MOUNT KELLETT CAPITAL MANAGEMENT INDIA P.LTD, MUMBAI V. DCIT 3(2), MUMBAI

ITA 786/MUM/2015

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 1502 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 9 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-11-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2009-2010
• Appeal Filed On: 05-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: CHAITANYA ANJARIA SR AR
• Assessee Lawyers: D YOGESH A THAR; CHAITANYA D JOSHI ARS
• Section: 43B; 28; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES D, MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO. A.Y. APPELLANT RESPONDENT 269/MUM/15 2009-10 D.C.I.T 3(2)(1), MUMBAI M/S. MOUNT KELLETT CAPITAL MANAGEMENT INDIA PVT. LTD., UNIT 61 AND 62, 6 TH FLOOR, 3 NORTH AVENUE, MAKER MAXITY, BANDRA KURLA COMPLEX, BANDRA (EAST), MUMBAI [PAN: AAFCM 6895 B] 786/MUM/15 2009-10 MOUNT KELLETT CAPITAL MANAGEMENT INDIA PRIVATE LIMITED, 1302, TOWER-3, INDIABULLS FINANCE CENTRE, SENAPATI BAPAT MARG, ELPHINSTONE ROAD WEST, MUMBAI [PAN: AAFCM 6895 B] THE DEPUTY COMMISSIONER OF INCOME TAX-3(2), MUMBAI APPELLANT BY : SHRI D. YOGESH A. THAR , & SHRI CHAITANYA D. JOSHI, ARS RESPONDENT BY : SHRI CHAITANYA A N JA RIA , SR.AR, CIT DATE OF HEARING : 1 5 - 11 - 201 8 DATE OF PRONOUNCEMENT : 27 - 11 - 201 8 O R D E R PER MAHAVIR SINGH, JUDICIAL MEMBER: THESE TWO APPEALS FILED BY THE REVENUE AS WELL AS T HE ASSESSEE ARE DIRECTED AGAINST THE ORDER OF THE COMM ISSIONER OF INCOME TAX(APPEALS)-4, MUMBAI. ITA NOS. 269/MUM/2015 & 786/MUM/2015 2 REVENUES APPEAL IN ITA NO. 269/MUM/2015: 2. THE FIRST ISSUE IN THIS APPEAL OF REVENUE IS AS REGARDS THE ORDER OF THE CIT(A), DELETING THE DISALLOWANCE OF B ONUS PAYMENT PAID BY THE ASSESSEE TO SHRI SURESH PRABHALA. FOR THIS, REVENUE HAS RAISED THE FOLLOWING TWO GROUNDS: 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE LD.CIT(A) WAS JUSTIFIED IN DELETING THE DI SALLOWANCE MADE BY THE AO ON ACCOUNT OF BONUS PAID BY ASSESSEE TO SHRI SURESH PRABHALA, HOLDING THAT THE BONUS PAID WAS IN CONNECTION WITH HIS EMPLOYMENT AND NOT IN RESPECT OF SHARES HELD BY SHRI SURESH PRABHA LA AND ALSO WRONGLY DISTINGUISHING THE DECISION OF SPECIAL BENCH OF ITA T, MUMBAI INT EH CASE OF DALAL BROACHA STOCK BROKING LTD. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) WAS JUSTIFIED IN DELETING THE DISALLO WANCE MADE BY THE AO, ON ACCOUNT OF BONUS PAID BY THE ASSESSEE TO MR. SURESH PRABHALA, HOLDING THAT THERE WERE NO PROFITS AVAILABLE WITH T HE ASSESSEE COMPANY IGNORING THE FACT THAT ASSESSEE COMPANY HAS OFFERED 11,92,23,908/- AS BUSINESS PROFIT FOR AY. 2009-10. 3. BRIEF FACTS OF THE CASE ARE THAT THE AO DURING T HE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT ASSESSEE-COMPAN Y HAS MADE PAYMENT OF BONUS APART FROM SALARY TO THE EXEC UTIVE CHAIRMAN AND DIRECTOR OF THE COMPANY, SHRI SURESH P RABHALA AMOUNTING TO 6,66,50,000/-. ACCORDING TO THE AO, DURING THE YEAR UNDER CONSIDERATION, 50% OF SHARES OF THE ASSE SSEE- COMPANY WERE HELD BY SHRI SURESH PRABHALA, WHICH WA S TRANSFERRED TO MOUNT KELLETT CAPITAL MANAGEMENT (MA URITIUS) LTD. ITA NOS. 269/MUM/2015 & 786/MUM/2015 3 ACCORDING TO AO, THE DIRECTORS COMMISSION/BONUS IS NOT ALLOWABLE EXPENSE AS PER THE PROVISIONS OF SECTION 36(1)(II) OF THE INCOME TAX ACT, 1961 [HEREIN AFTER REFERRED TO AS ACT]. ACCORDING TO HIM, ASSESSEE WAS ISSUED SHOW CAUSE NO TICE AS TO WHY THE COMMISSION/BONUS PAID TO SHRI SURESH PRABHA LA BE NOT DISALLOWED. ASSESSEE REPLIED THAT MR. SURESH PRABH ALA HAS ACQUIRED 5,000 EQUITY SHARES IN THE ASSESSEE-COMPAN Y ON 11-08- 2008 BUT SUBSEQUENTLY, TRANSFERRED 4,999 EQUITY SHA RES TO MOUNT KELLETT CAPITAL MANAGEMENT (MAURITIUS) LTD., AND ONE SHARE TO MOUNT KELLETT HK HOLDINGS LLC ON 16-09-200 8 RESPECTIVELY. ASSESSEE FILED COPIES OF FORM FC-TRS FILED WITH RESERVE BANK OF INDIA FOR TRANSFER OF EQUITY SHARES FROM SHRI SURESH PRABHALA TO MOUNT KELLETT CAPITAL MANAGEMENT (MAURITIUS) LTD., AND MOUNT KELLETT HK HOLDINGS LLC . ACCORDING TO ASSESSEE, SHRI SURESH PRABHALA CEASED TO BE SHAR EHOLDER IN THE ASSESSEE-COMPANY ON 16-09-2008. BUT THE AO DIS ALLOWED THE CLAIM OF BONUS EXPENSES OF 6,66,50,000/- PAID TO SHRI SURESH PRABHALA BY HOLDING THAT HE IS DIRECTOR AS W ELL AS SHAREHOLDER OF THE ASSESSEE-COMPANY AND BONUS PAID TO DIRECTOR/SHAREHOLDER IS NOT ALLOWABLE U/S. 36(1)(II ) OF THE ACT. AGGRIEVED, IS PREFERRED AN APPEAL BEFORE THE CIT(A) . THE CIT(A) ITA NOS. 269/MUM/2015 & 786/MUM/2015 4 AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE AND A LSO CONSIDERING THE DECISION OF SPECIAL BENCH OF ITAT I N THE CASE OF DALAL BROACHA STOCK BROKING (P) LTD., VS. ADDL. CIT [131 ITD 36], DELETED THE DISALLOWANCE BY OBSERVING IN PARA 5.3.1 .3.6 TO 5.3.1.3.8 AS UNDER: 5.3.1.3.6 HAVING CAREFULLY AND DISPASSIONATELY CON SIDERED THE RIVAL SUBMISSIONS AND IN VIEW OF THE ABOVE, THE SECOND CO NDITION WITH RESPECT TO ALLOWABILITY OF DEDUCTION UNDER SECTION 36(1)(II ) OF THE ACT IS ALSO SATISFIED. THEREFORE, IT IS NOT A CASE COVERED BY THE DECISION OF THE DALAL BROACHA STOCK BROKING PVT. LTD., VS. ACIT (SUPRA). LD.AR HAS CLEARLY DISTINGUISHED FACTS OF THE PRESENT CASE FROM THE FA CTS RECORDED IN THE CASE OF THE SAID DALAL BROACHA STOCK BROKING PVT. L TD., VS. ACIT (SUPRA) AND WHICH MAY BE TABULATED AS UNDER: SR. NO. FACS IN THE CASE OF DALAL BROACHA FACTS IN THE CASE OF THE APPELLANT 1. ENTIRE SHARE CAPITAL OF THE COMPANY WAS HELD BY THE SHAREHOLDER EMPLOYEES. ALL THE SHAREHOLDER EMPLOYEES HELD SHARES THROUGH OUT THE YEAR. ALSO, ON THE DATE THE COMMISSION WAS PAID TO THE EMPLOYEES, THE EMPLOYEES WERE SHAREHOLDERS IN THE COMPANY. ENTIRE SHARE CAPITAL OF THE APPELLANT WAS NOT HELD BY THE SHAREHOLDER EMPLOYEE I.E., MR. PRABHALA. INITIALLY, EVEN MR. RAMAN SHARMA HELD 50% OF THE SHARE CAPITAL WHICH WAS ULTIMATELY TRANSFERRED BY MR. PRABHALA AND MR. RAMAN SHARMA TO MK MAURITIUS AND MOUNT KELLETT HOLDINGS LLC, BOTH NON- RESIDENTIAL EMPLOYEES. AT THE TIME OF THE BONUS WAS PAID TO MR. PRABHALA, HE WAS NOT A SHAREHOLDER OF THE APPELLANT. 2. ALL SHAREHOLDER EMPLOYEES TO WHOM COMMISSION WAS PAID WERE RELATIVES. MR. PRABHALA WAS NOWHERE CONNECTED/RELATED TO ANY OF THE OTHER SHAREHOLDERS. 3. PAYMENT OF COMMISSION WAS LINKED TO THE PROFITS EARNED BY THE COMPANY. THE COMPANY HAD EARNED SUBSTANTIAL PROFITS THE YEAR UNDER CONSIDERATION, AY. 2009-10 WAS THE FIRST YEAR OF BUSINESS. THE APPELLANT HAD NO DISTRIBUTABLE PROFITS FOR THE YEAR ITA NOS. 269/MUM/2015 & 786/MUM/2015 5 IN THE YEAR IN WHICH THE COMMISSION WAS PAID. THUS, THE COMPANY HAD NO JUSTIFIABLE REASON AS TO WHY IT HAD NOT PAID DIVIDEND TO ITS SHAREHELODERS. TO ENABLE IT TO PAY DIVIDEND. THERE WAS NO POSSIBILITY THAT THE APPELLANT WOULD HAVE DISTRIBUTED DIVIDEND IN THE ABSENCE OF DISTRIBUTABLE PROFITS. FURTHER, THE BONUS AMOUNT WAS DETERMINED ON THE BASIS OF VARIOUS PARAMETERS SUCH AS QUALIFICATIONS AND EXPERIENCE OF EMPLOYEES, INDUSTRY TRENDS, ROLES AND RESPONSIBILITIES ETC., 5.3.1.3.7 LD.AR VIGOROUSLY ARGUED AND SUBMITTED THA T THE A.O. HAS ERRED IN DISALLOWING BONUS OF 6,66,50,000/- PAID BY THE APPELLANT TO MR. PRABHALA UNDER SECTION 36(1)(II) OF THE ACT ON ACCOUNT OF THE FOLLOWING REASONS: MR. PRABHALA WAS NOT A SHAREHOLDER IN THE APPELLANT IN JANUARY 2009 WHEN THE BONUS WAS PAID TO HIM AND HENCE, IT C OULD NOT HAVE BEEN POSSIBLE FOR THE APPELLANT TO PAY THE BON US AS DIVIDEND UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956, TH E APPELLANT HAD NO PROFITS AVAILABLE WHICH COULD HAVE BEEN DIST RIBUTED TO THE SHAREHOLDERS AS DIVIDEND. THE BONUS WAS PAID TO MR. PRABHALA (AND ALL OTHER E MPLOYEES OF THE APPELLANT) IN CONNECTION WITH THEIR EMPLOYMENT WITH THE APPELLANT AND HAD NO CONNECTION WITH THE SHARES HEL D BY MR. PRABHALA IN THE APPELLANT FOR A VERY SHORT PERIOD. 5.3.1.3.8 IN VIEW OF THE ABOVE, THE A.O. IS DIRECTE D TO REDUCE THE DISALLOWANCE OF PAYMENT OF BONUS TO THE SAID MR. SU RESH PRABHALA UNDER SECTION 36(1)(II) OF THE ACT. THEREFORE GROU ND OF APPEAL NO. 2 IS ALLOWED. AGGRIEVED, NOW REVENUE IS IN SECOND APPEAL BEFORE T HE TRIBUNAL. 4. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND FROM THE FAC TS OF THE CASE THAT IT IS A FACT THAT SHRI SURESH PRABHALA HAS ACQ UIRED 500 EQUITY SHARES OF ASSESSEE-COMPANY AS ON 11-08-2008 BUT ITA NOS. 269/MUM/2015 & 786/MUM/2015 6 SUBSEQUENTLY ON 16-09-2008, TRANSFERRED 4,999 EQUIT Y SHARES TO MOUNT KELLETT CAPITAL MANAGEMENT (MAURITIUS) LTD., AND ONE SHARE TO MOUNT KELLETT HK HOLDINGS LLC RESPECTIVELY . ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS BEFORE THE AO AND ALSO BEFORE THE CIT(A) DURING THE APPELLATE PROCEED INGS FILED THE DETAILS OF TRANSFER OF EQUITY SHARES BY SHRI SURESH PRABHALA TO MOUNT KELLETT HK HOLDINGS LLC. ASSESSEE ALSO FILED COPIES OF FORM FC-TRS AS FILED WITH RESERVE BANK OF INDIA FOR TRANSFER OF EQUITY SHARES FROM SHRI SURESH PRABHALA TO THESE TW O COMPANIES I.E., MOUNT KELLETT CAPITAL MANAGEMENT (MAURITIUS) LTD., AND MOUNT KELLETT HK HOLDINGS LLC. AS ON 16-09-2008, S HRI SURESH PRABHALA CEASED TO BE SHAREHOLDER OF THE ASSESSEE-C OMPANY. ASSESSEE-COMPANY HAS PAID BONUS TO SHRI SURESH PRAB HALA ALONG WITH SALARY FOR THE MONTH OF JANUARY, 2009 TO 31-03-2009. WHEN THIS BONUS/COMMISSION WAS PAID TO SHRI SURESH PRABHALA, HE WAS NOT SHAREHOLDER OF THE ASSESSEE-COMPANY AND ASSESSEES CONTENTIONS BEFORE US ALSO WAS THAT THE PROVISIONS OF SECTION 36(1)(II) WILL NOT BE APPLICABLE IN THE PRESENT CAS E IN THE GIVEN FACTS AND CIRCUMSTANCES. ITA NOS. 269/MUM/2015 & 786/MUM/2015 7 4.1. WE HAVE GONE THROUGH THE PROVISIONS OF COMPANI ES ACT, 1956 CITED BY LD. COUNSEL I.E., SECTION 371, 372 AN D 205 WHICH STATES THAT THE DIVIDEND IS TO BE PAID ONLY OUT OF PROFITS. WE ALSO FIND THAT THE ASSESSEE BEING THE FIRST YEAR OF BUSI NESS RECRUITED EMPLOYEES FROM OTHER ORGANISATIONS BASED ON EDUCATI ONAL QUALIFICATIONS, PAST EXPERIENCE OF SUCH EMPLOYEES A ND THE RELEVANT DETAILS ARE AS UNDER: NAME OF THE EMPLOYEE AND DATE OF JOINING DATE OF JOINING AND POSITION QUALIFICATION JOB/SECTOR FOCUS MR. PRABHALA PRABHALA MANAGING DIRECTOR MBA, IIM CALCUTTA, MAJOR IN FINANCE HE IS THE MANAGING DIRECTOR OF THE COMPANY. HE IS RESPONSIBLE FOR OVERLOOKING THE OVERALL ACTIVITIES OF THE COMPANY. SHIV NANDAN NEGI ASSOCIATE DIRECTOR MBA, IIM AHMEDABAD DELHI INSTITUTE OF TECHNOLOGY, DELHI UNIVERSITY HE FOCUSES ON RETAIL, CEMENT EDUCATION AND INDUSTRIAL APPLIANCES SECTORS. NIKHIL BANERJEE ASSOCIATE DIRECTOR MBA, IIM CALCUTTA, MAJOR IN FINANCE SHRIRAM COLLEGE OF COMMERCE (SRCC) DELHI UNIVERSITY HE FOCUSES ON METALS AND MINING, FINANCIAL SERVICES, POWER AND E-COMMERCE SECTORS NARAYANAN VENKITRAMAN ASSOCIATE DIRECTOR CHARTERED ACCOUNTANT HE IS RESPONSIBLE FOR ITA NOS. 269/MUM/2015 & 786/MUM/2015 8 B. COM (SIES), MUMBAI UNIVERSITY IDENTIFICATION OF INVESTMENT OPPORTUNITIES ACROSS SECTORS. 4.2. WE FIND THAT THE ASSESSEE HAS PAID BONUS IN AG GREGATING TO 12.90 CRORES TO ALL ITS EMPLOYEES IN THE MONTH OF JANUARY, 2009 AND OUT OF THE ABOVE, THE ASSESSEE PAID A BONU S OF 6,66,50,000/- TO SHRI SURESH PRABHALA. WE HAVE GON E THROUGH THE PROVISIONS OF SECTION 36(1)(II) OF THE ACT, WHI CH IS RELEVANT FOR THE YEAR UNDER CONSIDERATION, WHICH IS BEING REPROD UCED AS BELOW: SEC.36. (1) THE DEDUCTIONS PROVIDED FOR IN THE FOL LOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREIN, IN COMPU TING THE INCOME REFERRED TO IN SECTION 28 (I) .. (II) ANY SUM PAID TO AN EMPLOYEE AS BONUS OR COMMIS SION FOR SERVICES RENDERED, WHERE SUCH SUM WOULD NOT HAVE BEEN PAYABLE TO HIM A S PROFITS OR DIVIDEND IF IT HAD NOT BEEN PAID AS BONUS OR COMMISSION; 4.3. FROM THE PLAIN READING OF THE PROVISIONS OF SE CTION 36(1)(II) OF THE ACT, WHICH PROVIDES THAT A SUM PAID TO AN EM PLOYEE AS BONUS OR COMMISSION FOR SERVICES RENDERED BY THE EM PLOYEES SHOULD BE ALLOWABLE AS DEDUCTION UNLESS SUCH AMOUNT OR OTHERWISE PAYABLE TO EMPLOYEE AS PROVIDED ARE DIVID END. ITA NOS. 269/MUM/2015 & 786/MUM/2015 9 ACCORDING TO US, THE SECTION ALLOWED DEDUCTION IF T HE EXPENDITURE IS ON ACCOUNT OF BONUS OR COMMISSION PAID TO AN EMP LOYEE AND FOR SERVICES RENDERED. SUCH SUM WOULD NOT EVEN OTHE RWISE PAYABLE AS PROFIT OR DIVIDEND. ASSESSEE BEING NEWLY INCORPORATED, HAD RECRUITED EMPLOYEES FROM OTHER ORGANISATIONS BA SED ON EDUCATIONAL QUALIFICATIONS AND BASED ON EXPERIENCE OF SUCH EMPLOYEES, WHICH WE HAVE ALREADY NARRATED ABOVE. I T IS A FACT THAT ASSESSEE HAS AGREED TO PAY BONUS ONLY TO ITS E MPLOYEES FOR THE YEAR UNDER CONSIDERATION TO THEIR CONTINUED EMP LOYMENT AND SHRI SURESH PRABHALA RENDERED SERVICES FOR THE ASSE SSEE AND ASSESSEE IN LIEU OF THAT HAS PAID BONUS IN THE MONT H OF JANUARY, 2009. 4.4. HERE NOW, WE WANT TO REFER TO THE CASE LAW OF CO-ORDINATE BENCH OF ITAT, PUNE IN THE CASE OF ARIHANTAM INFRAP ROJECTS (P) LTD., VS. JT. COMMISSIONER OF INCOME-TAX, [156 ITD 425] (PUNE- TRIB.),WHEREIN THE TRIBUNAL HAS CONSIDERED THE DECI SION OF THE SPECIAL BENCH OF MUMBAI IN THE CASE OF DALAL BROACH A STOCK BROKING (P) LTD., VS. ADDL. CIT(SUPRA), DECIDED THE ISSUE VIDE PARA 18 TO 23 AS UNDER: 18. UNDER THE PROVISIONS OF SECTION 36(1)(II) OF THE A CT, IT IS PROVIDED THAT THE BONUS OR COMMISSION PAID WOULD BE ALLOWED AS DEDUCTION ITA NOS. 269/MUM/2015 & 786/MUM/2015 10 WITHOUT ANY RESTRICTION SUBJECT TO THE PROVISIONS O F SECTION 43B OF THE ACT, WHEREIN IT IS PROVIDED THAT THE SAID AMOUNT WO ULD BE ALLOWED AS DEDUCTION IN THE YEAR OF PAYMENT. THERE IS ANOTHER RESTRICTION TO THE SAID ALLOWABILITY OF DEDUCTION THAT IN CASE UNREASONABLY EXCESSIVE PAYMENTS ARE MADE TO RELATIVES OR CONNECTED PERSONS, THE SAM E COULD BE DISALLOWED UNDER THE PROVISIONS OF SECTION 40A(2) O F THE ACT. IT MAY BE PUT ON RECORD THAT THE CIT(A) HAD DISALLOWED THE CL AIM OF THE ASSESSEE ON THE PREMISE THAT WHERE DIVIDEND WAS TO BE PAID O UT OF THE PROFITS OF THE ASSESSEE COMPANY, THE PAYMENT OF COMMISSION TO THE DIRECTORS WAS HIT BY THE PROVISIONS OF SECTION 36(1)(II) OF THE A CT. THE CIT(A) HAS NOT HELD THE PAYMENT MADE TO THE DIRECTORS TO BE EXCESS IVE IN VIEW OF THE PROVISIONS OF SECTION 40A(2) OF THE ACT, WHICH IS A SAFEGUARD FOR CONTROLLING THE PAYMENT TO RELATIVES OR CONNECTED P ERSONS. UNDER THE AMENDED PROVISIONS OF SECTION 36(1)(II) OF THE ACT, THERE IS NO RESTRICTION ON THE QUANTUM OF PAYMENT. HOWEVER, THE SPIRIT OF S ECTION THAT WHERE THE EXPENDITURE HAS BEEN INCURRED IN CONNECTION WIT H CARRYING ON OF THE BUSINESS, THE SAME IS ALLOWED AS DEDUCTION, THE COM MERCIAL EXIGENCY IS TO BE VIEWED IN THE LIGHT OF THE REQUIREMENT OF BUS INESS AND THE ACTUAL SERVICES RENDERED BY THE PERSONS CONCERNED. LOOKING AT THE NATURE OF SUB-CONTRACT EXECUTED BY THE ASSESSEE WHICH IS IN S PECIALIZED FIELD, IT CANNOT BE HELD THAT THE SAME WAS CARRIED OUT WITHOU T THE EFFORTS OF CONCERNED DIRECTORS. IN ANY CASE, THE BUSINESSMAN I S THE BEST PERSON TO DECIDE ITS AFFAIRS AND EXPENDITURE CANNOT BE DISALL OWED ON ANY SURMISES. WE FIND MERIT IN THE PLEA OF THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT IN CASE THE CO NCERNED ENTITY WAS A PARTNERSHIP CONCERN, UNDER THE PROVISIONS OF SECTIO N 40(B) OF THE ACT, 60% OF THE PROFITS OF BUSINESS COULD BE ALLOWED AS REMUNERATION TO THE PARTNERS OF THE SAID ENTITY. THE ASSESSEE HAS FURNI SHED THE DETAILS OF DIRECTORS' REMUNERATION AND COMMISSION PAID TO THE DIRECTORS AND THE TOTAL OF THE SAME DOES NOT EXCEEDS 60% OF THE PROFI TS. MERELY BECAUSE THE ASSESSEE IS A PRIVATE LIMITED COMPANY AND HAD A GREED TO PAY THE COMMISSION TO THE DIRECTORS BY PASSING RESOLUTION I N THIS REGARD BEFORE THE CLOSE OF YEAR, THE SAME CANNOT BE BRUSHED ASIDE AND THE SAID EXPENDITURE WAS DISALLOWED IN THE HANDS OF ASSESSEE ON MERE SURMISES. ON THE OTHER HAND, REMUNERATION PAID TO T HE SAME DIRECTORS WAS ALLOWED BY THE ASSESSING OFFICER AND NOT DISTUR BED BY THE CIT(A), WHICH IN TURN ESTABLISHES THAT THE DIRECTORS WERE W ORKING DIRECTORS. WE FIND NO MERIT IN THE OBSERVATIONS OF CIT(A) IN THIS REGARD. THE ASSESSEE OUT OF TOTAL PROFITS OF RS.93.48 LAKHS AVAILABLE FO R APPROPRIATION, PROPOSED DIVIDEND AMOUNTING TO RS.1.90 LAKHS ONLY A ND THE TAXES ON DISTRIBUTED PROFITS WERE RS.0.30 LAKHS. IN VIEW THE REOF, WE HOLD THAT WHERE THE DIRECTORS HAD GIVEN SERVICES AND IN RECOG NITION THEREOF, THERE WAS PROPOSAL TO PAY COMMISSION TO THE SAID DIRECTOR S, THEN THE SAME COULD NOT BE QUESTIONED MERELY ON THE BASIS OF SPEC ULATION BY THE ITA NOS. 269/MUM/2015 & 786/MUM/2015 11 REVENUE THAT THE SAME WAS TO AVOID PAYMENT OF DIVID END TAX. THE ASSESSEE WAS ENTITLED TO CLAIM OF DEDUCTION OF RS.1 CRORE UNDER SECTION 36(1)(II) OF THE ACT. FOR THE ABOVE PROPOSITION, WE FIND SUPPORT FROM THE RATIO LAID DOWN BY THE HON'BLE DELHI HIGH COURT IN CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) (P.) LTD. V. DY. CIT [2 015] 232 TAXMAN 20/56 TAXMANN.COM 417, WHEREIN SIMILAR ISSUE AROSE IN RESPECT OF PAYMENT OF COMMISSION AND ITS ALLOWABILITY AS DEDUC TION UNDER SECTION 36(1)(II) OF THE ACT AND ITS DENIAL ON THE PREMISE THAT THE SAME WAS PAID TO THE SHAREHOLDERS IN VIEW OF DIVIDEND WITH THE OB JECTIVE OF AVOIDING TAXES. THE HON'BLE DELHI HIGH COURT HELD AS UNDER: '43. THE FINAL QUESTION THAT ARISES FOR THIS COURT' S DETERMINATION IN THE PRESENT APPEAL IS THE ASSESSEE'S CLAIM FOR DEDU CTION UNDER SECTION 36(1)(II) OF THE ACT IN RESPECT OF THE BONU S PAID BY IT TO ITS TWO SHAREHOLDERS - ASHISH DHAWAN AND KUNAL SHROFF. THE LOWER AUTHORITIES DENIED SUCH CLAIM, HOLDING THAT THE BON US WAS PAID TO THE SHAREHOLDERS IN LIEU OF DIVIDEND WITH THE OBJEC TIVE OF AVOIDING TAX. SUCH INFERENCE WAS DRAWN FROM TWO FACTS: A) TH E BONUS PAID WAS IN PROPORTION OF THEIR SHAREHOLDING IN THE ASSE SSEE COMPANY, I.E. 2:1; AND B) NO DIVIDEND HAD BEEN DECLARED BY T HE ASSESSEE. HOWEVER, A PERUSAL OF AN EXCERPT FROM THE DRP'S ORD ER DATED 21.09.2012 QUOTED BY THE AO IN HIS ORDER DATED 19.1 0.2012 CONTRADICTS BOTH THESE FACTS: A) BONUS WAS NOT PAID IN THE RATIO OF 2:1 AND B) THE ASSESSEE HAD DECLARED INTERIM DIVIDE ND OF RS.5,47,47,000/-. FURTHER, THE BONUSES PAID TO THE TWO SHAREHOLDER DIRECTORS IN THE PRECEDING TWO FINANCIAL YEARS WERE IN THE RATIO OF 60- 65%: 40-35%, EVEN THOUGH THEIR SHAREHOLDING WAS 1:1 . THE BALANCE SHEET OF THE ASSESSEE PLACED ON RECORD ALSO INDICAT ES THAT THE TWO SHAREHOLDERS ALSO HOLD DIRECTORIAL POSITIONS IN THE ASSESSEE. THEREFORE, THE ASSESSEE'S CONTENTION THAT THE BONUS WAS PAID TO THE SHAREHOLDERS IN THEIR MANAGERIAL CAPACITY, LIKE IN THE CASE OF OTHER MANAGERS, CANNOT BE QUESTIONED MERELY ON THE BASIS OF A SPECULATION BY THE REVENUE THAT SUCH PAYMENT WAS TO AVOID TAX. IN SUCH CIRCUMSTANCES, THE DEDUCTION UNDER SECTION 36( 1)(II) IN RESPECT OF PAYMENT OF BONUS TO THE TWO SHAREHOLDER DIRECTOR S IS ALLOWED. THE ASSESSEE HAS RELIED UPON A NUMBER OF JUDICIAL P RONOUNCEMENTS TO SUPPORT ITS CONTENTION. HOWEVER, WE DO NOT CONSI DER IT NECESSARY TO DISCUSS THOSE DECISIONS FOR RULING IN ITS FAVOUR . THEREFORE, THIS QUESTION IS ANSWERED IN FAVOUR OF THE ASSESSEE.' 19. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSE SSEE HAS PLACED RELIANCE ON SERIES OF DECISIONS. THE HON'BLE DELHI HIGH COURT IN AMD METPLAST (P.) LTD'S CASE (SUPRA) HAS LAID DOWN THE RATIO THAT WHERE COMMISSION WAS PAID AS PART AND PARCEL OF SALARY AN D TDS WAS DEDUCTED AND WHERE THE DIRECTOR WAS LIABLE TO PAY T AX ON BOTH THE ITA NOS. 269/MUM/2015 & 786/MUM/2015 12 SALARY AND COMPONENT IN THE COMMISSION, NO DISALLOW ANCE WAS WARRANTED UNDER SECTION 36(1)(II) OF THE ACT ON THE SURMISE THAT THE DIVIDEND HAD TO BE PAID TO THE SHAREHOLDERS IN TERM S OF THE COMPANIES ACT. THE HON'BLE HIGH COURT FURTHER HELD THAT DIVID END IS A RETURN ON INVESTMENT AND NOT SALARY OR PART THEREOF. HEREIN, THE CONSIDERATION IN THE FORM OF COMMISSION WHICH WAS PAID TO ASHOK GUPT A WAS FOR SERVICES RENDERED BY HIM AS PER THE TERMS OF APPOIN TMENT AS A MANAGING DIRECTOR. 20. SIMILAR PROPOSITION HAS BEEN LAID DOWN BY THE HON' BLE DELHI HIGH COURT IN CIT V. CONVERTECH EQUIPMENTS (P.) LTD. [20 13] 217 TAXMAN 115 (MAG.)/36 TAXMANN.COM 314 WHEREIN IF THE COMMIS SION WAS FOUND TO BE PAID FOR SERVICES RENDERED BY THE DIRECTOR, T HEN THE SAME CANNOT BE SAID TO BE DISTRIBUTION OF DIVIDEND OR PROFITS IN T HE GUISE OF COMMISSION. WHERE COMMISSION WAS PAID AS A FORM OF REMUNERATION FOR ACTUAL SERVICES RENDERED, THE DIVIDEND WAS A RETURN ON INV ESTMENT AND WAS TO BE PAID TO ALL THE SHAREHOLDERS EQUALLY. IT WAS THU S, HELD THAT IF THE COMMISSION WAS PAID FOR ACTUAL SERVICES RENDERED, P ROVISIONS OF SECTION 36(1)(II) OF THE ACT WOULD NOT APPLY. 21. ANOTHER ASPECT TO BE KEPT IN MIND WHILE ALLOWING T HE CLAIM OF THE ASSESSEE IS THAT WHERE THE COMMISSION HAS BEEN PAID TO THE DIRECTORS AND THE TAXES HAVE BEEN PAID BY THE SAID DIRECTORS ON ITS INCOME, THEN NO DISALLOWANCE IS WARRANTED IN THE HANDS OF THE AS SESSEE COMPANY. THE HON'BLE BOMBAY HIGH COURT IN INDO SAUDI SERVICE S (TRAVEL) (P.) LTD'S. CASE (SUPRA) HAVE LAID DOWN THE PROPOSITION THAT WHERE THE PAYEE HAS BEEN PAID INCENTIVE COMMISSION, THEN THERE IS N O TAX AVOIDANCE AND HENCE, NO DISALLOWANCE UNDER SECTION 40A(2)(B) OF T HE ACT. APPLYING THE SAME SIMILI TO THE FACTS OF THE PRESENT CASE, THE A SSESSEE COMPANY HAD PAID THE COMMISSION TO THE DIRECTORS, WHO IN TURN H AD DECLARED THE SAME IN THEIR INDIVIDUAL RETURN OF INCOME, ON WHICH TAXE S HAVE BEEN PAID AND APPLYING THE SIMILI LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN SUCH CIRCUMSTANCES, NO DISALLOWANCE WAS WARRANTED IN THE HANDS OF PAYER AS THERE WAS NO ATTEMPT TO AVOID TAX. 22. THE CIT(A) WHILE DISALLOWING THE CLAIM OF ASSESSEE HAD FOUND SUPPORT FROM THE RATIO LAID DOWN BY THE MUMBAI SPEC IAL BENCH OF TRIBUNAL IN DALAL BROACHA STOCK BROKING (P) LTD.'S CASE (SUPRA). THE DELHI BENCH OF TRIBUNAL IN K.L. CONCAST (P) LTD.'S CASE (SUPRA) WHILE DECIDING THE ISSUE OF COMMISSION PAID TO THE MANAGI NG DIRECTOR AND ITS ALLOWABILITY UNDER SECTION 36(1)(II) OF THE ACT, OB SERVED THAT WHERE THE COMMISSION WAS TREATED AS PART AND PARCEL OF SALARY BY THE ASSESSEE COMPANY AS WELL AS THE MANAGING DIRECTOR AND TAX DE DUCTION WAS MADE UNDER SECTION 192 OF THE ACT TREATING THE COMMISSIO N AS PART OF SALARY, THEN THE DISALLOWANCE OF COMMISSION PAID TO MANAGIN G DIRECTOR WAS NOT ITA NOS. 269/MUM/2015 & 786/MUM/2015 13 JUSTIFIED BY APPLYING THE PROVISIONS OF SECTION 36( 1)(II) OF THE ACT. RELIANCE IN THIS REGARD WAS PLACED ON THE RATIO LAI D DOWN BY THE JURISDICTIONAL HIGH COURT IN AMD METPLAST (P) LTD.' S CASE (SUPRA) IN VIEW THEREOF, THE RELIANCE PLACED UPON BY THE REVENUE ON RATIO LAID DOWN BY THE MUMBAI SPECIAL BENCH OF TRIBUNAL IN DALAL BROAC HA STOCK BROKING ((P) LTD.'S CASE (SUPRA) WAS HELD TO BE NOT CORRECT, IN VIEW OF THE DECISION OF HON'BLE HIGH COURT, WHICH WAS BINDING O N ALL THE SUBORDINATE COURTS AND TRIBUNALS WORKING WITHIN THE JURISDICTION OF SUCH HIGH COURT. THE DECISION OF MUMBAI SPECIAL BEN CH OF TRIBUNAL IS NOT BINDING, IN VIEW OF THE RATIO LAID DOWN BY THE HON'BLE DELHI HIGH COURT IN SERIES OF DECISIONS AS REFERRED TO BY US I N THE PARAS HEREINABOVE AND CONSEQUENTLY, WE FIND NO MERIT IN T HE RELIANCE PLACED UPON BY THE CIT(A). 23. IN THE TOTALITY OF THE ABOVE SAID FACTS AND CIRCUM STANCES, WE HOLD THAT THE ASSESSEE IS ENTITLED TO THE CLAIM OF DEDUC TION ON ACCOUNT OF COMMISSION PAID TO THE DIRECTORS FOR THE SERVICES R ENDERED BY THEM AT RS.1 CRORE. ACCORDINGLY, WE DIRECT SO. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE THUS, ALLOWED. 4.5. THE ASSESSEE, BEFORE US HAS ALSO MADE DISTINCT ION BETWEEN THE FACTS OF THE ASSESSEE WITH THE DECISION OF DALA L BROACHA STOCK BROKING (P) LTD., VS. ADDL. CIT(SUPRA), WHICH IS AS UNDER: PARTICULARS DALAL BROACHA MOUNT KELLET (ASSESSEE) 1 SHAREHOLDERS AT THE TIME OF PAYMENT OF BONUS/COMMISSION: THREE SHAREHOLDERS VIZ: A. MR. P. DALAL B. MR. N. DALAL C. MR. V. DALAL TWO SHAREHOLDERS VIZ: A. MOUNT KELLET CAPITAL MANAGEMENT (MAURITIUS) LTD., B. MOUNT KELLET CAPITAL HK HOLDINGS LLC 2 BONUS/COMMISSION PAID TO: ALL THREE DIRECTORS WHO WERE THE SHAREHOLDERS VIZ: A. MR. P. DALAL B. MR. N. DALAL C. MR. V. DALAL EMPLOYEES WHO WEE NOT SHAREHOLDERS AT TIME OF PAYMENT OF BONUS, VIZ: A. MR. SURESH BHABHALA B. MR. SHIV NANDAN NEGI ITA NOS. 269/MUM/2015 & 786/MUM/2015 14 C. MR. NIKHIL BANERJEE D. MR. N. VENKITRAMAN 3. WHETHER SUFFICIENT PROFITS WERE AVAILABLE AT THE TIME OF PAYMENT OF BONUS/COMMISSION: YES. THEREFORE ASSESSEE WAS ABLE TO DECLARE DIVIDEND NO (LOSS OF 13,52,63,768/- AS PER DRAFT ACCOUNTS AS OF JANUARY 2009 PG NO. 28 OF FPB) AND THEREFORE ASSESSEE WAS NOT ABLE TO DECLARE DIVIDEND 4. RELATIONSHIP OF EMPLOYEES/DIRECTORS INTER-SE TO WHOM BONUS/COMMISSION WAS PAID ALL DIRECTORS WERE RELATIVES MR. SURESH PRABHALA WAS NOT RELATED OTHER DIRECTORS OR CONNECTED TO OTHER SHAREHOLDERS 5. PERIOD OF HOLDING SHARES ALL THREE SHAREHOLDERS HELD THE ENTIRE SHARE CAPITAL THROUGHOUT THE YEAR (I.E. AT THE TIME OF PAYMENT OF COMMISSION AS WELL) MR. SURESH PRABHALA (PROMOTER DIRECTOR) HELD SHARES ONLY FOR A PERIOD OF 11.08.08 TO 16.09.08 (37 DAYS ONLY) AND NOT AT THE TIME OF PAYMENT OF BONUS. 6. RELEVANT TIME OF PAYMENT OF BONUS/COMMISSION COMMISSION WAS PAID AFTER THE YEAR END PROFITS WERE DETERMINED BONUS WAS PAID DURING THE YEAR I.E. BEFORE PROFITS WERE DETERMINED FOR THE YEAR 7. CRITERIA FOR PAYMENT OF BONUS/COMMISSION COMMISSION WAS LINKED TO THE PROFITS OF THE ASSESSEE COMPANY. COMPANY EARNED SIZABLE PROFITS AND NO JUSTIFICATION OFFERED BY THE COMPANY FOR NON- PAYMENT OF DIVIDEND FIRST YEAR OF BUSINESS. NO SUFFICIENT PROFITS FOR DECLARING DIVIDEND AT THE RELEVANT TIME WHEN THE BONUS WAS ACTUALLY PAID ITA NOS. 269/MUM/2015 & 786/MUM/2015 15 4.6. IN VIEW OF THE ABOVE FACTUAL POSITION THAT SHR I SURESH PRABHALA WAS NOT A SHAREHOLDER WHEN THE BONUS/COMMI SSION WAS PAID TO HIM AND ONCE HE IS NOT A SHAREHOLDER AN D COMMISSION/BONUS PAID FOR THE SERVICES RENDERED, TH E PROVISIONS OF SECTION 36(1)(II) MANDATES THAT THE BONUS IS TO BE ALLOWED. ADMITTEDLY, THIS BONUS IS NOT OUT OF THE EARLIER YE ARS ACCUMULATED PROFITS. HENCE, WE CONFIRM THE ORDER O F CIT(A) AND THIS ISSUE OF REVENUE IS DISMISSED. 5. IN THE RESULT, THE APPEAL OF REVENUE IS DISMISSE D. ASSESSEES APPEAL IN ITA NO. 786/MUM/2015: 6. THE NEXT ISSUE IN ASSESSEES APPEAL IS AS REGARD S THE ORDER OF THE CIT(A) ERRED IN NOT ADJUDICATING THE ISSUE O F GRANTING OF CREDIT FOR TAX DEDUCTED AT SOURCE AMOUNTING TO 1,31,32,183/-. FOR THIS, ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.1: GROUND NO. 1 SHORT CREDIT OF TAXES DEDUCTED AT S OURCE A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-4 [CIT (A)] ERRED IN NOT ADJUDICATING ON MERITS THE APPELLANTS PLEA FOR GRA NTING OF CREDIT FOR TAXES DEDUCTED AT SOURCE AMOUNTING TO 1,31,32,183/-. B) THE APPELLANT PRAYS THAT FULL CREDIT OF THE TAXE S DEDUCTED AT SOURCE BE ALLOWED. ITA NOS. 269/MUM/2015 & 786/MUM/2015 16 7. BRIEFLY STATED FACTS ARE THAT DURING THE YEAR UN DER CONSIDERATION, ASSESSEE RECEIVED TOTAL SERVICE FEE OF 31,29,01,267/- FROM ITS ASSOCIATE ENTERPRISES. OUT OF THE SAME, AN AMOUNT OF 11,77,87,477/- WAS RECEIVED BY ASSESSEE BY POST ON 31-03-2009, ON WHICH TAX WAS DEDUCTED AT SOURCE AND BONUS FOR THE PERIOD IN AY. 2010-11 @ 11.33%, INCLUDING S URCHARGE AND EDUCATION CESS. THE ASSESSEE IN ITS RETURN OF INCOM E FOR AY. 2009-10 OFFERED THE ENTIRE INCOME OF 31,29,01,267/- TO INCOME TAX, WHICH IS UNDISPUTED. BY VIRTUE OF EARNING OF T HIS INCOME IN AY. 2009-10 AND OFFERING THE SAME AS INCOME TO TAX IN AY. 2009- 10, THE ASSESSEE CLAIMED CREDIT FOR THE CORRESPONDI NG AMOUNT OF TDS AMOUNTING TO 3,54,51,714/- ON THE SAID INCOME IN ITS RETURN OF INCOME FOR THE AY. 2009-10. 8. THE AO DURING THE COURSE OF ASSESSMENT PROCEEDIN GS HAS NOT ALLOWED THE CREDIT FOR TDS AMOUNTING TO 1,33,45,316/-, BUT ALLOWED CREDIT ONLY FOR AN AMOUNT OF 2,23,19,530/-. THEREFORE, SHORT CREDIT FOR TDS WAS GRANTED BY AO AMOUNTING TO 1,31,32,184/-. AGGRIEVED, ASSESSEE PREFERRED AN AP PEAL BEFORE THE CIT(A). CIT(A) ALSO DIRECTED THE AO TO GRANT C ORRECT CREDIT FOR TDS AFTER DUE VERIFICATION, VIDE PARA 5.4.2 AS UNDE R: ITA NOS. 269/MUM/2015 & 786/MUM/2015 17 5.4.2. HAVING REGARD TO THE FACTS AND CIRCUMSTANCE S OF THE CASE, THE AO IS DIRECTED TO GRANT CORRECT CREDIT FOR TDS TO THE APPELLANT AFTER DUE VERIFICATION IN ACCORDANCE WITH CBDT INSTRUCTIO N NO. 01/2012 DATED 02.02.2012 AND CBDT INSTRUCTION NO. 04/2012 D ATED 25.05.2012 READ WITH CBDT INSTRUCTION NO. 05/2013 DATED 08.07. 2013 ISSUED VIDE F.NO. 275/03/2013 IT(B). GROUND OF APPEAL NO. 3 IS ACCORDINGLY DISPOSED OFF. AGGRIEVED, ASSESSEE PREFERRED SECOND APPEAL BEFORE THE TRIBUNAL. 9. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. BEFORE US, LD. COUNS EL FILED RECONCILIATION WITH ACCOUNTS AND RETURN OF INCOME A ND ALSO SUMMARY OF TDS CREDIT, WHICH IS AS UNDER: FPB PAGE NO. PARTICULARS INCOME TA X AMOUNT 57 APRIL 1, 2008 TO MARCH 31, 2009 19,51,13,792 2,21,06,398 58 APRIL 1, 2009 TO JUNE 30, 2009 11,81,58,470 1,33,87,358 TOTAL: 31,32,72,262 3,54,93,756 7 GROSS RECEIPTS AS PER PROFIT AND LOSS ACCOUNT 31,29,01,267 1 TDS CREDIT CLAIMED AS PER COMPUTATION OF TOTAL INCOME 3,54,51,714 60, 61 (PARA 2) DIFFERENCE EXPLAINED IN APPLICATION U/S. 154 3,70,995 42,042 10. IT WAS CONTENDED BY THE LD. COUNSEL THAT SAME S UMMARY WAS GIVEN BEFORE THE AO AS WELL AS BEFORE THE CIT(A ). LD. COUNSEL STATED THAT THIS ISSUE IS SQUARELY COVERED IN ASSES SEES FAVOUR IN ITA NOS. 269/MUM/2015 & 786/MUM/2015 18 THE CASE OF CIT VS. SMT. PUSHPA VIJOY [247 CTR 575] (KERALA), WHEREIN THE HON'BLE KERALA HIGH COURT WAS HELD THAT IN VIEW OF THE PROVISIONS OF SECTION 199 OF THE ACT, ASSESSEE IS ENTITLED TO CREDIT OF TAX BASED ON TDS CERTIFICATE IN THE ASSES SMENT YEAR IN WHICH INCOME FROM WHICH TAX IS DEDUCTED IS ASSESSED TO TAX AND DECLARED. THE HON'BLE KERALA HIGH COURT CONSIDERED THIS ISSUE IN PARA 11 AND 12 AS UNDER: 11. THE QUESTION TO BE CONSIDERED IS WHETHER THE ASSES SING OFFICER WAS JUSTIFIED IN REFUSING TO GIVE CREDIT FOR TAX PA YMENTS BASED ON TDS CERTIFICATES ISSUED BY THE BANK FOR THE REASON THAT INCOME IS NOT RETURNED FOR ASSESSMENT BY THE ASSESSEES IN THE ASS ESSMENT YEAR FOLLOWING THE YEAR IN WHICH TAX IS RECOVERED AND PA ID BY THE BANKS. WE DO NOT THINK THERE IS ANY JUSTIFICATION FOR ASSESSE ES' CLAIM BECAUSE SECTION 199 OF THE INCOME TAX ACT MAKES IT CLEAR TH AT THE ASSESSEE IS ENTITLED TO CREDIT BASED ON TDS CERTIFICATE ONLY IN THE ASSESSMENT YEAR IN WHICH INCOME FROM WHICH TAX IS DEDUCTED IS ASSESSED . THEREFORE, WHEN THE STATUTE MAKES IT MANDATORY THAT CREDIT OF TAX B ASED ON TDS CERTIFICATE IS AVAILABLE ONLY IN THE ASSESSMENT YEA R IN WHICH THE INCOME FROM WHICH TAX DEDUCTED AT SOURCE IS ASSESSED, WE D O NOT KNOW HOW THE TRIBUNAL CAN OVER-RULE THE STATUTORY PROVISIONS AND ALLOW THE CLAIM. IN OUR VIEW, GOING BY THE PRACTICAL DIFFICULTY TO R ETAIN TDS CERTIFICATES FOR SEVERAL YEARS UNTIL THE INTEREST IS RETURNED FOR AS SESSMENT ON CASH BASIS, PRUDENT ASSESSEES SHOULD RETURN INCOME ON WH ICH TAX IS RECOVERED AND REMITTED BY THE PAYER IN THE ASSESSME NT YEAR FOLLOWING THE YEAR IN WHICH SUCH INCOME IS SUBJECT TO DEDUCTI ON OF TAX AND REMITTANCE BY THE PAYER. THE ASSESSEES WHO DO NOT D O IT SHOULD FOLLOW SECTION 199 AND RULE 37BA, RETAIN THE TDS CERTIFICA TES AND CLAIM CREDIT IN THE ASSESSMENT YEAR IN WHICH SUCH INCOME IS RETU RNED FOR ASSESSMENT. 12. THE FINDING OF THE TRIBUNAL THAT THERE IS NO PROVI SION IN THE INCOME TAX ACT OR RULES TO DEFER CREDIT OF TAX IN ASSESSME NTS BASED ON TDS CERTIFICATES OBTAINED IS REALLY INCORRECT BECAUSE S UB-SECTIONS (1) AND (3) OF SECTION 199 READ WITH RULE 37BA OF THE INCOME TA X RULES SPECIFICALLY AUTHORISE THE ASSESSEE TO RETAIN TDS CERTIFICATES A ND TO PRODUCE IT AND ITA NOS. 269/MUM/2015 & 786/MUM/2015 19 CLAIM CREDIT IN THE YEAR IN WHICH INCOME ON WHICH R ECOVERY OF TAX MADE IS RETURNED FOR ASSESSMENT. AS OF NOW, THE ACT DOES NOT PROVIDE THAT ASSESSEES SHOULD RETURN THE INCOME FOR ASSESSMENT I N THE ASSESSMENT YEAR FOLLOWING THE PREVIOUS YEAR IN WHICH TAX IS RE COVERED AT SOURCE AND TDS CERTIFICATE IS ISSUED BY THE PAYER AND IF SO PR OVIDED ASSESSMENT AND CREDIT OF TAX WILL GO TOGETHER WHICH WILL AVOID BOTHERATION FOR THE ASSESSEES AS WELL AS FOR THE DEPARTMENTAL OFFICERS. IN OUR VIEW, THE PROVISIONS CONTAINED IN SUB-SECTIONS (1) AND (3) OF SECTION 199 READ WITH RULE 37BA OF THE INCOME TAX RULES SERVE A PURPOSE B ECAUSE IF INCOME IS NOT ASSESSABLE IN THE ASSESSMENT YEAR AND AT THE SA ME TIME ASSESSEES ARE ENTITLED TO CREDIT OF TAX RECOVERED AND REMITTE D IN RESPECT OF SUCH INCOME, THE DEPARTMENT WILL BE COMPELLED TO REFUND THE ENTIRE TAX AMOUNT EVERY YEAR AND ALONG WITH IT IF REFUND IS NO T MADE WITHIN THREE MONTHS FROM FILING OF RETURN, MANDATORY INTEREST WI LL ALSO PAYABLE, AS PROVIDED UNDER SECTION 243(1) OF THE INCOME TAX ACT WHICH WILL DEFEAT THE PURPOSE OF TDS PROVISIONS IN THE ACT. THEREFORE , WE DO NOT FIND ANY JUSTIFICATION FOR THE TRIBUNAL TO ALLOW CREDIT OF T AX BASED ON TDS CERTIFICATES WITHOUT CORRESPONDING ASSESSMENT OF IN COME IN THE ASSESSMENT YEARS CONCERNED WHICH IS AGAINST THE STA TUTORY PROVISION. WE ALSO DO NOT FIND ANY MERIT IN THE CONTENTION OF THE RESPONDENTS- ASSESSEES THAT THE AMOUNT COVERED BY TDS CERTIFICAT ES ITSELF SHOULD BE TREATED AS INCOME OF THE PREVIOUS YEAR RELEVANT FOR THE ASSESSMENT YEAR CONCERNED AND THE TAX AMOUNT SHOULD BE ASSESSED AS INCOME BY SIMULTANEOUSLY GIVING CREDIT FOR THE FULL AMOUNT OF TAX REMITTED BY THE PAYER. IN THESE CASES, THE ENTIRE INTEREST CREDITED SHOULD BE ASSESSED ON MATURITY OF THE DEPOSIT AND ON PAYMENT BY THE BANK, AS THE ASSESSEES ARE ADMITTEDLY FOLLOWING CASH SYSTEM OF ACCOUNTING. HOWEVER, IN OUR VIEW, IF SECTION 145(1) IS AMENDED FOR ASSESSMENT O F INCOME ON WHICH TDS IS MADE IN THE ASSESSMENT YEAR FOLLOWING THE YE AR IN WHICH DEDUCTION IS MADE IRRESPECTIVE OF THE SYSTEM OF ACC OUNTING FOLLOWED BY THE ASSESSEE, THE SAME WILL AVOID PROBLEMS FOR THE ASSESSEES AND THE DEPARTMENT. BASED ON THE FINDINGS ABOVE, WE ALLOW THE DEPARTMEN TAL APPEALS BY REVERSING THE ORDERS OF THE TRIBUNAL AND THAT OF TH E FIRST APPELLATE AUTHORITY AND BY RESTORING THE ASSESSMENTS DENYING CREDIT OF TAX IN THE ASSESSMENTS FOR WHICH CORRESPONDING INCOME IS NOT A SSESSED. HOWEVER, SINCE WE ARE ALLOWING THE DEPARTMENTAL APPEALS, WE LEAVE IT OPEN TO THE RESPONDENTS-ASSESSEES TO CLAIM CREDIT BASED ON THE VERY SAME TDS CERTIFICATES AGAINST THE INTEREST INCOME ASSESSED I N THE YEAR IN WHICH SUCH INCOME IS ASSESSED. ITA NOS. 269/MUM/2015 & 786/MUM/2015 20 11. SIMILARLY, THE CO-ORDINATE BENCH OF THE TRIBUNA L IN THE CASE OF SURENDRA S. GUPTA VS. ADDL. CIT HAS CONSIDERED T HE SIMILAR ISSUE AND DIRECTED TO ALLOW THE CREDIT. ACCORDINGL Y, WE DIRECT THE AO TO ALLOW THE CREDIT IN TERMS OF THE DECISION OF THE HON'BLE KERALA HIGH COURT AND AFTER VERIFICATION OF THE FAC TS. THIS ISSUE OF ASSESSEES APPEAL IS SET ASIDE FOR VERIFICATION ONLY. 12. IN THE RESULT, THE APPEAL OF ASSESSEE IS ALLOWE D SUBJECT TO VERIFICATION OF FACTS. 13. TO SUM-UP, THE APPEAL OF REVENUE IS DISMISSED A ND THE APPEAL OF ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH DAY OF NOVEMBER, 2018 SD/- SD/- (RAJESH KUMAR) (MAHAV IR SINGH) ACCOUNTANT MEMBER JUDICIA L MEMBER MUMBAI; DATED: 27 TH NOVEMBER, 2018 TNMM ITA NOS. 269/MUM/2015 & 786/MUM/2015 21 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A),MUMBAI 4. THE CIT 5. DR, D BENCH, ITAT, MUMBAI BY ORDER, #TRUE COPY # ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI