ASSESSEE COMPANY. IT WAS CONTENDED THAT THERE IS NO MANAGERIAL EMPLOYE E EMPLOYED BY ASSESSEE-COMPANY AND TO SUBSTANTIATE HIS SUBMISSION LD. AR REFERRED PROFIT AND LOSS ACCOUNT FOR ASSESSMENT YEAR UNDER CONSIDER ATION WHICH IS PLACED AT P-100 OF PAPER BOOK AND SUBMITTED THAT ONLY ASSESSE E WAS HAVING 7 EMPLOYEES IN CLERICAL STAFF TO WHOM AGGREGATE SALAR Y/WAGES AND BONUS PAID IN THE WHOLE FINANCIAL YEAR IS RS. 3,44,272/-. LD. AR SUBMITTED THAT IN ASSESSMENT YEAR 1990-91, ASSESSMENT ORDER WAS PASSE D U/S. 143(3) OF THE ACT AND NO DISALLOWANCE OF COMMISSION PAID TO NON-W HOLE TIME DIRECTORS WAS DISALLOWED AND TO SUBSTANTIATE HIS SUBMISSION REFER RED PAGE 131 TO 136 OF PAPER BOOK WHICH IS A COPY OF ASSESSMENT ORDER FOR ASSESSMENT YEAR 1999- 91. LD. AR FURTHER SUBMITTED THAT ASSESSMENT ORDER S WERE ALSO PASSED U/S 143(3) OF THE ACT FOR ASSESSMENT YEARS 1994-95 AND 2005-06 AND NO DISALLOWANCE OF COMMISSION PAID TO NON WHOLE TIME D IRECTORS WERE DISALLOWED AND REFERRED AT PAGE 137-138 OF PAPER BOOK RELATING TO ASSESSMENT YEAR 1994-95 AND PAGES 148 TO 153 FOR ASSESSMENT YEAR 20 05-06. LD. AR SUBMITTED THAT PAYMENT OF COMMISSION TO NON WHOLE T IME DIRECTORS WAS PAID AS PER APPROVAL OF SHARE HOLDERS IN EGM AND FILED C OPY OF MINUTES OF MEETING ITA NO. 5446/M/10 4 WHICH IS PLACED AT PAGE-105 OF PAPER BOOK. LD. AR SUBMITTED THAT PAYMENT OF COMMISSION IS JUSTIFIED BECAUSE NON-WHOLE TIME D IRECTORS HAVE BEEN INTERACTING WITH ENAM. 10. ON THE OTHER HAND, LD. DEPARTMENTAL REPRESENTAT IVE SUPPORTED ORDERS OF AUTHORITIES BELOW. HE SUBMITTED THAT SUBSTANTIA L FEE WAS PAID TO ENAM FOR PORTFOLIO MANAGEMENT AND THERE IS NO JUSTIFICATION TO PAY COMMISSION TO NON WHOLE TIME DIRECTORS. HE SUBMITTED THAT PAYMENT OF COMMISSION TO NON- WHOLE TIME DIRECTORS IS DIVERSION OF INCOME WITHOUT RENDERING SERVICES TO ASSESSEE COMPANY. HE FURTHER SUBMITTED THAT THERE IS MISMATCH OF TDS DEDUCTED BY ASSESSEE VIS-A-VIZ COMMISSION PAID TO S HRI H.C. BHABHA OF RS. 20,75,000/-. HE SUBMITTED THAT ORDERS OF AUTHORITI ES BELOW MAY BE CONFIRMED. 11. WE HAVE CAREFULLY CONSIDERED SUBMISSIONS OF LD. REPRESENTATIVES OF PARTIES AND ORDERS OF AUTHORITIES BELOW. WE HAVE A LSO CONSIDERED RELEVANT PAGES OF PAPER BOOK TO WHICH OUR ATTENTION WAS DRAW N. THERE IS NO DISPUTE TO THE FACT THAT ASSESSEE PASSED RESOLUTION IN ITS SHARE HOLDERS MEETING FOR PAYMENT OF COMMISSION NOT EXCEEDING 10% TO ITS NET PROFIT TO NON WHOLE TIME DIRECTORS. A COPY OF SAID RESOLUTION IS PLACE D AT PAGE-105 OF PAPER BOOK. LD. DR HAS NOT DISPUTED THE FACT THAT ASSESS EE HAS BEEN PAYING COMMISSION TO ITS NON WHOLE TIME DIRECTORS SINCE 19 88 AND COMMISSION DOES NOT EXCEED 10% OF NET PROFIT OF ASSESSEE. WE ALSO OBSERVE THAT IN THE PRECEDING ASSESSMENT YEARS, NO SUCH DISALLOWANCE HA S BEEN MADE BY DEPARTMENT EVEN FOR ASSESSMENT WERE COMPLETED U/S. 143(3) OF THE ACT FOR ASSESSMENT YEARS 1990-91, 1994-95, 2005-06 AND THE COPIES OF ASSESSMENT ORDERS ARE PLACED AT PAGES 131 TO 136 FOR ASSESSMEN T YEAR 1990-91 AND PAGES 148 TO 153 FOR ASSESSMENT YEAR 2005-06. WE A LSO OBSERVE THAT ASSESSEE COMPANY HAS NO MANAGERIAL/OTHER OFFICIAL A S WHOLE TIME EMPLOYEE SAVE AND EXCEPT THE STAFF IN CLERICAL SECTION. IT I S A FACT THAT ASSESSEE COMPANY IS AN ARTIFICIAL ENTITY AND ACTS THROUGH NA TURAL PERSON. THEREFORE ASSESSEE HEREIN IS ACTING THROUGH ITS NON-WHOLE TIM E DIRECTORS FOR COMPLYING WITH LEGAL REQUIREMENTS AND OTHER ACTS AS APPLICABL E TO A CORPORATE ENTITY ITA NO. 5446/M/10 5 BESIDES INTERACTING TO CARRY OUT ITS BUSINESS. CON SIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT PAYMENT OF COMMISSION BY ASSESSEE COMPANY IS TO ITS WHOLE TIM E DIRECTORS IS TO FACILITATE AND TO CARRY OUT ON ITS BUSINESS. THUS, WE ARE OF THE CONSIDERED VIEW THAT PAYMENT COMMISSION BY ASSESSEE COMPANY IS WHOLLY AN D EXCLUSIVELY FOR BUSINESS PURPOSES AND SAME IS ALLOWABLE. HENCE WE DELETE DISALLOWANCE MADE BY AUTHORITIES BELOW BY ALLOWING GROUND NOS. 3 TO 5 OF APPEAL OF ASSESSEE. 12. IN GROUND NO. 6 ASSESSEE HAD DISPUTED ORDER OF L D. CIT(A) IN CONFIRMING DISALLOWANCE OF RS. 6,73,440/- PAID TO M /S. CANCO ADVERTISING PVT. LTD. 13. THE ASSESSEE PAID AN AMOUNT OF RS. 6,73,440/- T O M/S. CANCO ADVERTISING PVT. LTD. FOR ADVISORY AND CONSULTANCY FEES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS ASSESSEE JUSTIFIED THE SAID PAYMENT VIDE ITS LETTER DT. 27 TH AUGUST, 2009 STATING AS UNDER: CANCO ADVERTISING PVT. LTD. IS A COMPANY RUN BY MR . RAMESH NARAYAN, PAST PRESIDENT OF THE INS, ADVERTISI NG SOCIETY OF INDIA AND A DISTINGUISHED REPRESENTATIVE OF INDI A ON INTERNATIONAL ADVERTISING ASSOCIATIONS. WITH HIS B ACKGROUND, MR. NARAYAN AND HIS COLLEAGUES OCCASIONALLY COME AC ROSS BUSINESS PROPOSALS. THESE HAVE BEEN PASSED TO BRAN DON & CO. PVT. LTD SINCE AROUND 1999-2000, BECAUSE OF THE FRI ENDSHIP OVER MANY DECADES BETWEEN HIM AND MR. C.H. BHABHA, AND BECAUSE MR. BHABHA HAS CONSISTENTLY SOUGHT TO ESTAB LISH BUSINESS IN VENTURES BROUGHT TO HIM IN BRANDON AND NOT TO TAKE THEM UP PERSONALLY. UNFORTUNATELY, NONE OF THE PRO POSALS BROUGHT BY CANCO HAVE MEANINGFULLY FRUCTIFIED. HOWE VER, IT IS ONLY REASONABLE THAT CANCO HAS CHARGED BRANDON FEES IN THE CURRENT YEAR FOR THEIR ROLE IN INTRODUCTIONS TO BUS INESS PROPOSALS AND NEW TRENDS IN VARIOUS MARKETS, PERSONAL MEETING S AND DISCUSSIONS, ETC. EXAMPLES OF SUCH PROPOSALS ARE: 1) THE ENTRY TO INDIA OF TALENTHILL, A US CONSULTING C OMPANY THAT SOUGHT AN INDIAN PARTNER TO MANAGE IN INDIA TH EIR WEB- BASED CONSULTING SERVICE. ITA NO. 5446/M/10 6 2) INDIAARTGLOBAL.COM-A PROPOSAL TO ESTABLISH AN ONLINE ART GALLERY WITH A PARTNER TO HANDLE THE WEBSITE AND ADMINISTRATION ASPECTS OF THE BUSINESS 3) AN ONLINE PORTAL DEALING IN GOLD AND PRECIOUS STONE S, WITH ADVERTISING-RELATED REVENUE 4) INTRODUCTION TO THE CERO OF A PORTAL RELATING TO CAR S AND MOTORBIKES. 5) INTRODUCTION TO PERSONS IN MADRAS WITH REFERENCE TO THE TRAVEL WEBSITE THAT THEY PROPOSED TO ESTABLISH AND EVENTUALLY DID WITHOUT CHOICE OF A PARTNER IN BOMBA Y 14. THE AO STATED THAT PAYMENT HAS NO RELEVANCE TO THE BUSINESS AFFAIRS OF ASSESSEE. THERE WERE PERSONAL RELATIONS EXISTED BE TWEEN SHRI RAMESH NARAYAN AND SHRI BHABHA. HENCE AO DISALLOWED PAYME NT OF RS. 6,73,440/-. 15. BEING AGGRIEVED, ASSESSEE FILED AN APPEAL BEFOR E LD. CIT(A). LD. CIT(A) CONFIRMED THE ACTION OF AO VIDE PARAS 12 & 1 3 WHICH READ AS UNDER: 12. I HAVE DULY CONSIDERED THE SUBMISSIONS OF THE A UTHORIZED REPRESENTATIVE AND I FIND THAT THE AO HAS DISALLOWED CONSULTANCY/ADVISORY FEE PAID TO CANCO ADVERTISING PVT. LTD., AS ACCORDING TO HIM THE EXPENDITURE WAS NOT INCURRED W HOLLY AND EXCLUSIVELY FOR THE BUSINESS OF THE ASSESSEE. IN TH E ASSESSMENT ORDER THE AO HAS POINTED OUT THAT CANCO ADVERTISING WAS PAID FOR SERVICES RENDERED BUT PROFESSIONAL SERVICES HAS NO RELEVANCE WITH THE BUSINESS OF THE ASSESSEE COMPANY. IN THE WRITT EN SUBMISSION THE AR HAS ALSO SUBMITTED THAT CANCO ADV ERTISING PVT. LTD. GAVE SEVERAL PROPOSALS TO THE ASSESSEE COMPANY AS ENUMERATED IN PARA 11 ABOVE. HENCE, THE PAYMENT OF CONSULTANCY FEE SHOULD BE ALLOWED. 13. I FIND THAT NONE OF THESE PROPOSALS HAVE BEEN O F ANY USE TO THE APPELLANT. THE AO HAS ALSO NOTED THAT THERE WERE PERSONAL RELATIONS BETWEEN BHABHA AND MR. RAMESH NA RAYAN. SINCE NONE OF THE SERVICES OFFERED BY DCANCO ADVERT ISING PVT. LTD. WAS UTILIZED BY THE ASSESSEE COMPANY THE AO IS JUSTIFIED IN DISALLOWING THE CONSULTANCY FEE PAID BY THE APPELLA NT TO CANCO ADVERTISING PVT. LTD. HENCE, THE DISALLOWANCE IS C ONFIRMED AND APPEAL ON THIS GROUND IS DISMISSED. ITA NO. 5446/M/10 7 HENCE, ASSESSEE IS IN FURTHER APPEAL BEFORE TRIBUNA L. 16. DURING THE COURSE OF HEARING, LD. AR SUBMITTED THAT SAID PAYMENTS WERE MADE FOR BUSINESS PURPOSES. HOWEVER, LD. AR C ONCEDED THAT NO BUSINESS PROPOSAL WAS FRUCTIFIED. SUBSEQUENTLY, LD . AR ALSO FILED COPY OF BILL RAISED BY CANCO ADVERTISING PVT. LTD STATING THAT RS. 6,00,000/- TOWARDS CHARGES FOR PROFESSIONAL CHA RGES RENDERED TILL 31.12.2006 AND SERVICE TAX OF RS. 73,440/- ALONGWIT H A COVERING LETTER FROM MANAGING DIRECTOR SHRI RAMESH NARAYAN FROM CANCO AD VERTISING PVT. LTD., STATING THAT FROM TIME TO TIME THEY PROVIDED PROFES SIONAL SERVICES INCLUDING ADVICE OF MARKET TRENDS, INTRODUCTIONS TO MANY OF T HEIR TOP CLIENTS IN THE AREA OF FINANCIAL SERVICES AND INSURANCE AND ANALYZING A ND INTERPRETING MARKETING DATA. LD. AR SUBMITTED THAT PAYMENT IS FOR BUSINES S PURPOSES AND THE SAME MAY BE ALLOWED. 17. ON THE OTHER HAND LD. DEPARTMENTAL REPRESENTATI VE SUPPORTED THE ORDERS OF AUTHORITIES BELOW AND SUBMITTED THAT NO D ETAILS OF SERVICES RENDERED BY CANCO ADVERTISING PVT. LTD HAS BEEN FILED AGAINS T WHICH ASSESSEE HAS MADE PAYMENT OF RS. 6,73,440/-. 18. WE HAVE CAREFULLY CONSIDERED ORDERS OF AUTHORIT IES BELOW AND SUBMISSIONS OF LD. REPRESENTATIVES OF PARTIES. WE HAVE ALSO PERUSED THE LETTER FILED BY ASSESSEE BEFORE AO CONTENTS OF WHIC H HAS BEEN REPRODUCED BY AO IN THE ASSESSMENT ORDER AND ALSO HEREINABOVE IN PARA-13. WE OBSERVE THAT NO DETAILS OF SERVICES RENDERED HAVE BEEN PLAC ED ON RECORD JUSTIFYING THAT ASSESSEE MADE PAYMENT TO CANCO ADVERTISING PVT. LTD ., FOR THE SERVICES RECEIVED. THERE IS NO DOCUMENT ON RECORD AS WELL, T O JUSTIFY ABOVE PAYMENTS THAT IT WAS MADE FOR BUSINESS PURPOSES. CONSIDERIN G THE FACTS OF THE CASE AND IN THE ABSENCE OF ANY MATERIAL ON RECORD, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF AUTHORITIES BELOW. HENCE, WE REJECT G ROUND NO. 6 OF APPEAL TAKEN BY ASSESSEE. ITA NO. 5446/M/10 8 19. IN GROUND NO. 7 ASSESSEE HAS DISPUTED IN CONFIRM ING LEVY OF INTEREST U/S. 234B OF THE I.T. ACT. SINCE LEVY OF INTEREST I S CONSEQUENTIAL ITDOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. 20. IN THE RESULT, APPEAL FILED BY ASSESSEE IS ALLO WED IN PART. ORDER PRONOUNCED ON THIS 25 TH DAY OF JANUARY, 2012 SD/- SD/- ( RAJENDRA SINGH) (B.R. MITTAL ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 25 TH JANUARY, 2012 RJ COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR B BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI