DALAL & BROACHA STOCK BROKING P. LTD, MUMBAI V. ADDL CIT RG 4(1), MUMBAI

ITA 5792/MUM/2009

• Counselvise Citation: 579219914 RSA 2009
• Duration Of Justice: 1 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-06-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2006-2007
• Appeal Filed On: 30-10-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Depreciation; Rule of consistency; Commercial expediency
• Section: 143(3); 37(1); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI D BENCH, - SPECIAL BENCH BEFORE HONBLE SHRI D.K. AGARWAL (J.M.), SHRI. N.V. VASUDEVAN (J.M.) AND SHRI RAJENDRA SINGH ,(A.M.) I.T.A. NO.5792/MUM/2009 ASSESSMENT YEAR : 2006-07 M/S. DALAL BROACHA STOCK BROKING PVT. LTD. 507, MAKER CHAMBERS-V NARIMAN POINT MUMBAI-400 021. . APPELLANT PAN : AAACD 5662 J VS. ADDL. CIT RANGE 4(1), AAYAKAR BHAVAN, M.K. MARG, MUMBAI 400 020. ...RESPONDENT APPELLANT BY : SHRI VIJAY MEHTA RESPONDENT BY : SHRI SENTHIL KUMAR O R D E R PER RAJENDRA SINGH, (AM). THE HONBLE PRESIDENT OF THE TRIBUNAL HAS CONSTITUTED TH IS SPECIAL BENCH UNDER THE PROVISIONS OF SECTION 255(3) OF THE INCOM E TAX ACT VIDE ORDER DATED 16.12.2010 AND THE FOLLOWING QUEST ION HAS BEEN REFERRED TO THE SPECIAL BENCH FOR CONSIDERATION AND DEC ISION. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE PAYMENT OF COMMISSION TO THE EXTENT OF RS.1,20,00,000/- IS DISALLOWABLE UNDER THE PROVISIONS OF SECTION 36(1)(II). 1.1 IN ADDITION TO ANSWERING THE ABOVE QUESTION, THE SPECIAL BENCH IS ALSO REQUIRED TO DISPOSE OF THE APPEAL IN ITS ENTIRET Y. 5792/MUM/09 ASSESSMENT YEAR:06-07 2 2. WE FIRST DEAL WITH THE SPECIFIC QUESTION REFERRED TO THE SPECIAL BENCH WHICH IS REGARDING ALLOWABILITY OF CLAIM OF DEDUCT ION ON ACCOUNT OF PAYMENT OF COMMISSION TO THE TUNE OF RS.1.20 CRORES T O THE THREE EMPLOYEE DIRECTORS UNDER PROVISIONS OF SECTION 36(1)(II ). THE CLAUSE (II) OF SUB SECTION (1) OF SECTION 36 OF THE INCOME TAX A CT, 1961 ALLOWS DEDUCTION OF ANY SUM PAID TO AN EMPLOYEE AS BONUS OR COM MISSION FOR SERVICES RENDERED, WHERE SUCH SUM WOULD NOT HAVE BEEN PAY ABLE TO HIM AS PROFITS OR DIVIDEND IF IT HAD NOT BEEN PAID AS BONUS OR COMMISSION. 2.1 THE FACTS OF CASE, IN BRIEF, ARE THAT THE ASSESSEE COMPA NY DURING THE RELEVANT YEAR HAD PAID COMMISSION TO THE TUNE OF RS.40.00 LACS EACH TO THE THREE WORKING DIRECTORS. THE THREE EMPLOY EE DIRECTORS WERE THE ONLY SHAREHOLDERS OF THE COMPANY AND OWNED T HE ENTIRE SHARE CAPITAL OF RS.6.5 CRORES OF THE COMPANY. THE DET AILS OF SALARY, COMMISSION AND THE SHARE HOLDING OF THE THREE DIRECTORS W ERE AS UNDER :- S.NO. NAME OF DIRECTOR NATURE OF PAYMENT AMOUNT( RS .) SHARE HOLDING SALARY- 6,00,000 1. MR. P.K. M. DALAL COMMISSION- 40,00,000 50% SALARY 12,00,000 2. MR. NILESH P. DALAL COMMISSION 40,00,000 25% SALARY 12,00,000 3. MR.VIPUL P. DALAL COMMISSION 40,00,000 25% 2.2 DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER ( AO) AFTER EXAMINING THE LEGAL PROVISIONS REGARDING THE A LLOWABILITY OF BONUS OR COMMISSION OBSERVED THAT, IN CASE OF THE ASSESSEE, PROVISI ONS OF 5792/MUM/09 ASSESSMENT YEAR:06-07 3 SECTION 36(1)(II) WHICH SPECIFICALLY DEALT WITH ALLOWABIL ITY OF EXPENDITURE ON ACCOUNT OF BONUS OR COMMISSION WERE APPLI CABLE AND NOT THE PROVISIONS OF SECTION 40A(2)(B) WHICH PROVIDES FO R DISALLOWANCE OF EXPENDITURE INCURRED ON ACCOUNT OF RELATED PERSONS T O THE EXTENT FOUND EXCESSIVE COMPARED TO THE MARKET VALUE. HE, THERE FORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE CLAIM OF THE EXPEND ITURE ON ACCOUNT OF COMMISSION SHOULD NOT BE DISALLOWED AS THE ASSESSE E HAD EARNED SUBSTANTIAL PROFITS AND THE SAID AMOUNT COULD HAV E BEEN DISTRIBUTED AS DIVIDEND. THE ASSESSEE SUBMITTED THAT THE PAYMENT OF COMMISSION WAS NOT IN LIEU OF PROFIT OR DIVIDEND AS PAYM ENT HAD BEEN MADE TO THE DIRECTORS FOR THE HARD WORK THEY HAD PUT IN IMPROVING THE PROFITS OF THE COMPANY. THE ASSESSEE HAD NOT PAID ANY COM MISSION DURING ASSESSMENT YEARS 2001-02 TO 2003-04 AND COMMISSION W AS PAID IN THE ASSESSMENT YEAR 2000-01 AND AGAIN FROM ASSESSME NT YEAR 2004-05 ONWARDS WHEN THE EFFORTS MADE BY THE DIRECTORS HAD RESULTED INTO SUBSTANTIAL PROFITS. IT WAS ALSO SUBMITTED THAT TH E ASSESSEE COMPANY WAS NOT BOUND TO DECLARE DIVIDEND COMPULSORILY A ND THEREFORE, THE DIRECTORS / SHARE HOLDERS COULD NOT FORCE THE ASSESSEE TO DECLARE DIVIDEND. THE ASSESSEE WAS NOT DECLARING DIVIDEND BECAUSE IT WANTED TO IMPROVE ITS NET WORTH TO ATTRACT FIIS. IT WAS ALSO POINTED OUT THAT THE THREE DIRECTORS WERE HOLDING SHARES AT 50 %, 25% AND 25% AND THEREFORE IN CASE THE AMOUNT OF COMMISSION HAD BEEN DISTRIBUTED AS DIVIDEND, THEY WOULD NOT HAVE GOT THE SAME AMOUNT AS DIVIDEND. THEREFORE IT COULD NOT BE SAID THAT THE COMM ISSION PAID WAS IN LIEU OF DIVIDEND. 2.3 THE ASSESSEE FURTHER ARGUED THAT WHILE APPLYING THE PR OVISIONS OF 36(1)(II), IT WAS REQUIRED TO BE SEEN WHETHER THE REMUNERATION PAID TO DIRECTORS WAS MORE THAN THE AMOUNT PAYABLE TO OTHER PERSONS IN 5792/MUM/09 ASSESSMENT YEAR:06-07 4 OPEN MARKET HAVING SIMILAR EXPERIENCE IN THE SAME BUSIN ESS. IT WAS POINTED OUT THAT ALL THREE DIRECTORS HAD VAST EXPERIEN CE. IT WAS ALSO POINTED OUT THAT IN ASSESSEES OWN CASE, MR. MILIND KARMAK AR, C.A. WHO WAS HEAD OF THE RESEARCH DEPARTMENT HAD BEEN PAID REMUNERATION OF RS .46,61,860/-. THEREFORE, THE REMUNERATION INCLUDING COMMISSION PAID TO THE THREE DIRECTORS HAVING MANIFOLD EXPERIENCE IN THE BUSINESS COMPARED TO MR. MILIND KARMAKAR COULD NOT BE SAID TO B E EXCESSIVE COMPARED TO MARKET VALE OF SERVICES. FURTHER THE ASSESSEE HAD PAID THE SAME AMOUNT OF COMMISSION FOR ASSESSMENT YEARS 2004-05 TO 2006-07 WHEN THE PROFITS HAD INCREASED SUBSTANTIALLY IN SUBSEQUENT YEARS WHICH ALSO SHOWED THAT THE ASSESSEE WANTED TO INCREASE THE NET WORTH FOR IMPROVING THE BUSINESS. THE ASSESSEE ALSO POINTE D OUT THAT IN ASSESSMENT YEAR 2004-05, 50% OF THE COMMISSION HAD BEE N DISALLOWED BY THE ASSESSING OFFICER UNDER THE PROVISIONS OF SECTION 40A(2)(B) HOLDING THE SAME AS EXCESSIVE BUT THE SAME WAS D ELETED BY THE CIT(A). IN ASSESSMENT YEAR 2005-06 THE ASSESSING OFFI CER HAD DISALLOWED THE CLAIM UNDER PROVISIONS OF SECTION 36(1)(I I) WHICH WAS ALSO NOT UPHELD IN APPEAL. 2.4 THE ASSESSING OFFICER, HOWEVER, DID NOT ACCEPT THE CONTENT IONS RAISED BY THE ASSESSEE. IT WAS OBSERVED BY HIM THAT IN T HE PROFIT & LOSS ACCOUNT OF THE RELEVANT YEAR, THERE WAS NET PROFIT OF RS.15.55(BEFORE TAX) CRORES AFTER CLAIMING DEDUCTION ON ACCOUNT OF COMMISSION OF RS.1.20 CRORES, WHICH HAD BEEN CARRIED FORWA RD IN THE BALANCE SHEET AS RESERVE AND SURPLUS. THE DIRECTORS HOWEVE R DID NOT DECLARE ANY DIVIDEND AND NO REASONS WERE GIVEN FOR NOT DECLARING THE DIVIDEND. IT WAS THUS, CLEAR THAT THE DIRECTORS HAD DIST RIBUTED DIVIDEND IN THE FORM OF COMMISSION AND THEREFORE, PAYMENT WAS COV ERED BY THE EXCEPTIONS PROVIDED IN SECTION 36(1)(II). THE ASSESSING OF FICER ALSO 5792/MUM/09 ASSESSMENT YEAR:06-07 5 OBSERVED THAT THE PROVISIONS OF SECTION 36(1)(II) WERE I NTENDED TO PREVENT AN ESCAPE FROM TAXATION BY DESCRIBING A PAYMENT AS BONUS OR COMMISSION WHEN, IN FACT ORDINARILY IT SHOULD HAVE REACHE D THE SHAREHOLDERS AS PROFIT OR DIVIDEND AS HELD BY THE HONBL E HIGH COURT OF BOMBAY IN LOYAL MOTOR SERVICES COMPANY LTD. VS. CIT (1 4 ITR 647). IT WAS POINTED OUT, THAT HAD THE ASSESSEE PAID DIVIDEND , THE INCOME OF THE COMPANY WOULD HAVE GONE UP BY RS.1.20 CRORES ON WHI CH TAX AT THE RATE OF 30% WOULD HAVE BEEN PAYABLE WHICH CAME TO RS.36.00 LACS. IN ADDITION, THE COMPANY WOULD ALSO HAVE TO PAY DIVIDEND DISTRIBUTION TAX AT THE RATE OF 12.5% ON THE ENTIRE AMOUNT OF DIVIDEND WHICH CAME TO RS.15.00 LACS. THUS TOTAL OUTGOINGS IN TH E FORM OF TAX IN CASE ASSESSEE HAD PAID DIVIDEND AND NOT COMMISSION WAS RS. 51.00 LACS. ON THE CONTRARY, BY SHOWING PAYMENT AS COMMISSION, T HE DIRECTORS WOULD HAVE PAID TAX OF ONLY RS.36.00 LACS ON T HE COMMISSION INCOME. THUS THERE WAS TAX AVOIDANCE OF RS.15.00 LACS. T HE ASSESSING OFFICER ALSO POINTED OUT THAT, IN THIS CASE, THE THREE EMPLOYEE DIRECTORS WERE THE ONLY SHARE HOLDERS AND THEY WERE ALSO THE DECISION MAKING AUTHORITIES. THEREFORE, IT WAS CLEAR THA T COMMISSION PAYMENT WAS A DEVICE FOR TAX EVASION. AS REGARDS THE A RGUMENT OF THE ASSESSEE THAT THE COMMISSION HAD BEEN PAID FOR SERVICES REND ERED WHICH WAS COMPARABLE TO THE MARKET RATE, THE ASSESSING OF FICER OBSERVED THAT, EVEN IF THE COMMISSION HAD BEEN PAID FOR ANY EXTRA SERVICES RENDERED, THE ASSESSEE COULD NOT ESCAPE THE PROVISION S OF SECTION 36(1)(II) IN CASE IT WAS FOUND THAT COMMISSION PAYM ENT WAS IN LIEU OF DIVIDEND. THE ASSESSING OFFICER ACCORDINGLY HELD THAT THE PAYMENT OF COMMISSION BY THE ASSESSEE TO THE DIRECTORS WAS I N LIEU OF DIVIDEND AND WAS NOT ELIGIBLE FOR DEDUCTION U/S.36(1) (II). HE THEREFORE, DISALLOWED THE SUM AND ADDED THE SAME TO THE TOTAL INCO ME. 5792/MUM/09 ASSESSMENT YEAR:06-07 6 3. IN APPEAL THE ASSESSEE REITERATED THE SAME SUBMISSIONS BEFORE THE CIT(A) WHO WAS ALSO NOT SATISFIED WITH THE ARGUMENT S ADVANCED AND CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICE R. THE ASSESSEE HAD ALSO RAISED AN ADDITIONAL GROUND BEFORE THE CIT(A) THAT COMMISSION PAYMENT SHOULD BE ALLOWED U/S.37(1) OF THE IN COME TAX ACT. THE CIT(A) HOWEVER REJECTED THE ADDITIONAL GROU ND ALSO AFTER OBSERVING THAT THERE BEING SPECIFIC PROVISION UNDER SECTIO N 36(1)(II) REGARDING ALLOWABILITY OF BONUS OR COMMISSION, THE CLAI M WILL BE GOVERNED BY THE SAID SECTION AND NOT BY THE PROVISIONS OF SEC.37(1). 4. BEFORE US, THE LD. AR FOR THE ASSESSEE ARGUED THAT T HE INTENTION OF THE LEGISLATURE WAS ALWAYS TO MAKE ALLOWANCES FOR BO NAFIDE EXPENDITURE INCURRED ON ACCOUNT OF PAYMENT OF BONUS OR COMMISSION. HOWEVER, SINCE THE HONBLE MADRAS HIGH COURT IN CASE OF R .E. MAHOMED KASSIM ROWTHER OF R.E. MAHOMED KASSIM ROWTHER & CO. (2 ITC 482) HAD HELD THAT SUCH EXPENDITURE CALCULATED ON T HE BASIS OF PROFITS WAS NOT ALLOWABLE AS PROFIT COULD BE COMPUTED ONLY AFTER DEDUCTING ALL EXPENDITURE. THEREAFTER SECTION 10(2) OF THE INCOME TAX ACT, 1922 WAS AMENDED AND CLAUSE VIII(A) WAS INSERTED IN SECTION 10(2) MAKING PROVISION FOR ALLOWABILITY OF EXPENDITU RE ON ACCOUNT OF BONUS OR COMMISSION. THE SAID CLAUSE VIII(A), WAS LATER RE NUMBERED AS CLAUSE (X) OF SECTION 10(2) WHICH CORRESPONDS TO THE PRESENT SECTION 36(1)(II) OF THE INCOME TAX ACT, 1961. IT WAS ALSO ARG UED THAT SECTION 36(1)(II) WAS AN ENABLING PROVISION TO ALLOW EXPENDIT URE ON ACCOUNT OF BONUS OR COMMISSION. IT WAS SUBMITTED THAT HEAD OF EXP ENDITURE WAS DIFFERENT FROM NATURE OF EXPENDITURE. IT WAS ARGUE D THAT NOT ALL EXPENDITURE INCURRED UNDER THE HEAD BONUS OR COMMISSIO N WOULD BE COVERED BY THE SECTION 36(1)(II). IT WAS SUBMITTED THAT THE SAID 5792/MUM/09 ASSESSMENT YEAR:06-07 7 SECTION COVERED ONLY COMMISSION PAID TO NON-SHARE HOLDER E MPLOYEES AS THERE WAS NO POSSIBILITY OF PAYING DIVIDEND TO SUCH EM PLOYEES. THEREFORE, IT WAS FURTHER ARGUED THAT COMMISSION PAID TO SHARE HOLDER EMPLOYEES WILL BE COVERED UNDER THE PROVISIONS OF SEC.37( 1) UNDER WHICH EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR T HE PURPOSE OF BUSINESS IS ALLOWABLE. IT WAS SUBMITTED THAT THERE WAS NO DISPUTE IN THE PRESENT CASE THAT THE EXPENDITURE INCURRED WAS WHOL LY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND, THEREFORE, T HE SAME SHOULD BE ALLOWED U/S.37(1). 4.1 THE LD. AR FOR THE ASSESSEE ALSO SUBMITTED THAT EVEN IF T HE EXPENDITURE WAS COVERED BY THE PROVISIONS OF SECTION 36 (1)(II), THE SAID PROVISIONS COULD BE APPLIED ONLY WHEN THE COMMISSION IF NOT PAID, WOULD NOT HAVE BEEN PAYABLE AS DIVIDEND. IT WAS POI NTED OUT THAT THE PAYMENT OF BONUS UNDER THE COMPANIES ACT WAS DISCRETIONA RY, TO BE DECIDED BY THE MANAGEMENT OF THE COMPANY. THEREFORE , IT COULD NOT BE SAID THAT THE COMMISSION IF IT HAD NOT BEEN PAID, THE SAME WOULD HAVE BEEN PAYABLE AS DIVIDEND. IT WAS ALSO SUBMITTED T HAT THE PLAIN READING OF THE PROVISIONS MADE IT CLEAR THAT FOR DISALL OWANCE OF THE CLAIM OF COMMISSION, THE SAME AMOUNT SHOULD HAVE BEEN PAY ABLE AS DIVIDEND AS HELD BY HONBLE HIGH COURT OF BOMBAY IN THE CASE OF LOYAL MOTOR SERVICES COMPANY LTD. (SUPRA). IN THIS CASE, IT W AS POINTED OUT, THAT THE COMMISSION HAD BEEN PAID AMOUNTING TO RS.40.0 0 LACS IN EACH CASE. BUT IN CASE, THE ENTIRE COMMISSION OF RS .1.20 CRORES HAD BEEN PAID AS DIVIDEND, THE SHARE OF EACH DIRECTOR IN THE DIV IDEND WOULD NOT HAVE BEEN THE SAME, AS THE SHAREHOLDINGS OF THE DIRECTOR S WERE NOT THE SAME. THEREFORE, IT WAS ARGUED THAT THE EXPENDIT URE INCURRED BY THE ASSESSEE WAS NOT HIT BY THE PROVISIONS OF SECTION 36(1)( II). AS REGARDS THE FINDING OF THE ASSESSING OFFICER THAT THE CL AIM OF DEDUCTION 5792/MUM/09 ASSESSMENT YEAR:06-07 8 ON ACCOUNT OF COMMISSION WAS FOR TAX AVOIDANCE, THE LD. AR SUBMITTED THAT THE TAX RATE APPLICABLE IN CASE OF DIRECTORS WAS 33 % WHEREAS THE RATE IN THE CASE OF COMPANY WAS 35.75%. THE DIVIDEND D ISTRIBUTION TAX, IT WAS SUBMITTED, COULD NOT BE TAKEN INTO ACCOUNT U NLESS IT WAS ESTABLISHED THAT THE ASSESSEE WOULD HAVE DECLARED DIVIDEN D. THEREFORE, THERE WAS HARDLY ANY DIFFERENCE IN TAX. I N ANY CASE, IT WAS SUBMITTED THAT THE ARGUMENT BASED ON TAX AVOIDANCE WAS IRRELEVANT BECAUSE LEGITIMATE AND BONAFIDE EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS COULD NOT BE DISALLOWED ON THE GROUND THAT T HE ASSESSEE WAS SAVING IN TAXES. THE LD. AR ALSO REFERRED TO THE FOLLOWING DECISIONS OF THE TRIBUNAL IN SUPPORT OF THE CASE OF THE ASSESSEE. I) 36 SOT 456 (DELHI) IN CASE OF ACIT VS. BONY POLYMERS ( P) LTD. DATED 23.11.2009, II) ITA NO.4747/M/10 IN THE CASE OF DCIT VS. M/S. CELSIEUS REFRIGERATION (P) LTD. DATED 31.12.2010, III) ITA NO.631/BANG/2010 IN THE CASE OF ACIT VS. MANDAVI MOTORS (P) LTD. DATED 12.11.2010 AND IV) ITA NO.4924 & 4925/RAJ./09 IN THE CASE OF M/S. CAREER LAUNCHER PVT. LTD. VS. ACIT DATED 27.12.2010 4.2 IT WAS ALSO ARGUED THAT THERE WAS NO DISPUTE REGARDING THE RENDERING OF SERVICES BY THE DIRECTORS AND THE REASONABLE NESS OF PAYMENT MADE TO THEM. IT WAS POINTED OUT THAT IN A SSESSMENT YEAR 2004-05, DISALLOWANCE HAD BEEN MADE BY THE ASSESSING OFFI CER UNDER SECTION 40A(2)(B) HOLDING THE COMMISSION PAYMENT EXCESSIVE COMPARED TO MARKET VALUE BUT THE ADDITION HAD BEEN D ELETED BY THE TRIBUNAL. THEREFORE, IN CASE THE INTERPRETATION ADOPT ED BY THE DEPARTMENT WAS ACCEPTED, AN EXPENDITURE COULD BE DISALLO WED U/S. 36(1)(II) EVEN IF THE COMMISSION WAS PAID FOR COMMENSURAT E SERVICES 5792/MUM/09 ASSESSMENT YEAR:06-07 9 RENDERED BY THE DIRECTORS WHICH WOULD LEAD TO ABSURDIT Y AS IT COULD NOT BE THE INTENTION OF THE LEGISLATURE. HE REFERRED TO THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF K.P. VARGHESE (131 ITR 597) IN WHICH IT WAS HELD THAT STATUTORY PROVISIONS SHOULD BE SO INTERPRETED TO AVOID ABSURDITY. FURTHER WHILE INTERPRETING STATUTORY PROVISIONS, THE SCOPE AND OBJECT OF THE PROVISIONS MUST BE SEEN AS HELD BY THE HONBLE SUPREME COURT IN CASE OF ASSAM CO. LTD. VS. STATE OF ASSA M (248 ITR 567). IT WAS SUBMITTED THAT THE INTENTION OF THE LE GISLATURE WAS TO ALLOW EXPENDITURE ON ACCOUNT OF COMMISSION FOR SERVICES RE NDERED UNDER THE PROVISIONS OF SECTION 37(1). HE REFERRED TO T HE CHART, PLACED ON RECORD, SHOWING TURNOVER AND PROFIT OF THE ASSESSEE FO R ASSESSMENT YEARS 1999-00 TO 2008-09 TO POINT OUT THAT THERE WAS SUBSTANTIAL IMPROVEMENT IN THE FINANCIAL RESULTS OF THE ASSESSEE COMPANY WHICH WAS DUE TO THE EFFORTS MADE BY THE WORKING DIRECTORS. IT WAS ACCORDINGLY URGED THAT THE PAYMENT OF COMMISSION WHICH WA S FOR SERVICES RENDERED BY THE DIRECTORS SHOULD BE ALLOWED UNDE R THE PROVISIONS OF SEC.37(1) AND THAT, IN SUCH CASES, THE PROVISIO NS OF SEC.36(1)(II) HAD NO APPLICATION. 4.3 THE LD. AR FURTHER ARGUED THAT, BOTH IN THE PRIOR Y EARS AND IN THE SUBSEQUENT ORDERS, THE CLAIM HAS BEEN ALLOWED EITHER BY THE ASSESSING OFFICER HIMSELF OR IN APPEAL BY THE TRIBUNAL. IT WAS P OINTED OUT THAT IN THE ASSESSMENT YEAR 2004-05, THE ASSESSING OFFICER HAD NOT APPLIED THE PROVISIONS OF SEC.36(1)(II) AND HAD MADE DISALLOWAN CE UNDER SEC.40A(2)(B) HOLDING THAT THE CLAIM OF EXPENDITURE WA S EXCLUSIVE COMPARED TO THE MARKET VALUE. THE ADDITION MADE WAS, HOWEVER, NOT UPHELD BY THE TRIBUNAL IN THE ORDER DATED 31.3.2010 FOR ASSESSMENT YEAR 2004-05 IN ITA NO.2461/MUM/08 AND NO FURTHER D ISPUTE WAS RAISED ON THIS ISSUE BY THE DEPARTMENT BEFORE THE HIGH COURT. IN 5792/MUM/09 ASSESSMENT YEAR:06-07 10 ASSESSMENT YEAR 2005-06, THE ASSESSING OFFICER HAD MADE THE DISALLOWANCE OF COMMISSION APPLYING THE PROVISIONS OF SEC.3 6(1)(II) AND DISALLOWANCE HAD BEEN CONFIRMED BY CIT(A) BUT THE TRIBUNAL VIDE ORDER DATED 31.3.2010 IN ITA NO.7194/M/08 DELETED T HE ADDITION HOLDING THAT THE PROVISIONS OF SEC.36(1)(II) WERE NOT A PPLICABLE AND NO APPEAL WAS FILED BY THE DEPARTMENT BEFORE THE HIGH CO URT. IN ASSESSMENT YEAR 2007-08, THE ASSESSING OFFICER HAD MADE DISALLOWANCE IN THE ASSESSMENT ORDER DATED 19.11.2009 U/S. 143(3) BUT THE ADDITION WAS DELETED BY CIT(A) VIDE ORDER DATED 23.11.2010 FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSMENT YEAR 2004-05 AND 2005-06 (SUPRA) AND IN ASSESSMENT YEAR 2008-09, THE ASSESSIN G OFFICER HIMSELF DID NOT MAKE ANY DISALLOWANCE OUT OF COM MISSION IN THE ORDER DATED 1.12.2010 PASSED U/S.143(3). THUS, THE CLA IM OF COMMISSION HAD BEEN ALLOWED IN THE EARLIER YEARS AND SUB SEQUENT YEARS. IT WAS ARGUED THAT THE PRINCIPLE OF CONSISTENCY DE MANDED THAT NO DISALLOWANCE SHOULD BE MADE IN THE ASSESSMENT YEAR UND ER CONSIDERATION. RELIANCE WAS PLACED ON THE JUDGMENT OF HO NBLE SUPREME COURT IN THE CASE OF RADHA SAOMI SATSANG VS. CIT (193 ITR 321). 5. ON THE OTHER HAND THE LD. DR STRONGLY SUPPORTED TH E ORDERS OF AUTHORITIES BELOW. IT WAS ARGUED THAT THERE BEING SU BSTANTIAL PROFITS AND CUMULATIVE RESERVES AND SURPLUS, THE DECISION OF THE DIRECTORS WHO WERE THE ONLY SHARE HOLDERS AND WERE ALSO RELATED TO E ACH OTHER (FATHER AND SONS ) TO NOT DECLARE DIVIDEND WAS NOT REASO NABLE. THE DECISION OF THE SHARE HOLDER DIRECTORS TO PAY COMMISSION I NSTEAD OF DECLARING DIVIDEND WAS OBVIOUSLY WITH THE INTENTION TO REDUCE PROFITS FOR AVOIDING PAYMENT OF TAXES AS THE ASSESSEE COMPANY HA D DERIVED TAX ADVANTAGE AS POINTED OUT BY THE AUTHORITIES BELOW . IT WAS 5792/MUM/09 ASSESSMENT YEAR:06-07 11 SUBMITTED THAT THE DIRECTORS HAD NOT GIVEN ANY REASONS F OR NOT PAYING DIVIDEND ALTHOUGH THERE WERE SUBSTANTIAL PROFITS. THE ARGUMENT THAT THE DIVIDEND WAS NOT PAID TO IMPROVE THE NET WORTH T O ATTRACT FIIS WAS NOT SUPPORTED BY ANY EVIDENCE. IT WAS POINTED OUT THA T REASONABLENESS OF PAYMENT OR RENDERING OF EXTRA SERVICES BY DIRECTORS WERE NOT RELEVANT FACTORS WHILE CONSIDERING ALLOWABILIT Y OF CLAIM OF DEDUCTION ON ACCOUNT OF PAYMENT/COMMISSION TO THE EMPLOYE ES UNDER THE PROVISIONS OF SEC.36(1)(II). IT WAS SUBMITTED THAT T HE PROVISIONS OF SECTION 36(1)(II) WERE APPLICABLE EVEN WHEN NO EXTRA SE RVICES WERE RENDERED FOR PAYMENT OF COMMISSION. RELIANCE WAS PLACED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF S HAHZADA NAND & SONS VS. CIT (108 ITR 358). THERE WAS ALSO NO EVIDEN CE OF ANY EXTRA SERVICES RENDERED BY THE DIRECTORS. FURTHER THE A SSESSEE HAD NOT MADE ANY PAYMENT OF COMMISSION TO ANY OTHER EMPLOYEE. THE COMMISSION HAD BEEN PAID ONLY TO THE DIRECTORS WHO WERE ALSO THE SHARE HOLDERS WHICH CLEARLY SHOWED THAT THE PAYMENT OF CO MMISSION WAS IN LIEU OF DIVIDEND AS THERE WERE SUBSTANTIAL PROFI TS AND SURPLUS. IT WAS FURTHER ARGUED THAT THERE BEING SPECIFIC PROVISION IN SECTION 36(1)(II), ANY EXPENDITURE INCURRED ON ACCOUNT OF PAYM ENT OF BONUS OR COMMISSION TO EMPLOYEE SHOULD BE COVERED BY THE SAID SECTI ON AND NOT UNDER SECTION 37(1). RELIANCE WAS PLACED ON THE FOLLOW ING JUDGMENTS IN SUPPORT OF THE CASE : I) 24 ITR 566 (BOM.) IN CASE OF SUBODH CHANDRA POPATLAL VS. CIT II) 54 ITR 763 (GUJ.) IN CASE OF LAXMANDAS SEJRAM VS. CIT III) 26 ITR 265 (MAD.) IN CASE OF N.M. RAYLOO IYER & SONS V S. CIT 5792/MUM/09 ASSESSMENT YEAR:06-07 12 5.1 THE LD. DR FURTHER ARGUED THAT PROVISIONS OF SEC.3 6(1)(II) WERE APPLICABLE IN CASE OF PAYMENT OF BONUS OR COMMISSION TO AL L EMPLOYEES WHICH WAS CLEAR FROM THE PLAIN READING OF THE PROVISIO N AND NOT TO ONLY NON SHARE HOLDER EMPLOYEES AS ARGUED BY THE LD. AR OF THE ASSESSEE. AS REGARDS THE PRINCIPLE OF CONSISTENCY, THE LD.DR ARGUE D THAT NO DOUBT IT WAS TRUE THAT IN THE EARLIER YEARS AND IN THE SUBSEQ UENT YEARS, THE DEDUCTION IN RESPECT OF COMMISSION TO THE SAME DIRECTOR EMP LOYEES HAD BEEN ALLOWED BUT THE DECISION WAS BASED ON THE DECISI ON OF THE TRIBUNAL. SINCE THE ISSUE HAS NOW BEEN REFERRED TO THE SPECIAL BENCH WHICH IS A LARGER BENCH, THE DECISION OF THE SPECIAL BENCH SHALL BE BINDING AND THE PRINCIPLE OF CONSISTENCY SHALL NOT BE A PPLICABLE IN SUCH CASES. 6. IN REPLY THE LD. AR FOR THE ASSESSEE SUBMITTED THAT T HE JUDGMENTS RELIED UPON BY THE LD.DR WERE DISTINGUISHABL E AS IN THOSE CASES, PAYMENT OF BONUS OR COMMISSION HAD BEEN MADE TO EMP LOYEES AND NOT TO PARTNER OR SHAREHOLDERS. THE CASE OF THE AS SESSEE WAS COVERED BY THE JUDGMENT OF HONBLE HIGH COURT OF BOMBA Y IN THE CASE OF LOYAL MOTORS SERVICE COMPANY. LTD. VS. CIT (SUPRA). 7. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE ISSUE RAISED BEFORE US IS REGAR DING ALLOWABILITY OF DEDUCTION ON ACCOUNT OF PAYMENT OF COMM ISSION OF RS.1.20 CRORES TO THE THREE EMPLOYEE DIRECTORS UNDER SE CTION 36(1)(II). THERE IS NO DISPUTE THAT THE THREE DIRECTORS WERE SHARE HOLDER EMPLOYEES WHO HELD THE ENTIRE SHARE CAPITAL OF THE COM PANY AND WERE ALSO RELATED(FATHER AND SONS). THERE IS ALSO NO DISPUTE THAT THE COMMISSION HAD BEEN PAID TO THE THREE DIRECTOR EMPLOYEE S ONLY AND NOT TO ANY OTHER EMPLOYEE. THE ISSUE IS WHETHER ON T HE FACTS OF THE 5792/MUM/09 ASSESSMENT YEAR:06-07 13 CASE, EXPENDITURE ON ACCOUNT OF COMMISSION CAN BE ALLOWED U NDER THE PROVISIONS OF SECTION 36(1)(II). 7.1 FOR ANSWERING THE QUESTION REFERRED, WE HAVE TO F IRST DEAL WITH THE OBJECT AND SCOPE OF THE PROVISIONS OF SECTION 36(1)(I I) WHICH ALLOWS DEDUCTION ON ACCOUNT OF EXPENDITURE ON PAYMENT O F BONUS OR COMMISSION TO EMPLOYEES SUBJECT TO CERTAIN CONDITIONS WHILE COMPUTING THE INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. THESE PROVISIONS WERE FIRST INCORPORATED UND ER THE INCOME TAX ACT 1922 (HEREINAFTER REFERRED TO AS THE OL D ACT). THE PROVISIONS WERE INSERTED SUBSEQUENT TO THE JUDGMENT OF HO NBLE MADRAS HIGH COURT IN THE CASE OF R.E. MAHOMED KASSIM ROW THER OF R.E. MAHOMED KASSIM ROWTHER & CO. (2 ITC 482). THE HONBLE MADRAS HIGH COURT IN THE SAID CASE HAD HELD THAT PAYMENT OF ANY AMOUNT WHICH WAS DIRECTLY OR INDIRECTLY DEPENDENT UPON THE EARNINGS OR THE PROFITS OF THE BUSINESS, COULD NOT BE ALLOWED AS B USINESS EXPENDITURE. THE REASONING WAS THAT PROFIT IS COMPUTE D ONLY AFTER DEDUCTING ALL EXPENSES AND, THEREFORE, ANY PAYMENT MAD E OUT OF PROFIT COULD NOT BE CONSIDERED AS EXPENDITURE INCURRED FOR THE PURPOSE OF EARNING OF THE PROFIT. THE OLD ACT WAS AMENDED BY IN COME TAX (3 RD AMENDMENT) ACT 1930 AND A NEW CLAUSE (VIIIA) WAS INSERTE D IN SECTION 10(2) TO ALLOW EXPENDITURE ON ACCOUNT OF PAYMENT OF B ONUS OR COMMISSION TO AN EMPLOYEE AND LATER, THE SAID CLAUSE WAS RE- NUMBERED AS CLAUSE (X) OF SECTION 10(2). THE SAID PROVI SIONS OF SECTION 10(2)(X) ARE REPRODUCED BELOW AS A READY REFERE NCE : (X) ANY SUM PAID TO AN EMPLOYEE AS BONUS OR COMMISSION FOR SERVICES RENDERED, WHERE SUCH SUM WOULD NOT HAVE BEEN PAYABLE TO HIM AS PROFITS OR DIVIDEND IF IT HAD NOT BEEN PAID AS BONUS OR COMMISSION 5792/MUM/09 ASSESSMENT YEAR:06-07 14 PROVIDED THAT THE AMOUNT OF BONUS OR COMMISSION IS OF REASONABLE AMOUNT WITH RESPECT TO : A) PAY OF THE EMPLOYEE AND CONDITIONS OF HIS SERVICE. B) THE PROFITS OF THE BUSINESS OR PROFESSION FOR THE YEAR IN QUESTION AND C) THE GENERAL PRACTICE IN SIMILAR BUSINESS OR PROFESSION 7.2 THE ABOVE PROVISIONS OF SECTION 10(2)(X) OF THE OLD ACT WERE INCORPORATED IN THE INCOME TAX ACT, 1961 ALSO WITHOUT A NY CHANGES AS CLAUSE (II) TO SECTION 36(1). SUBSEQUENTLY, THE CLAUSE WA S AMENDED AND A NEW PROVISO WAS INSERTED AS THE FIRST PROVISO AND T HE EXISTING PROVISO WITH SOME MODIFICATIONS WAS SUBSTITUTED AS SECOND P ROVISO W.E.F. ASSESSMENT YEAR 1976-77. THE AMENDED PROVISIONS W .E.F. 1976-77 READ AS UNDER :- 36(I)(II) ANY SUM PAID TO EMPLOYEE AS BONUS OR COMMISSION FOR SERVICES RENDERED WHERE SUCH SUM WOULD NOT HAVE BEEN PAYABLE TO HIM AS PROFITS OR DIVIDEND I F IT HAD NOT BEEN PAID A BONUS OR COMMISSION PROVIDED THAT THE DEDUCTION IN RESPECT OF BONUS PAID TO EMPLOYEE EMPLOYED IN FACTORY OR OTHER ESTABLISHMENT TO WHICH PROVISIONS OF PAYMENT OF BONUS ACT (521 OF 1965) APPLY, SHALL NOT EXCEED THE AMOUNT OF BONUS PAYABLE UNDER THE ACT. PROVIDE FURTHER THAT THE AMOUNT OF BONUS (NOT BEING BONUS REFERRED TO IN THE FIRST PROVISO ) OR COMMISSION IS REASONABLE WITH RESPECT TO: A) PAY OF THE EMPLOYEE AND CONDITIONS OF HIS SERVICE. B) THE PROFITS OF THE BUSINESS OR PROFESSION FOR THE YEAR IN QUESTION AND 5792/MUM/09 ASSESSMENT YEAR:06-07 15 C) THE GENERAL PRACTICE IN SIMILAR BUSINESS OR PROFESSION 7.3 THE PROVISIONS OF SECTION 36(1)(II) WERE AGAIN AME NDED BY THE DIRECT TAX LAWS (AMENDMENT) ACT, 1987 FROM ASSESSMENT YEA R 1988- 89 AND THE TWO PROVISOS WERE DELETED. THUS, THE PROVI SIONS OF SECTION 36(1)(II) APPLICABLE FROM 1988-89 WHICH REMAINED IN F ORCE DURING THE RELEVANT YEAR UNDER CONSIDERATION WERE AS UNDER :- 36(1)(II) ANY SUM PAID TO THE EMPLOYEE AS BONUS OR COMMISSION FOR SERVICES RENDERED, WHERE SUCH SUM WOULD NOT HAVE BEEN PAYABLE TO HIM AS PROFITS OR DIVIDEND IF IT HAD NOT BEEN PAID AS BONUS OR COMMISSION 7.4 THE OBJECT BEHIND THE PROVISIONS OF SECTION 36(1)(I I) IS TO ALLOW DEDUCTION ON ACCOUNT OF ANY EXPENDITURE ON ACCOUNT OF PA YMENT OF BONUS OR COMMISSION TO AN EMPLOYEE EVEN IF THE SAID PAYM ENT IS MADE OUT OF PROFITS OF THE ASSESSEE SUBJECT TO THE CONDITIONS MEN TIONED IN THE SECTION. THIS IS AN ENABLING PROVISION WHICH ALLOWS D EDUCTION ON ACCOUNT OF BONUS OR COMMISSION TO EMPLOYEES. THE REASONAB LENESS OF PAYMENT OR ADEQUACY OF SERVICES RENDERED BY THE EMPLOYE ES ARE NOT RELEVANT FACTORS IN DECIDING THE ALLOWABILITY OF DEDUCT ION. THE SECTION ALLOWS DEDUCTION IF THE EXPENDITURE IS: I) ON ACCOUNT OF BONUS OR COMMISSION; II) IS PAID TO AN EMPLOYEE; III) FOR SERVICES RENDERED AND IV) IS NOT IN LIEU OF PAYMENT OF DIVIDEND. 7.5 THE PROVISIONS OF SECTION 36(1)(II) COVER ONLY THE CA SE OF EXPENDITURE ON ACCOUNT OF BONUS OR COMMISSION PAID TO AN EMPLOYEE. 5792/MUM/09 ASSESSMENT YEAR:06-07 16 ANY EXPENDITURE INCURRED ON ACCOUNT OF PAYMENT OF COMMI SSION TO A PERSON WHO IS NOT AN EMPLOYEE IS NOT COVERED BY THE SAID PROVISION. SUCH CASES OF EXPENDITURE ON ACCOUNT OF COMMISSION TO NON EM PLOYEES WILL BE GOVERNED BY THE PROVISIONS OF SECTION 37(1) WH ICH ALLOW DEDUCTION ON ACCOUNT OF ANY EXPENDITURE WHICH IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS SUBJECT TO CERTAIN CONDITIONS. THE CRITERIA OF WHOLLY AND EXCLUSIVELY IS NOT RELEV ANT WHILE CONSIDERING DEDUCTION UNDER SECTION 36(1)(II). THE PAYME NT MAY BE MADE OUT OF COMMERCIAL EXPEDIENCY WHICH SHOULD BE JUDGED IN THE LIGHT OF CURRENT SOCIO ECONOMIC THINKING WHICH ENCOURAGES E MPLOYERS TO SHARE A PART OF THE PROFITS WITH THE EMPLOYEES AS HE LD BY HON'BLE SUPREME COURT IN THE CASE OF SHAZADA NAND & SONS (108 ITR 358) WHILE DEALING WITH THE PROVISIONS OF SECTION 36(1)(II). THE RELEVANT PORTION OF THE JUDGMENT IS REPRODUCED BELOW: .WHAT IS THE REQUIREMENT OF COMMERCIAL EXPEDIENCY MUST BE JUDGED, NOT IN THE LIGHT OF THE 19TH CENTUR Y LAISSEZ FAIRE DOCTRINE WHICH REGARDED MAN AS AN ECO NOMIC BEING CONCERNED ONLY TO PROTECT AND ADVANCE HIS SEL F- INTEREST, BUT IN THE CONTEXT OF CURRENT SOCIO-ECONO MIC THINKING WHICH PLACES THE GENERAL INTEREST OF THE COMMUNITY ABOVE THE PERSONAL INTEREST OF THE INDIVI DUAL AND BELIEVES THAT A BUSINESS OR UNDERTAKING IS THE PRODUCT OF THE COMBINED EFFORTS OF THE EMPLOYER AND THE EMPLOYEES AND WHERE THERE IS SUFFICIENTLY LARGE PRO FIT, AFTER PROVIDING FOR THE SALARY OR REMUNERATION OF T HE EMPLOYER AND THE EMPLOYEES AND OTHER PRIOR CHARGES SUCH AS INTEREST ON CAPITAL, DEPRECIATION, RESERVES, ETC ., A PART OF IT SHOULD IN ALL FAIRNESS GO TO THE EMPLOYEES 7.6 THE LD. AUTHORISED REPRESENTATIVE FOR THE ASSESSEE A RGUED THAT PROVISIONS OF SECTION 36(1)(II) ARE APPLICABLE ONLY IN T HE CASE OF EMPLOYEES WHO ARE NOT SHARE HOLDERS. HIS ARGUMENT WAS TH AT THE PROVISION IS NOT APPLICABLE WHEN THE PAYMENT OF COMMISSI ON IS IN LIEU OF DIVIDEND AND SINCE DIVIDEND IS PAYABLE ONLY IN THE CASE OF SHARE HOLDERS, THE PROVISIONS WILL NOT BE APPLICABLE IN CASE OF SHARE HOLDER 5792/MUM/09 ASSESSMENT YEAR:06-07 17 EMPLOYEES. WE ARE UNABLE TO ACCEPT SUCH ARGUMENT WHICH CA N BE RELEVANT ONLY WHEN THE PAYMENT OF DIVIDEND TO SHAREH OLDERS IS COMPULSORY. IT IS AN UNDISPUTED FACT THAT PAYMENT OF DIV IDEND BY A COMPANY IS NOT COMPULSORY AND IT IS DEPENDENT UPON THE P ROFITABILITY AND OTHER CONDITIONS OF THE BUSINESS. THEREFORE, IN CASES WHERE DIVIDEND IS NOT PAYABLE, THE PAYMENT OF BONUS OR COMMI SSION CAN BE ALLOWED AS DEDUCTION IN CASE OF EMPLOYEE SHARE HOLDERS A LSO UNDER SECTION 36(1)(II) AS IN THAT CASE IT COULD NOT BE SAID T HAT PAYMENT OF BONUS OR COMMISSION IS IN LIEU OF DIVIDEND. THUS THE PRO VISIONS OF SECTION 36(1)(II) ARE ALSO APPLICABLE TO SHARE HOLDER EM PLOYEES SUBJECT TO THE CONDITION THAT PAYMENT IS NOT MADE IN LIEU OF DIVIDEND. THE PROVISIONS OF SECTION 36(1)(II) CAN BE SPLIT INTO TWO PA RTS. THE FIRST PART VIZ., ANY SUM PAID TO AN EMPLOYEE AS BONUS OR COMMISSI ON FOR SERVICES RENDERED IS AN ENABLING PROVISION. THIS PART A PPLIES TO ALL EMPLOYEES. THE SECOND PART IS A DISABLING PROVISION WH ICH PROVIDES THAT IF THE SUM SO PAID IS IN LIEU OF PROFIT OR DIV IDEND, IT CANNOT BE ALLOWED AS DEDUCTION. THIS PART APPLIES ONLY TO EMPLO YEES WHO ARE PARTNERS OR SHAREHOLDERS. THUS, IN SO FAR ALLOWABILITY OF EXPENDITURE ON ACCOUNT OF BONUS OR COMMISSION UNDER SECTION 36(1)(II) I S CONCERNED, IT APPLIES TO ALL EMPLOYEES INCLUDING SHAREHOL DER EMPLOYEES. THE DISALLOWABILITY IS RESTRICTED TO ONLY PA RTNERS AND SHAREHOLDERS AS ONLY IN THOSE CASES, PAYMENT COULD BE IN LI EU OF PROFIT OR DIVIDEND. WE THEREFORE, REJECT THE ARGUMENTS ADVAN CED BY THE LD. AR THAT THE PROVISIONS OF SECTION 36(1)(II) APPLY ONLY TO NON- SHAREHOLDER EMPLOYEES. 7.7 AS REGARDS THE RENDERING OF SERVICES BY THE EMPLOYEE S FOR PAYMENT OF BONUS/COMMISSION, THE ONLY REQUIREMENT OF SECTION 36(1)(II) IS THAT SOME SERVICES SHOULD HAVE BEEN RENDERED . ADEQUACY 5792/MUM/09 ASSESSMENT YEAR:06-07 18 OF SERVICES IS NOT A RELEVANT CONSIDERATION. IT IS NOT NE CESSARY THAT PAYMENT SHOULD BE MADE COMMENSURATE TO THE RENDERING OF SERVICES OR THERE SHOULD BE SOME EXTRA SERVICES RENDERED FOR PAYM ENT ON ACCOUNT OF BONUS OR COMMISSION. THIS PROPOSITION IS SUPPORTE D BY THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF SHAZADA N AND & SONS (108 ITR 358). RELEVANT PORTION OF THE JUDGMENT IS R EPRODUCED FOR READY REFERENCE: SECTION 36(1)(II) OF THE INCOME TAX ACT, 1961 DOES NOT POSTULATE THAT THERE SHOULD BE ANY EXTRA SERVICES RENDERED BY AN EMPLOYEE BEFORE PAYMENT OF COMMISSION TO HIM CAN BE JUSTIFIED AS ALLOWABLE EXPENDITURE. IF SERVICES WERE IN FACT RENDERED BY THE EMPLOYEE, IT IS IMMATERIAL THAT THE SERVICES RENDERED BY THE EMPLOYEE WAS IN NO WAY GREATER OR MORE ONEROUS THAN THE SERVICES RENDERED BY HIM IN THE EARLIER YEARS. OF COURSE, THE CIRCUMSTANCES THAT NO ADDITIONAL SERVICES WERE RENDERED BY THE EMPLOYEE, WOULD UNDOUBTEDLY BE OF SOME RELEVANCE IN DETERMINING THE REASONABLENESS OF THE AMOUNT OF COMMISSION BUT IT WOULD HAVE TO BE CONSIDERED ALONG WITH OTHER CIRCUMSTANCES. 7.8 THUS ANY EXPENDITURE ON ACCOUNT OF PAYMENT OF BONU S OR COMMISSION TO AN EMPLOYEE FOR SOME SERVICES RENDERED WILL BE AN ALLOWABLE DEDUCTION SUBJECT TO THE CONDITION THAT THE PAYMENT OF BONUS OR COMMISSION SHOULD NOT BE IN LIEU OF DIVIDEND. THIS CO NDITION, AS POINTED OUT EARLIER, IS RELEVANT ONLY IN CASE OF SHARE HOLDER EMPLOYEES AS DIVIDEND IS PAYABLE ONLY IN CASE OF SHARE HOLDERS. F URTHER, REASONABLENESS OF THE PAYMENT IS NO LONGER A REQUIREME NT AS PER THE AMENDED PROVISIONS OF SECTION 36(1)(II) APPLICABLE FROM ASSESSMENT YEAR 1988-89. THE LD. AR FOR THE ASSESSEE HAS ARGUED TH AT THE EXPRESSION PAYABLE USED IN SECTION 36(1)(II) MEANT THA T THE SHAREHOLDER SHOULD HAVE RIGHT TO RECEIVE THE DIVIDEND . IT WAS SUBMITTED THAT PAYMENT OF DIVIDEND WAS DISCRETIONARY TO BE DECIDED BY 5792/MUM/09 ASSESSMENT YEAR:06-07 19 THE MANAGEMENT OF THE COMPANY AND NOT COMPULSORY. THE REFORE, IT COULD NOT BE SAID THAT THE DIVIDEND WAS PAYABLE IN CASE OF THE EMPLOYEE DIRECTORS. ACCORDINGLY IT WAS ARGUED THAT SIN CE THE DIVIDEND WAS NOT PAYABLE IN CASE OF THE ASSESSEE COMPANY, THE CLAI M COULD NOT BE DISALLOWED UNDER SECTION 36(1)(II). WE ARE UNABLE TO ACCEPT THE ARGUMENTS ADVANCED. IN OUR VIEW THE WORD PAYABLE U SED IN SECTION 36(1)(II) DOES NOT MEAN STATUTORILY PAYABLE OR LEGALL Y PAYABLE. SINCE PAYMENT OF DIVIDEND IS DISCRETIONARY AND NOT COMPULSOR Y, ANY SUCH CONSTRUCTION WILL LEAD TO ABSURD RESULTS. THE WORD PAYA BLE IN OUR VIEW MEANS THAT DIVIDEND WOULD HAVE BEEN DECLARED BY ANY REASONABLE MANAGEMENT, ON THE FACTS AND CIRCUMSTANCES OF THE CASE CONSID ERING THE PROFITABILITY AND OTHER RELEVANT FACTORS AND BECO ME PAYABLE TO SHAREHOLDERS. THEREFORE, AFTER CONSIDERING THE ENTIRE TY OF THE FACTS AND CIRCUMSTANCES OF THE CASE IF A REASONABLE CONCLUSION CAN BE DRAWN THAT THE DIVIDEND WAS PAYABLE BY THE COMPANY AND IF T HE ASSESSEE COMPANY INSTEAD OF PAYING DIVIDEND HAD PAID COMMISSION TO THEIR EMPLOYEE SHARE HOLDERS, SUCH PAYMENT OF COMMISSION WILL B E IN LIEU OF DIVIDEND AND THE CLAIM OF DEDUCTION WILL NOT BE ALLOW ABLE UNDER SECTION 36(1)(II). 7.9 FOR DECIDING THE ISSUE WHETHER DIVIDEND IN CASE OF THE ASSESSEE WOULD HAVE BEEN PAYABLE, WE HAVE TO CONSIDER THE PROF ITABILITY OF THE COMPANY AND ALL OTHER RELEVANT FACTORS. IN THIS CASE, T HE POSITION REGARDING THE BUSINESS TURNOVER, THE PROFIT AND PAYM ENT OF SALARY AND COMMISSION TO DIRECTOR EMPLOYEES FROM ASSESSMENT YEAR 1999-0 0 TO ASSESSMENT YEAR 2008-09 WHICH HAS BEEN PLACED ON RECORD BY THE ASSESSEE WAS AS UNDER :- ASSESSMENT YEAR TURNOVER INCOME AS PER P&L A/C. SALARY TO DIRECTORS COMMISSION TO DIRECTORS 5792/MUM/09 ASSESSMENT YEAR:06-07 20 1999-00 4,97,93,940/- 2,69,77,012/- 30,00,000/- - 2000-01 11,78,42,787/- 6,71,14,638/- 30,00,000/- 1,05,00,000/ - 2001-02 4,77,03,584/- 57,26,229/- 30,00,000/- - 2002-03 5,95,29,967/- 2,44,95,962/- 30,00,000/- - 2003-04 4,58,18,043/- 1,04,13,105/- 30,00,000/- - 2004-05 10,51,26,344/- 4,55,44,868/- 30,00,000/- 1,20,00,000/ - 2005-06 12,74,11,457/- 6,69,78,205/- 30,00,000/- 1,20,00,000/ - 2006-07 17,86,29,800/- 10,57,96,305/- 30,00,000/- 1,20,00,000/- 2007-08 18,86,71,578/- 10,81,16,140/- 30,00,000/- 1,50,00,000/- 2008-09 32,21,66,934/- 22,42,87,992/- 30,00,000/- 1,50,00,000/- 7.10 REFERRING TO THE FINANCIAL PERFORMANCE MENTIONED ABOVE, IT WAS ARGUED ON BEHALF OF THE ASSESSEE THAT FROM ASSESSMENT YEAR 2004-05 ONWARDS, THE PERFORMANCE OF THE COMPANY HAD IMPROVED PROGRESSIVELY AND THAT IT HAD BEEN DUE TO THE EXTRA EFFORTS MADE B Y THE DIRECTORS. THE BOARD, THEREFORE, VIDE RESOLUTION DATED 3.3.2003 ALLOWED PAYMENT OF COMMISSION TO THE DIRECTORS @ 10% OF PROFIT BEFORE T AX SUBJECT TO A LIMIT OF RS.40.00 LACS PER YEAR IN EACH CASE FOR EXTRA SE RVICES. IT WAS POINTED OUT THAT THE TURNOVER OF THE BUSINESS INCREASED FROM RS.10.51 CRORES IN 2004-05 TO RS.32.21 CRORES IN ASSESSMENT YEAR 200 8-09 AND PROFIT BEFORE TAX AFTER CLAIMING DEDUCTION ON ACCOUNT OF COMMISSION, IMPROVED FROM RS.4.55 CRORES IN ASSESSMENT YEAR 2004-05 TO 22.42 CRORES IN ASSESSMENT YEAR 2008-09. IT HAS BEEN SUBMITTED TH AT PAYMENT OF SALARY AND COMMISSION WAS COMMENSURATE TO MARK ET VALUE OF THE SERVICES RENDERED BY THE DIRECTOR AND THEREFORE IN SUCH CASES NO DISALLOWANCE COULD BE MADE U/S.36(1)(II). COMPARISON HAS BEEN MADE 5792/MUM/09 ASSESSMENT YEAR:06-07 21 TO THE PAYMENT OF REMUNERATION OF RS.46,61,860/- TO AN EMPLOYEE OF THE ASSESSEE COMPANY NAMELY SHRI MILIND KARMAKAR WHO WAS HEADING THE RESEARCH DIVISION. REFERENCE HAS ALSO BEEN MADE TO T HE CASE OF M/S. MOTILAL OSWAL SECURITIES WHO WAS IN THE SAME BUSINESS A ND IN WHICH CASE ALSO COMMISSION AGGREGATING TO RS.7.44 CRORES HAD BEEN PAID TO DIRECTORS IN ADDITION TO THE AGGREGATE SALARY OF RS.2.54 CRORES. IT HAS ALSO BEEN SUBMITTED THAT NON-DECLARATION OF DIVI DEND BY DIRECTORS WAS TO IMPROVE THE NET WORTH OF THE COMPANY SO AS TO ATTRACT FIIS WHO SELECT BROKERS BASED ON THEIR NET WORTH. 7.11 ON CAREFUL CONSIDERATION OF VARIOUS ASPECTS OF THE M ATTER, WE ARE NOT CONVINCED BY THE ARGUMENTS ADVANCED. THE LEGAL POSI TION AS WE HAVE DISCUSSED EARLIER IS THAT ANY EXPENDITURE ON ACCOUNT OF PAYMENT OF COMMISSION TO AN EMPLOYEE WILL BE ALLOWABLE AS DEDUC TION UNDER THE PROVISIONS OF SECTION 36(1)(II) IRRESPECTIVE OF THE FACT WHETHER THE EMPLOYEE IS A SHAREHOLDER OR NOT OR WHETHER THE COMMISSI ON HAS BEEN PAID FOR SOME EXTRA SERVICES OR FOR THE SOME SERVICES SUBJE CT TO THE CONDITION THAT THE PAYMENT IS NOT IN LIEU OF DIVIDEND . HOWEVER, IN CASE EXTRA SERVICES HAVE BEEN RENDERED FOR PAYMENT OF COMMIS SION, IT WILL BE ONE OF THE RELEVANT FACTORS TO CONSIDER WHILE DECIDIN G WHETHER THE CASE IS COVERED BY THE EXCEPTION PROVIDED IN THE SECTION 3 6(1)(II) I.E. WHETHER THE PAYMENT OF COMMISSION IS IN LIEU OF DIVIDE ND. IN THE PRESENT CASE, NO EVIDENCE IS AVAILABLE ON RECORD TO SUPPOR T THE PLEA THAT THE DIRECTORS HAD RENDERED ANY EXTRA SERVICES FOR P AYMENT OF HUGE COMMISSION IN ADDITION TO SERVICES RENDERED AS AN EMPLOYEE FOR WHICH SALARY HAS BEEN PAID. NO SUCH EVIDENCE HAS BEEN PLACED E VEN BEFORE US NOR EVEN THE DETAILS OF ANY SUCH EXTRA SERVICES HAVE BEEN GIVEN. THE LD. AR FOR THE ASSESSEE HAS REFERRED TO THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2004-05 (SUP RA), 5792/MUM/09 ASSESSMENT YEAR:06-07 22 IN WHICH DISALLOWANCE MADE BY THE ASSESSING OFFICER OF 50% OF REMUNERATION AND COMMISSION UNDER SECTION 40A(2)(B) HAS BEEN DELETED TO POINT OUT THAT THE TRIBUNAL ACCEPTED THE C ASE OF THE ASSESSEE THAT PAYMENT OF SALARY AND COMMISSION WAS COMPARABL E TO MARKET VALUE OF SERVICES. WE HAVE GONE THROUGH THE SAI D DECISION OF THE TRIBUNAL. THE FINDING RECORDED BY THE TRIBUNAL IN PARA-9 ON THIS ISSUE IS REPRODUCED BELOW AS READY REFERENCE :- 9 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDERED THEM CAREFULLY. AFTER CONSIDERING THE SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE DO NOT FIND ANY INFIRMITY IN THE FINDING S OF THE LD CIT(A) IN RESPECT OF THE DELETION OF RS. 75 LACS U/S 40A(A)(B). IT IS SEEN THAT IN EARLIER, THE REMUNERA TION PAID BY THE ASSESSEE HAS BEEN ALLOWED BY THE AO. IT IS FURTHER SEEN THAT THE COMPANY HAS PASSED RESOLUTION THAT THE DIRECTORS OF THE ASSESSEE COMPANY WILL BE PAID COMMISSION OVER AND ABOVE THE SALARY AMOUNT. IN ACCORDANCE WITH THE RESOLUTION, THE COMPANY HAS PAI D REMUNERATION PLUS COMMISSION. IT IS FURTHER SEEN TH AT THE DIRECTORS OF THE COMPANY ARE ASSESSED TO TAX AN D THEIR TAXABLE INCOME IS SUBJECT TO PAYMENT OF MAXIM UM MARGINAL RATE OF TAX WHICH IS 33% INCLUDING SURCHAR GE. THE COMPANY IS LIABLE TO PAY TAX @ 35.75%; THEREFOR E, IT CANNOT BE SAID THAT THE COMMISSION AND REMUNERATION AID TO THE DIRECTORS WAS ON ACCOUNT OF TAX PLANNING . 9.1 THE FINDINGS OF THE LD CIT(A) HAVE BEEN REPRODUCED SOMEWHERE ABOVE IN THIS ORDER. IN OUR VI EW, THE FINDINGS OF THE LD CIT(A) DOES NOT SUFFER FROM ANY INFIRMITY. THE DECISION RELIED UPON BY THE LD COUN SEL OF THE ASSESSEE ARE ALSO IN FAVOUR OF THE ASSESSEE. THEREFORE, KEEPING IN VIEW OF THESE FACTS AND CIRCUMSTANCES AND IN VIEW OF THE DETAILED FINDINGS GIVEN BY THE LD CIT(A), WE HOLD THAT THE LD CIT(A) WAS JU STIFIED IN DELETING THE ADDITION OF RS. 75 LACS ON ACCOUNT OF REMUNERATION PAID TO THE DIRECTORS. ACCORDINGLY, WE CONFIRM THE FINDINGS OF THE LD CIT(A) ON THIS ISSUE . 5792/MUM/09 ASSESSMENT YEAR:06-07 23 7.12. THE ASSESSMENT YEAR 2004-05 WAS THE FIRST YEAR WHE N THE ASSESSEE STARTED PAYING COMMISSION OF RS.40.00 LACS TO EACH WO RKING DIRECTOR IN ADDITION TO SALARY. IN THE IMMEDIATELY PR ECEDING 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 PER ANNUM IN CASE OF THE OTHER TWO DIRECTORS. THE TRIBUNAL IN THE SAID ORDER HAS NOT GIVEN ANY FINDING WHETHER SUBSTANTIAL PAYMENT OF RS.40.00 LACS WAS FOR ANY EXTRA SERVICES RENDERED. THE TRIBUNAL BASICALLY ALLOWED THE CLAIM ON THE GROUND THAT IN THE IMMEDIATE PRECEDING YEAR, SALARY E XPENDITURE HAD BEEN ALLOWED AND PAYMENT OF COMMISSION WAS SUPPORTED BY THE BOARD RESOLUTION AND THAT THERE WAS NO TAX ADVANTAGE TO TH E ASSESSEE. THE TRIBUNAL CONFIRMED THE FINDING OF THE CIT(A) WHICH HA D BEEN REPRODUCED IN PARA-7 OF THE ORDER OF THE TRIBUNAL AS PER WHICH THE CIT(A) DELETED THE ADDITION MADE BY THE ASSESSING OFFI CER ON THE GROUND THAT THE DIRECTORS WERE COMPETENT TO UNDERTAKE THE ACTIVITIES OF THE COMPANY WHICH HAD YIELDED HUGE PROFITS. THE ED UCATION OF THE DIRECTORS WAS OF NOT GREAT SIGNIFICANCE. CIT(A) THUS DEL ETED THE ADDITION ON ACCOUNT OF ESTIMATED DISALLOWANCE. THUS EV EN CIT(A) WHOSE FINDING HAS BEEN CONFIRMED BY THE TRIBUNAL HAS N OT GIVEN ANY FINDING THAT HUGE PAYMENT OF COMMISSION WAS LINKED TO A NY EXTRA SERVICES. THE BOARD RESOLUTION CANNOT BE CONSIDERED AS AN EVIDENCE OF EXTRA SERVICE PARTICULARLY WHEN THE BOARD IS CONSTITUTED BY THE DIRECTOR EMPLOYEES TO WHOM PAYMENTS HAVE BEEN MADE. THERE IS A LSO NO FINDING BY THE TRIBUNAL TO THE EFFECT THAT PAYMENT O F COMMISSION WAS COMMENSURATE TO THE MARKET VALUE OF THE SERVICES. THUS, THE DECISION OF THE TRIBUNAL IN ASSESSMENT YEAR 2004-05 (SUPRA), CANNO T BE CONSIDERED AS PRECEDENT FOR THE PLEA THAT HUGE COMMISSION HAD BEEN PAID FOR EXTRA SERVICES OR THAT PAYMENT WAS COMMENSURATE TO MARKET 5792/MUM/09 ASSESSMENT YEAR:06-07 24 VALUE OF SERVICES. AS POINTED OUT EARLIER, NO EVIDENCE OF ANY EXTRA SERVICES TO JUSTIFY HUGE COMMISSION PAYMENTS HAS BEEN PRODU CED BEFORE THE LOWER AUTHORITIES OR EVEN BEFORE US. 7.13 WE HAVE TO EVALUATE THE CASE ON BASIS OF MATERIAL AVAILABLE ON RECORD. ON CAREFUL PERUSAL OF FINANCIAL PERFORMANCE STA TISTICS TABULATED EARLIER, WE NOTE THAT BOTH THE TURNOVER AND THE PRO FIT WAS EXCEPTIONALLY HIGH IN ASSESSMENT YEAR 2000-01 COMPARED TO THE EARLIER YEAR AND SUBSEQUENT THREE YEAR PERIOD. BUT THIS WAS BECAUSE OF T HE REASON THAT THERE WAS STOCK MARKET BOOM WHICH HAD PEAKED IN ASSESSMENT YEAR 2000-01 AND THE BUBBLE HAD BURST ONLY TOWARDS THE FAG END OF THAT YEAR, WHICH WAS THE REASON FOR EXCEPTIONAL PERFORMANCE I N THAT YEAR. THE ASSESSEE IS A SHARE BROKER WHO GETS COMMISSION ON SALE/P URCHASE OF SHARES BY INVESTORS/TRADERS. THE INCOME OF THE ASSESSE E IS ASSURED IRRESPECTIVE OF THE FACT WHETHER THE INVESTOR/TRADER LO SES OR GAINS IN THE TRANSACTION. THE COMMISSION, WILL, HOWEVER, DEPEND UPON THE MARKET CONDITIONS. IN CASE OF BOOM WHEN THE MARKET IS F LOODED WITH INVESTORS/TRADERS, INCOME WILL RISE AS VOLUME INCREASES BUT IN CASE OF SLUMP WHEN INVESTORS/TRADERS DESERT THE MARKET, THERE W ILL BE FALL IN VOLUME AND INCOME. AFTER THE ASSESSMENT YEAR 2000-01 WHE N THE STOCK MARKET CRASHED, THERE WAS SLUMP IN THE MARKET FOR T HREE YEARS WHICH RESULTED IN SHARP FALL IN BOTH TURNOVER AND PROF IT FROM ASSESSMENT YEAR 2001-02 TO 2003-04. THE TURNOVER FELL TO 50% OR EVEN LESS AND THE PROFIT DECLINED MORE STEEPLY. 7.14 THEREFORE, THE ONLY REASONABLE CONCLUSION WHICH CAN BE DRAWN IS THAT THE PAYMENT OF RS.1.05 CRORES SHOWN AS COMMISSION IN ASSESSMENT YEAR 2000-01 WHEN THERE WAS EXCEPTIONAL PROFIT WAS NOTHING BUT DIVIDEND BECAUSE HAD IT BEEN A GENUINE COM MISSION, THE 5792/MUM/09 ASSESSMENT YEAR:06-07 25 ASSESSEE WOULD HAVE CONTINUED THE PAYMENT OF COMMISSION AND EVEN MAY HAVE INCREASED IN THE SUBSEQUENT THREE YEAR PERIOD TO IMPROVE PERFORMANCE BUT NO COMMISSION WAS PAID IN THESE YEARS EVE NTHOUGH TURNOVER AND PROFIT WERE BOTH DECLINING. OBVIOUSLY, SHARP FALL IN PROFITS HAD FORCED THE COMPANY MANAGEMENT NOT TO PAY DIVIDEND IN THE GARB OF COMMISSION IN THE NEXT THREE YEARS. THE STOCK MARKET STARTED RECOVERY FROM ASSESSMENT YEAR 2004-05 AND HAD STEADILY GA INED TILL ASSESSMENT YEAR 2008-09 WHICH IS REFLECTED IN STEADY INCREA SE IN BOTH TURNOVER AND PROFIT. THE ASSESSEE AGAIN STARTED SHOWING PAYMENT OF COMMISSION FROM ASSESSMENT YEAR 2004-05. THE PROFIT BEFORE TAX BUT AFTER DEDUCTION ON ACCOUNT OF COMMISSION WAS RS.4.55 CRORES I N ASSESSMENT YEAR 2004-05 WHICH STEADILY ROSE TO RS.22.42 CROR ES IN ASSESSMENT YEAR 2008-09. IN OUR VIEW THE STEADY RISE IN P ERFORMANCE WAS DUE TO IMPROVED MARKET CONDITIONS AND NOT BECAUSE O F ANY EXTRA SERVICE RENDERED BY THE DIRECTORS AS NO EVIDENCE HAS BEEN PRODUCED FOR RENDERING OF EXTRA SERVICES. THE EQUITY CAPITAL OF THE COMPANY WHICH IS ENTIRELY OWNED BY THE THREE DIRECTORS WAS RS.6.5 0 CRORES. INVESTORS IN EQUITY SHARES EXPECT A REASONABLE RETURN ON THE SHARE INVESTMENT AND IN OUR VIEW ANY REASONABLE MANAGEMENT WOULD HAVE DECLARED AT LEAST ABOUT 20% DIVIDEND IN THE ABOVE YEA RS TO THE SHARE HOLDERS WHEN THERE WERE SUBSTANTIAL PROFITS. NO DOUBT IT IS TRUE THAT DIVIDEND IS NOT MANDATORY AND IS DISCRETIONARY TO BE D ECIDED BY THE MANAGEMENT AFTER CONSIDERING THE PROFITABILITY AND OT HER FACTORS. THE MANAGEMENT MAY NOT DECLARE DIVIDEND EVEN WHEN THERE ARE SUBSTANTIAL PROFITS BECAUSE OF BUSINESS EXIGENCY SUCH AS REQU IREMENT OF FUND FOR ANY EXPANSION OR DIVERSIFICATION PROGRAMME BUT NO SUCH EXIGENCIES HAVE BEEN SHOWN. THE ASSESSEE COMPANY IS A SHARE B ROKER AND ONLY EXECUTES ORDERS ON BEHALF OF INVESTORS ON COMMISSI ON BASIS. NO FUNDS ARE THEREFORE REQUIRED FOR ANY EXPANSION ETC. NOR ANY SUCH 5792/MUM/09 ASSESSMENT YEAR:06-07 26 CASE HAS BEEN MADE. THE DIRECTORS IN THE ANNUAL REPORT HAVE NOT GIVEN ANY REASON FOR NOT DECLARING DIVIDEND. THE REA SON GIVEN BEFORE US IS THAT THE ASSESSEE DID NOT DECLARE DIVIDEND TO IMPROV E NET WORTH TO ATTRACT FIIS WHO DO TRANSACTIONS ONLY THROUGH HIGH N ET WORTH BROKERS. THIS ARGUMENT IS NOT CONVINCING AT ALL BECAUSE WHETHER THE ASSESSEE PAYS COMMISSION OR DIVIDEND THE NET WORTH IS REDUCED BY THE SAME AMOUNT. IT IS ALSO TO BE NOTED THAT COMMISSION HAS BEEN PAID ONLY TO THE DIRECTOR EMPLOYEES AND COMMISSION HAS BEEN PA ID AS 10% OF PROFITS SUBJECT TO A LIMIT OF RS.40.00 LACS WHICH ALSO SH OWS THAT THE ASSESSEE COMPANY DISTRIBUTED PART OF THE PROFITS TO THE DI RECTOR EMPLOYEES WHO WERE THE ONLY SHAREHOLDERS. THEREFORE, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AS DISCUSSED ABOVE WE HAVE NO HESITATION IN COMING TO THE CONCLUSION THAT DIVIDEND IN CASE OF THE ASSESSEE COMPANY WAS PAYABLE AND THAT THE SAME HAS BEEN PA ID IN THE GARB OF COMMISSION. 7.15 THE COMPARISON MADE BY THE ASSESSEE TO THE HIGH REMU NERATION OF RS.46.61 LACS PAID TO A NON SHARE HOLDER EMPLOYEE IS NOT VERY RELEVANT IN OUR OPINION. THE THREE DIRECTORS ARE THE OWNERS OF THE COMPANY. THE OWNERS OF BUSINESS IF THEY ARE NOT TECHNICAL LY QUALIFIED MAY HAVE TO ENGAGE HIGHLY QUALIFIED EMPLOYEES FOR DO ING SPECIALIZED JOBS AND MAY HAVE TO PAY HIGH REMUNERATION MORE TH AN THE SALARY PAYABLE TO THEM FOR THE SERVICES RENDERED. THE STOCK MA RKET IS A HIGHLY SPECIALIZED FIELD AND REQUIRES ADEQUATE RESEARCH TO ATTRACT INVESTORS. THE QUALITY AND RELIABILITY OF RESEARCH IS BACK-BONE OF STOCK BROKING BUSINESS. THEREFORE, OBVIOUSLY THE ASSESSEE COMPANY HAD TO ENGAGE A HIGHLY QUALIFIED CA TO HEAD RESEARCH DIVISION ON HIGH REMUNERATION WHICH CANNOT BE COMPARED TO THE REMUNERAT ION PAYABLE TO THE ASSESSEE. THE ASSESSING OFFICER HAS ALSO POINTED OUT T HAT THE 5792/MUM/09 ASSESSMENT YEAR:06-07 27 ASSESSEE COMPANY HAD OTHER B.COM EMPLOYEES WHO HAVE BEEN PAID REMUNERATION OF ONLY RS.3.00 LACS PER ANNUM. FURTHER, NO COMMISSION IS PAID TO ANY EMPLOYEE OTHER THAN THE THREE SHARE HO LDER DIRECTORS. AS REGARDS, THE CASE OF MOTILAL OSWAL SECURITIES WHICH HA S BEEN QUOTED IN COMPARISON, NO DETAILS SUCH AS QUALIFICATIONS OF THE DIR ECTORS, PROFITABILITY AND PAYMENT MADE TO OTHER EMPLOYEES HA S BEEN PLACED ON RECORD. WE ARE THEREFORE NOT IN A POSITION TO COMMENT AS TO WHETHER IN THAT CASE IT WAS A GENUINE PAYMENT OF COMMISSION OR P AYMENT IN LIEU OF DIVIDEND. MOREOVER, MERELY BECAUSE COMMISSION HAS BEEN CLAIMED AND ALLOWED IN ANOTHER CASE WRONGLY, CANNOT BE THE GROUND TO ALLOW A CLAIM OF DEDUCTION IN CASE OF THE ASSESSEE. EACH CASE HAS TO BE VIEWED ON THE FACTS OF THE CASE. 7.16 THE LD. AR FOR THE ASSESSEE HAS ALSO ARGUED VEHEMEN TLY THAT THE CASE OF THE ASSESSEE IS SUPPORTED BY THE JUDGMENT OF HONBL E HIGH COURT OF BOMBAY IN CASE OF LOYAL MOTOR SERVICE COMPAN Y. LTD.(SUPRA), IN WHICH CASE IT HAS BEEN HELD THAT FOR DI SALLOWANCE OF BONUS OR COMMISSION UNDER SECTION 36(1)(II), THE SAME AMOU NT IF NOT PAID AS COMMISSION SHOULD HAVE BEEN PAYABLE AS DIVIDEND. IN THE PRESENT CASE, IT HAS BEEN POINTED OUT THAT THE DIRECTOR S HAD BEEN PAID COMMISSION OF RS .40.00 LACS EACH BUT IN CASE THE ENTIRE AMOUNT OF COMMISSION OF RS .1.20 CRORES HAD BEEN PAID AS DIVIDEND, THE PAYMENT OF DIVIDEND WOULD NOT HAVE COME TO RS .40.00 LACS IN EACH CASE BECAUSE SHARE HOLDING OF THE THREE DIRECTORS WAS NOT THE SAME. THE CHAIRMAN HELD 50% OF THE SHARES WHEREAS THE OTHER TWO D IRECTORS HELD 25% EACH. 7.17 WE HAVE CAREFULLY GONE THROUGH THE SAID JUDGMEN T. THAT WAS THE CASE OF A PUBLIC LIMITED COMPANY AND THE ISSUE WAS A LLOWABILITY OF 5792/MUM/09 ASSESSMENT YEAR:06-07 28 DEDUCTION ON ACCOUNT OF BONUS UNDER SECTION 10(2)(X) WHI CH CORRESPONDS TO SECTION 36(1)(II). IN THAT CASE BONUS HAD BE EN PAID NOT ONLY TO THIRTEEN SHARE HOLDER EMPLOYEES BUT ALSO TO TW ENTY-EIGHT NON SHARE HOLDER EMPLOYEES AT THE SAME RATE AND THEREFORE , PAYMENT OF BONUS TO THE SHAREHOLDER EMPLOYEE COULD NOT BE SAID TO BE UNREASONABLE. IN CASE OF PUBLIC COMPANIES HAVING LARGE NU MBER OF SHAREHOLDERS WHICH ARE UNRELATED, IT MAY NOT BE POSSIBL E TO USE A DEVICE. THE PRESENT CASE INVOLVES A FAMILY BUSINESS OWNE D BY THE THREE DIRECTORS WHO WERE NOT ONLY SHAREHOLDERS BUT WERE ALSO DECISION MAKERS. THEY ARE ALSO BLOOD RELATIONS (FATHER AND SON S). THEREFORE, THEY COULD EASILY SHOW PAYMENT OF DIVIDEND AS COMMISSION AND TAKE THE PAYMENT IN SUCH A MANNER THAT THE SAME AMOUNT DOE S NOT BECOME PAYABLE AS DIVIDEND THOUGH THE TOTAL AMOUNT REMAINS WITHIN THE FAMILY. THEREFORE, IN OUR VIEW, THE JUDGMENT CITED ABOVE CANNOT BE APPLIED TO A CASE WHERE A DEVICE IS ADOPTED BY CLOSELY HE LD PRIVATE COMPANIES TO DISTRIBUTE DIVIDEND IN THE GARB OF COMMISSI ON IN SUCH A MANNER TO TAKE ADVANTAGE OF JUDGMENT IN THE CASE OF L OYAL MOTOR SERVICE COMPANY LTD. (SUPRA). WE HAVE ALREADY HELD E ARLIER THAT, CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, THE COMM ISSION PAYMENT IN THIS CASE WAS IN LIEU OF DIVIDEND AND THERE FORE, THE CLAIM CANNOT BE ALLOWED ONLY ON THE GROUND THAT THE PAYMEN T TAKEN BY THE DIRECTORS IS NOT IN THE SHARE HOLDING RATIO. THE DEVI CE ADOPTED BY THE ASSESSEE IS OBVIOUSLY WITH THE INTENTION TO AVOID PAYMENT OF FULL TAXES. THERE IS OBVIOUS TAX AVOIDANCE. IN CASE DIVIDEND IS PAID , THE TAX PAYABLE AT THE RATE OF 35.75% IN CASE OF A COMPANY ON THE AMOUNT OF RS .1.20 CRORES COMES TO RS .42.90 LACS AND IN THAT CASE THE COMPANY WOULD HAVE ALSO TO PAY DIVIDEND DISTRIBUTION TAX @12 .5% WHICH COMES TO RS .15.00 LACS. THE TOTAL TAX PAYMENT IN CASE OF DIVIDEND PAYMENT WOULD COME TO RS.57.90 LACS WHEREAS IN CASE COMMISSION WAS PA ID, 5792/MUM/09 ASSESSMENT YEAR:06-07 29 THE TAX PAYABLE COMES TO RS.39.60 LACS. THERE IS THUS TAX AVOIDANCE OF RS. 18.30 LACS. THE PROVISIONS OF SECTION 36(1)(II) ARE INTENDED TO PREVENT AN ESCAPE FROM TAXATION BY DESCRIBING THE PAYME NT AS BONUS OR COMMISSION WHEN IN FACT ORDINARILY IT SHOULD HAVE REA CHED THE SHAREHOLDERS AS PROFIT OR DIVIDEND AS HELD BY THE HONBL E HIGH COURT OF BOMBAY IN THE CASE OF LOYAL MOTOR SERVICE COMPANY LTD. (SUPRA). IN THIS CASE WE ARE CONVINCED IN VIEW OF THE DISCUSSION MADE EA RLIER THAT IT IS A CASE OF PAYING COMMISSION WHICH WAS OTHERWISE PAYABL E AS DIVIDEND, TO ESCAPE TAXATION. 7.18 THE LD. AR FOR THE ASSESSEE HAS ALSO RELIED ON CERTA IN DECISIONS OF THE TRIBUNAL AS MENTIONED EARLIER IN PARA 4.1. THESE CASES IN OUR VIEW ARE DISTINGUISHABLE. MOREOVER THESE ARE DECISIONS OF DIVISION BENCH OF THE TRIBUNAL WHICH CANNOT ACT AS BINDING PRECEDE NT FOR THE SPECIAL BENCH WHICH IS A LARGER BENCH. IN CASE OF ACIT VS . BONY POLYMER PVT. LTD. (SUPRA), TWO WHOLE TIME WORKING D IRECTORS HAD BEEN PAID COMMISSION @ .5% OF TURNOVER. THE DIVISIONAL BENCH OF THE TRIBUNAL ON FACTS OF THAT CASE HELD THAT THERE WAS NO M ATERIAL TO SUPPORT THE PROPOSITION THAT HAD COMMISSION BEEN NOT PAI D, IT WOULD HAVE BEEN PAYABLE AS DIVIDEND. THE CASE OF DCIT VS. M /S. CELSIUS REFRIGERATION P. LTD. (SUPRA), WAS IDENTICAL IN WHICH CA SE, THE DECISION IN CASE OF BONY POLYMERS (SUPRA) WAS FOLLOWED. IN CASE OF ACIT VS. MANDAVI MOTORS PVT. LTD. (SUPRA), THE DIRECTORS WHO HAD BEEN PAID BONUS HELD ONLY FEW SHARES AND THEREFORE, THE DIVIDEND PAYABLE WOULD HAVE BEEN NEGLIGIBLE. IN CASE OF M/S. CARRIER LAUNCHER P. LTD. (SUPRA), THERE WAS A WIDE GAP BETWEEN THE SHARE HOLDINGS OF THE TWO DIRECTORS WHICH WERE 40.93% AND 1.09%. MOREOVER THE DIRECTORS WERE ALSO NOT RELATED AND THEREFORE IT COULD NOT HAVE BEEN A CASE O F DEVICE. THESE 5792/MUM/09 ASSESSMENT YEAR:06-07 30 CASES THEREFORE ARE DISTINGUISHABLE AND CANNOT COME TO THE RESCUE OF THE ASSESSEE. 7.19 ARGUMENTS HAVE ALSO BEEN ADVANCED BY THE LD. AR BASED ON THE PRINCIPLE OF CONSISTENCY. IT HAS BEEN SUBMITTED THAT IN E ARLIER YEARS AND SUBSEQUENT YEARS THE CLAIM HAS BEEN ALLOWED AND THER EFORE, IT COULD NOT BE DISALLOWED IN THE PRESENT YEAR. RELIANCE HAS BEEN PLACED ON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE O F RADHA SAOMI SATSANG (SUPRA). NO DOUBT, THE REVENUE AUTHORITIES AR E EXPECTED TO ADOPT A CONSISTENT APPROACH IN ALLOWING OR DISALLOWING A CLAIM AND IF A CLAIM HAS BEEN ALLOWED IN AN EARLIER YEAR, ANY DISALLO WANCE IN SUBSEQUENT YEAR CANNOT BE JUSTIFIED IF FACTUAL AND LEG AL POSITION REMAINS THE SAME. BUT IN THIS CASE WE NOTE THAT THE C LAIM HAS BEEN ALLOWED IN THE EARLIER AND SUBSEQUENT YEAR BASED ON TH E DECISIONS OF DIVISIONAL BENCH OF THE TRIBUNAL. THE BENCH WHICH ORIG INALLY HEARD THE APPEAL FOR THIS YEAR HAD RESERVATIONS REGARDING CORRECTN ESS OF THE DECISION OF THE DIVISIONAL BENCH AND ACCORDINGLY MATTER WAS REFERRED TO A LARGER BENCH. THE DECISION OF THE DIVISIONAL BENCH I N EARLIER YEAR CANNOT ACT AS A BINDING PRECEDENT FOR THE SPECIAL BENC H WHICH IS A LARGER BENCH. FURTHER IN CASE THE DECISION OF THE DIVI SION BENCH WAS TO BE FOLLOWED, THERE WAS NO NEED TO REFER THE ISSUE T O A LARGER BENCH. THEREFORE, IN OUR VIEW, ON THE FACTS OF THE CASE, THE PRINCIPLE OF CONSISTENCY WILL BE OF NO HELP AND THE ARGUMENT RAISED H AS TO BE REJECTED. EVEN IN CASE OF RADHA SAOMI SATSANG(SUPRA), HONBLE SUPREME COURT HAD HELD THAT THE DECISION WAS CONFINED TO FACTS OF THAT CASE ONLY. 5792/MUM/09 ASSESSMENT YEAR:06-07 31 7.20 IN VIEW OF THE FOREGOING DISCUSSION AND FOR THE REASONS GIVEN EARLIER, WE ARE OF THE VIEW THAT THE PAYMENT OF COMM ISSION OF RS.1.20 CRORES TO THE THREE WORKING DIRECTORS WAS IN LIEU OF DIV IDEND AND THE SAME IS NOT ALLOWABLE AS DEDUCTION UNDER SECTION 36(1)(II ). WE ANSWER THE REFERENCE ACCORDINGLY. 8. WE NOW TAKE UP THE APPEAL OF THE ASSESSEE. IN THE A PPEAL, THE ASSESSEE HAS RAISED DISPUTES ON TWO GROUNDS WHICH ARE AS UNDER :- I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. ASSESSING OFFICER ERRED AND LD. CIT(A) CONFIRMED THE DISALLOWANCE OF RS.1,20,00,000/- UNDER SECTION 36(1)(II) OF THE I.T. ACT BEING COMMISSION PAID TO EXECUTIVE WORKING DIRECTORS. II) ALTERNATIVELY, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. ASSESSING OFFICER AND THE LD. CIT (A) VIII DID NOT CONSIDER THE APPELLANTS CLAIM OF RS .1,20,00,000/- BEING COMMISSION PAID TO THREE DIRECTO R AS ALLOWABLE UNDER SECTION 37(1). 8.1 THE DISPUTE RAISED IN GROUND NO.1 IS THE SAME AS TH E QUESTION REFERRED BEFORE THE SPECIAL BENCH I.E. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, PAYMENT OF COMMISSION TO THE EXTE NT OF RS.1.20 CRORES IS ALLOWABLE UNDER PROVISIONS OF SECTION 36 (1)(II). WE HAVE ALREADY ANSWERED THE QUESTION VIDE PARA 7.20 OF THIS ORDER AND HELD THAT THE PAYMENT OF COMMISSION OF RS.1.20 CRORES WAS IN LIEU OF DIVIDEND AND THE SAME IS NOT ALLOWABLE UNDER SECTION 3 6(1)(II). THE GROUND IS THEREFORE, DECIDED AGAINST THE ASSESSEE. 5792/MUM/09 ASSESSMENT YEAR:06-07 32 8.2. THE SECOND GROUND IS REGARDING ALTERNATE CLAIM OF ALLOWABILITY OF DEDUCTION ON ACCOUNT OF COMMISSION OF RS.1.20 CRORES PAID TO THE THREE DIRECTOR EMPLOYEES UNDER PROVISIONS OF SECTION 37(1 ) OF THE I.T. ACT. THE LD. AR FOR THE ASSESSEE ARGUED THAT PROVISIONS OF SECTION 36(1)(II) WERE APPLICABLE ONLY IN THE CASE OF NON-SHARE HOLDER EMPLOYEES. IT WAS ALSO ARGUED THAT COMMISSION PAID FOR A NY EXTRA SERVICES RENDERED BY THE SHARE HOLDER EMPLOYEES WILL BE COVERED BY THE PROVISIONS OF SECTION 37(1) WHICH ALLOWS DEDUCTION O N ACCOUNT OF ANY EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR TH E PURPOSE OF BUSINESS SUBJECT TO THE CONDITIONS MENTIONED IN THE SECTION . WE HAVE ALREADY CONSIDERED THESE ASPECTS WHILE CONSIDERING THE QU ESTION REFERRED TO THE SPECIAL BENCH AND VIDE PARA 7.6 AND 7 .7 HAVE HELD THAT THE PROVISIONS OF SECTION 36(1)(II) WILL APPLY IN CASE O F ALL EMPLOYEES INCLUDING SHARE HOLDER EMPLOYEES IRRESPECTIVE OF THE F ACT WHETHER ANY EXTRA SERVICES HAVE BEEN RENDERED OR NOT. THE ISSUE WHE THER PAYMENT OF BONUS OR COMMISSION TO AN EMPLOYEE WILL BE COVERED BY THE PROVISIONS OF SECTION 36(1)(II) OR SECTION 37(1) IS ALSO SET TLED BY THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN CASE OF SUBODH CHANDRA POPPATLAL VS. CIT (24 ITR 586) IN WHICH THE HO NBLE HIGH COURT WHILE DEALING WITH SIMILAR PROVISIONS OF THE OLD ACT HELD THAT WHEN AN EXPENDITURE FELL UNDER SECTION 10(2)(X) [WHIC H CORRESPONDS TO SECTION 36(1)(II)], IN THE SENSE THAT IT IS AN EXPENDITU RE IN THE NATURE OF BONUS OR COMMISSION PAID TO AN EMPLOYEE FOR SERVICES RE NDERED THEN ITS VALIDITY CAN ONLY BE DETERMINED BY THE TESTS LAID DOWN IN SECTION 10(2)(X) AND NOT BY THE TESTS LAID DOWN IN SECTIO N 10(2)(XV) WHICH CORRESPONDS TO SECTION 37(1). RESPECTIVELY FOLLOWING THE SAID JUDGMENT, WE HOLD THAT THE PAYMENT OF COMMISSION TO TH E THREE DIRECTOR EMPLOYEES HAD BEEN RIGHTLY CONSIDERED BY THE A UTHORITIES 5792/MUM/09 ASSESSMENT YEAR:06-07 33 BELOW UNDER THE PROVISIONS OF SECTION 36(1)(II) AND THA T THE PROVISIONS OF SECTION 37(1) WILL NOT BE APPLICABLE IN SUCH CASES. 8.3 IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 22.6.2011. SD/- SD/- SD/- (D.K. AGARWAL) (N.V. VASUDEVAN) (RAJENDRA SINGH) JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED : 22.6.2011 JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.