M/S. SRC AVIATION PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “E”: NEW DELHI BEFORE SHRI H.S.SIDHU, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 1765/Del/2016 (Assessment Year: 2011-12) ACIT, Vs. SRC Aviation Pvt. Ltd, Circle-22(2), 507, G-5, Building, New Delhi Terminal1, IGI Airport, New Delhi PAN: AABCS2455F (Appellant) (Respondent)

ITA No. 1065/Del/2016 (Assessment Year: 2011-12) SRC Aviation Pvt. Ltd, Vs. ACIT, 507, G-5, Building, Circle-22(2), Terminal1, IGI Airport, New Delhi New Delhi PAN: AABCS2455F (Appellant) (Respondent)

Revenue by : Ms Rinku Singh, Sr. DR Assessee by: Shri Atul Puri, CA Date of Hearing 07/01/2019 Date of pronouncement 28/02/2019

O R D E R PER PRASHANT MAHARISHI, A. M. 1. These are the appeals filed by the assessee and the revenue against the order of the ld CIT (A)-28, New Delhi dated 18.01.2016 for the Assessment Year 2011-12. 2. The revenue has raised the following grounds of appeal in ITA No. 1765/Del/2016 for the Assessment Year 2011-12:- (i) “The Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 37,66,725/- made by the Assessing Officer on account of non deduction of TDS on Aircraft Maintenance Charges”. (ii) “The Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 5,68,325/- made by the Assessing Officer on account of non deduction of TDS on Catering Services.”

(iii) “The Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 84,040/- on account of non deduction of TDS on Vehicle Maintenance.” (iv) “The Ld. CIT(A) has erred on facts and in law in deleting the disallowance of expenses of capitalize nature of Rs. 56,07,180/- on account of repair/replacement of Aircraft parts.” (v) “The Ld. CIT(A) has erred on facts and in law in deleting the disallowance of expenses of capitalize nature of Rs. 40,900/- on account of purchase of Inverter Battery.” (vi) “The Ld. CIT(A) has erred on facts and in law in deleting the addition of disallowance of prior period expenses of amounting to Rs. 4,500/- and prepaid expense amounting to Rs. 11,342/-.” (vii) “The Ld. CIT(A) has erred on facts and in law in deleting the disallowance of Rs. 29,53,348/- on account of interest paid on unsecured loan.” 3. The assessee has raised the following grounds of appeal in ITA No. 1065/Del/2016 for the Assessment Year 2011-12:- “1. That the ld CIT(A) has erred in misunderstanding the facts of the case. 2. That the ld CIT(A) has further erred in confirming the disallowance made by the AP of Rs. 686970/- in the nature of renovation of tenanted premises, belonging to the Airport Authority of India, to make these usable for the business of the assessee by treating these as capital expenses. 3. That the ld CIT(A) has further erred in confirming the disallowance made by the AO of Rs. 26,000/- incurred towards gear lock, seat covers etc. spent for the security of the card, treating it to be capital expense in complete disregard of the facts, evidence placed on record and explanations offered. 4. That the ld CIT(A) has further erred in confirming the disallowance made by the AO of bonus paid to Directors of Rs. 2,00,00,000/- on assumptions and surmises in complete disregard of the facts, evidence placed on record and explanations offered.”

disallowances and confirmed some of the disallowances. Therefore, both the parties are in appeal before us. 5. We now take up the appeal of the learned assessing officer. The first ground of appeal is against the order of the learned CIT – A in deleting the addition of INR 3766725/– on account of non-deduction of tax at source on aircraft maintenance charges. 6. We have heard the parties on this issue. Facts show that assessee is in the business of maintenance of the aircraft. Parts are procured from overseas and effort made is carried out in India. The payment for the fitness tour replacement of parts are made within India the assessee has already deducted tax at source. As far as the supply part of maintenance is concerned, they are procured from overseas and hence the assessee has not deducted any tax thereon as it is a supply of goods from outside India. The learned CIT appeal after considering the above facts has held that INR 3 766725/– is payment on account of supply of goods which are related to purchase and supply of parts from overseas. He has also noted that the assessee has deducted tax at source on fitment charges and produce the necessary challan is for payment of the tax. On verification of the invoices for supply, he held that no tax is deductible on such payment under section 195 of the income tax act. He therefore held that there cannot be any disallowance of the above sum under section 40 (a) (ia) of INR 3 766725/–. The learned departmental representative also could not point out that whether tax is deductible or not when the goods have been supplied from outside India where nothing is shown that income is chargeable to tax in India. In view of this, we do not find any infirmity in the order of the learned CIT – A and accordingly ground number 1 of the appeal is dismissed. 7. Ground number 2 is against deletion of the addition of INR 5 68325 made by the assessing officer on account of non-deduction of tax at source on catering services. The contention of the assessee is that that catering charges are for supply of food to the aircraft at the airport on which VAT has been charged and TDS provisions are not applicable, as the food is not served to the passengers by the supplier but by the in-flight crew.

replacement of aircraft parts. The brief fact shows that assessee has incurred expenditure on repairs and maintenance of defective aircraft parts of INR 5 607180 which has been held by the learned assessing officer as capital expenditure and therefore the same was disallowed. The learned CIT – A allowed the claim of the assessee holding it to be revenue expenditure and therefore the revenue is in appeal before us. The learned senior departmental representative reiterated the facts stated in the assessment order and stated that when there are parts, which are replaced in the aircraft, they are capital in nature. The learned authorised representative also reiterated the same facts stated before the learned CIT – A. 11. On hearing of the parties the facts noted that that these are the expenses incurred by the assessee for the replacement of various parts of an aircraft and stated that no new asset has come into an existent but the only the old aircraft has been prepared with new parts. The assessee also submitted that it is a current repair for the plant and machinery. Further, the learned CIT – A has clearly noted that by replacement of these parts the amount of expenditure is current repairs, no new asset has come into existence, and therefore the expenditure are revenue in nature. However, we are aware that not all replacement become revenue expenditure automatically. Example as replacement of engineering aircraft. However looking to the nature and the amount of expenditure It is apparent that assessee has not made any major replacement to the aircraft, which can fall into the category of capital expenditure. The learned departmental representative also did not show us anything that replacement is of such a nature, which can be said to be of capital in nature. Therefore on the facts and circumstances of the case we do not find any infirmity in the order of the learned CIT – A. Accordingly, ground number 4 of the appeal of the revenue is dismissed. 12. Ground number 5 is with respect to deletion of the addition of INR 4 0900/- incurred by the assessee on purchase of inverter battery held by the learned assessing officer as capital expenditure. The learned CIT – A has held it to be revenue in nature. 13. We have heard the parties and found that the learned assessing officer has clearly erred in holding that replacement of battery in inverter is a capital expenditure. It is not the purchase of the inverter but one of the parts of

the inverter has been replaced. The learned senior DR also could not show us any reason to support the order of the learned assessing officer. In view of this, we do not find any infirmity in the order of the learned CIT – A in holding that replacement of battery in any inverter is revenue expenditure and not a capital expenditure as held by the AO. Accordingly, ground number 5 of the appeal is dismissed. 14. Ground number 6 is with respect to deletion of the addition of disallowance of prior period expenses of INR 4500 and prepaid expenses of Rs 11342/- to by the learned CIT appeal. The learned assessing officer has made the above disallowance, as the assessee has not allocated periodical expenses based on the tenure of the services of the annual maintenance contract with respect to the computers. Therefore, the learned assessing officer has stated that the expenses pertaining to the current year shall only be allowed as deduction. The learned assessing officer also ignored the explanation of the assessee that the repairs and maintenance expenses on computer has been claimed as an expenses only on the receipt of the bill and there is no prior period or prepaid expenses booked. It was further stated that the assessee for last several years and which was not disturbed have followed the system. The learned CIT – A holding that expenditure has been incurred by the assessee during the year and therefore the same is allowable in the current year and these are not prepaid expenses or prior period expenses. The learned senior departmental representative could not point out any infirmity in the order of the learned CIT – A. We have also seen that the assessee has received the bills during the year and the same has been admitted and approved by the assessee during the year. Even otherwise, these are the expenditure pertaining to the annual maintenance contract of the computers. The assessee has incurred this expenditure as and when the bill has been approved in the liability has been assumed by the assessee. In view of this we do not find any infirmity in the order of the learned CIT – A accordingly the ground number 6 of the appeal is dismissed. 15. Ground number 7 is with respect to disallowance deleted by the learned CIT – A of Rs. 2953348/– on account of interest paid on unsecured loan. The brief facts of the case was that during the course of assessment proceedings the learned assessing officer examined the details of the interest payment

and asked the details of such payment in a particular format. On submission of the required dated by the assessee the learned assessing officer noted that assessee has issued amount of unsecured loan, which was not utilized by the company for the purposes of the business. He further noted that the assessee had enough month wise balance in its bank accounts, which indicates that there was no requirement of any unsecured loan, but still assessee took unsecured loan from the related party, which to the large extent remain on utilized. He further noted that assessee is also having huge fixed deposit receipts, which were not utilized. Therefore, he held that the assessee has used the excessive expenses and claim them as a deduction under the head interest expenditure. Therefore he disallowed the total interest expenditure of Rs. 2953348/–. The learned CIT appeal has deleted the disallowance on the ground that reasonableness of the expenditure has to be judged from the point of view of the business mind and not of the revenue and the learned assessing officer is only to verify whether the expenditure in question has been incurred wholly and exclusively for the purposes of the business are not. He further noted that during the brought on anything on record to show that the amount of interest paid by the assessee company to its related party are director was excessive or unreasonable. In view of this, he stated that the disallowance could not be made. The learned senior departmental representative also could not point out any infirmity in the order of the learned CIT – A. We have also perused the reasons given by the learned CIT – A for deleting the addition and the reasons recorded by the learned assessing officer for making the disallowance. The interest expenditure is to be allowed if the same is used for the purposes of the business. Interest expenditure paid to the related parties in case of the company can be disallowed if the same was found to be excessive or unreasonable with respect to the market rates. Relevant finding to the disallowance of interest expenditure that they are not incurred for the purposes of the business is missing in the assessment order. Further, the learned assessing officer has also not held that what is the market rate of the interest expenditure and how it is less than the amount of interest paid by the assessee to its directors and related parties. In view of this we do not find any infirmity in the order of the learned CIT –

A deleting the above disallowance on account of interest expenditure. Accordingly, the ground number 7 of the appeal is dismissed. 16. Accordingly, appeal of the revenue is dismissed. 17. Now we come to the appeal of the assessee. The ground number 1 of the appeal is general in nature and therefore it is dismissed. 18. The second ground of appeal is with respect to the disallowance made by the learned assessing officer of INR 6 86970/– in the nature of renovation of rented premises belonging to the airport authority of India. The facts show that the company has acquired lease premises and incurred capital expenditure on it . The nature of the expenditure are in the nature of partition panel, CPU trolley with hardware, table tops, pantry tabletop side panel, glass screen, sofa sets, electrical works and security systems. The total expenditure incurred was in the range of INR 6 86970. The assessee submitted that the property acquired by the assessee is a licensed property and airport authority can have the property vacated at any time. It was further stated that the security system installed is not creating any enduring benefit and if the assessee is removed, it will be rendered useless therefore, it is revenue expenditure. The assessee also submitted that the expenditure of repair and maintenance building an office expenses are of temporary nature, which are in the form of temporary partition, cubicles, electrical fittings, replacement et cetera in a talented premises and airport authority can evict the assessee at anytime. On the vacation of the licensed property these partition et cetera even if removed will be rendered useless and therefore they are revenue expenditure in nature. The assessee also supported its argument with several judicial precedents. The learned assessing officer also relying upon the several judicial precedent and held that the sum of INR 6 86970/– is a capital expenditure. On appeal before the learned CIT – A it was also confirmed. 19. We have heard the parties. The learned CIT – A has given a categorical finding in para number 8.2 of the order that the expenditure has not been incurred for partitions, networking, tabletops, storage units installed to the walls sofa sets and electrical installation et cetera. Apparently, the assessee has incurred the total expenditure, which are furniture in nature and not with respect to the wooden partitions or panels to make the office premises

taken on lease conducive to its business. The assessee has also purchased security systems, which is certainly of the nature of capital expenditure. We have also perused the several decisions cited by the learned assessing officer as well as by the assessee before us however we do not find that any of the decisions the distinction has been blurred between the purchase of plant and machinery and furniture et cetera compared to the temporary structures in the building to make the premises suitable for carrying on the business of the assessee. Even in the decision of the honourable Delhi High Court in case of Hi line Pens also there was no reference of any capital expenditure such as furniture fixtures and plant and machinery, which are held to be of revenue expenditure in a rented premises. In view of this, we set aside the whole issue back to the file of the learned assessing officer with a direction to the assessee to submit the complete details of such expenditure. If the expenditure have been incurred by the assessee on the he expenditure was towards false ceiling, fixing tiles, replacing glasses, wooden partitions, replacement of electric wiring, earthing etc same is allowable as revenue expenditure and other expenditure incurred on acquisition of furniture or plant and machinery such a security system same are capital expenditure. Accordingly, ground number 2 of the appeal of the assessee is set aside back to the file of the learned assessing officer with above direction. 20. Ground number 3 of the appeal is with respect to the disallowance confirmed by the learned CIT – A of INR 26,000 incurred towards the law, seat cover et cetera spent for security of the car treating it as a capital expenditure. The assessee has incurred the above expenditure for the security of the car when the gear locks are purchased and there is a change of seat covers only. The learned CIT – A has held that assessee has made a purchase of music system, gear locks, and seat cover in the new car purchased. Therefore, the same was held to be capital expenditure. The learned CIT appeal also directed the learned assessing officer to allow the depreciation on the same. 21. On careful consideration of the various arguments raised before us, it is found that the assessee has incurred the expenditure while purchasing a new car in the form of music system, gear lock and seat covers et cetera.

Naturally, the assessee has incurred the above expenditure at the time of purchase of the new car and therefore it adds to the value of the vehicle purchased by the assessee. Accordingly we find no infirmity in the order of the learned CIT – A in confirming the action of the learned assessing officer. Accordingly, ground number 3 of the appeal of the assessee is dismissed. 22. The fourth ground of appeal is against the disallowance confirmed by the learned CIT – A of INR 2 0000000/– as bonus paid to the directors. During the course of assessment proceedings it was noted by the learned assessing officer that assessee has paid bonus of rupees one crore each to the two directors of the company who are holding 50% shares each in the company. The learned assessing officer asked the assessee to produce the board resolution of the company. He noted on perusal of the resolution that no such resolution of giving bonus to both the directors were passed by the company. He further held that issue is squarely covered against the assessee by the decision of the coordinate bench in the case of Dalal Barocha stock broking private limited vs ACIT that is on identical facts. Therefore the learned assessing officer held that the assessee has paid the bonus in lieu of the dividend and therefore disallowed the above sum under section 36 (1) (ii) of the act. 23. Before the learned CIT appeal, assessee submitted that the resolution has been submitted before the learned assessing officer vide letter dated 23/8/2013. It was further stated that the payment of bonus has been made all along and accepted by the revenue. The assessee also relied upon the decision of the honourable Delhi High Court in case of CIT vs career launcher India Ltd dated 19/04/2012 and stated that the issue is squarely covered in favour of the assessee. Assessee also relied upon the host of the decisions of the various courts. The learned CIT – A has noted that assessing officer has disallowed the above sum under section 36 (1) (ii) of the income tax act. He further noted that there are only two directors in the company and both of them are equal shareholders of the company. Resolution has been passed by them that on 31/3/2011 , INR 10,000,000 bonus will be paid to each of the directors of the company for the year ending 31/3/2011. He noted that it is apparent that this arrangement has clearly indicated that if this bonus were not paid to both the directors then

they would have received it in the shape of profit or dividend. He further noted that no reasonable basis for payment of the commission has been mentioned in the resolution passed by the company and therefore it is linked neither to the sale of the company or performance of the directors. The learned CIT – A also noted that different decisions cited by the learned authorised representative are not comparable with the facts of the case of the assessee. He further noted that in none of the cases identical number of directors and shareholders received the bonus of equal amount was found. He therefore stated that since both the directors are holding 50% share therefore in any case Rs 2 crore could have been paid as a dividend which clearly shows that the commission has been paid in lieu of dividend and not in lieu of services rendered. He further noted that the decision in the case of the assessee for assessment year 2007 – 08 of the coordinate bench also does not support the case of the assessee because in that particular case the issue was whether the company has paid excessive remuneration or bonus or commission to the directors and not the disallowance made by the learned assessing officer under section 36 (1) (ii) of the act. He therefore noted that since the share holding of both the directors are 50% , e dividend would have been much equal to the bonus actually paid to the directors, therefore, this bonus would have been payable to both the directors as profit or dividends, had it not been paid as a bonus. Accordingly, he confirmed the disallowance. 24. The learned authorised representative vehemently submitted that issue squarely covered in favour of the assessee by the decision of the honourable Delhi High Court in case of CIT V Carrier Launcher India Ltd 358 ITR 179 . He also relied upon the decision of the coordinate bench in case of ARihnatam Infraprojetcs P Ltd V Jt CIT 156 ITD 425 . He further submitted a copy of the resolution dated 29/03/2016 passed in the board meeting of the company wherein dividend of INR 1 130/– per share was declared. He therefore submitted that the assessees declaring bonus. He further referred to the order of the learned Commissioner of income tax appeals for assessment year 2012 – 13 stating that on the identical facts and circumstances bonus paid to directors of INR 25,000,000 has been deleted. He further referred to page number 23 of the order of the learned

CIT – A wherein he held that the issue squarely covered by the decision of the CIT vs career launcher India Ltd of the honourable Delhi High Court. He further submitted that on identical grounds the disallowance was bad for assessment year 2007 – 08, which has been deleted by the coordinate bench. He further stated that that the decision relied upon by the learned assessing officer in the case of the Dalal Barocha stock broking private limited is also not applicable to the facts of the case. 25. The learned Department representative vehemently relied upon the order of the lower authorities. 26. We have carefully considered the rival contention and perused the orders of the lower authorities. Admittedly, in the company two shareholders are holding 50% shares in the company. Both of them are directors of the company growing remuneration. Both of them have been paid the commission of Rs. 1 crore each. Therefore, the company has claimed the deduction of INR 20,000,000 as bonus paid to the directors. The claim of the assessee is supported by the board resolution for payment of commission. Provisions of section 36 (1) (ii) of the act provides that Section 36(1)(ii) of the Income Tax Act, 1961 („Act‟ for short) provides that 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 is deductible. This provision is an enabling provision allowing deduction o account of bonus or commission paid to employees. The said payment is to be made out of profits subject to the conditions mentioned in the section. Any expenditure incurred on account of payment of commission to a person other than an employee is not covered by this provision. However the deduction is also restricted, if such sum would not have been payable to him as profits earned /dividend , if it had not been paid as bonus of commission. Therefore it provides that, if the bonus/ commission is not paid to those shareholders, then , identical amount is available to them as payment of dividend or profits or not, If it satisfies that condition, the bonus paid is disallowable even, if paid as a bonus by the company to its employees for services rendered.

Loyal Motor Service Co. Ltd vs CIT (1946) 14 TTR 647 (Bombay), Metplast Pvt. Ltd vs DCIT (2012) 341 ITR 563)(Delhi), S.A. Builders Ltd. v. CIT (2006) 289 ITR 26 , Commissioner of Income Tax Vs Walchand & Co. etc.. (1967) 65 ITR 381 In the case of the assessee itself, the Hon’ble ITAT had directed the AO to look into similar payment and the AO, during the A. Y. had found the payment commensurate to the market price and allowed the same in full.(Copy of the relevant portion of the order of the Hon’ble '.TAT and the AO enclosedAnnexure-15 14.2 I have carefully considered the submission of the fact of the case , finding of the A.O and the submission of the L.d A.r. The Assessing Officer has held that the that commission paid to director is in lieu of dividend and it is a device to reduce overall tax effect, therefore cannot be allowed under Section 36(l)(ii) of the Act. Now the question under consideration is whether on the facts and circumstances of the case it can be said that the bonus of Rs. 1 Crore each paid to the both director was on account of services rendered in the normal course of business or it would even otherwise would have been paid under different nomenclature . 14.3 There are only two directors in the company and both of them are also equal (50%) share holders of the company. A resolution has been passed by them that on 31.03.2011 that Rs. 1 crore bonus will be paid to each of the directors of the company for the year ending 31.03.2011. Had resolution been passed to pay dividend to the share holders then also the amount in question had been equally received by them as there are only two shareholders. In other words it is apparent this arrangement clearly indicates that if this bonus was not paid to both the directors director then it would be received in the shape of profit/dividend. Moreover the bonus paid is neither link to the sale of the company or performance of the directors. In the resolution no reason or basis for payment of the commission has been mentioned. The different decisions cited by the L.d A.R is not comparable as the fact of the case is totally different . In none of the case discussed there were identical number of directors and shareholders or in other words all the share holders were directors and all of them had received bonus of equal amount. Hence since both the directors are holding 50% percent share, therefore, in any case, Rs. 2 crore could have been paid as dividend, which clearly show's that the commission had been paid in lieu of dividend and not in lieu of for services rendered . Further the decision of Hon’ble ITAT in the assessee own case for the A.Y 2007-08 case cited by the appellant is not relevant as the matter under consideration was whether the company has paid excessive remuneration, bonus and commission to the directors. 14.4 Taking all the facts and figures into consideration it is held that Since the shareholding of both the directors are 50 percent , the dividend Page | 14

would have been much equal to the bonus actually paid to the directors. Therefore, sum of Rs. 1 crore in any case, would have been paid to both the directors as profits or dividend if it had not been paid as bonus. Accordingly the finding of the Assessing Officer that it was apparently a device for reducing the overall tax effect in the of taxpayer appears to reasonable. It is a settle issue that if on considering the entirety of the facts and circumstances of the case if a reasonable conclusion can drawn that the dividend was payable by the company and if the assessee company instead of paying dividend had paid bonus to their directors share holders then such payment of bonus will be in lieu of dividend and the claim of deduction will not be allowable under section 36(i)(ii) of the Act . Moreover the fact of the case is identical and comparable with the fact of the case of Dalai Broacha Stock Broking Pvt. Ltd Vs. vs. ACIT I.T.A. No.5792/MUM/2009 (ITAT Mumbai - Special Bench). Respectively following the said judgment, I hold that the payment of bonus of Rs. 1 crore paid to the two directors, had been rightly disallowed by the Officer. Accordingly addition of Rs.2,00,000,00/ made by the A.O is confirmed and ground no 13 taken by the appellant is dismissed.”

would have got much higher amount has dividend than as bonus and there was no tax avoidance motive. Therefore the honourable High Court held that the provisions of section 36 (1) (ii) does not prevent the allowance of the above sum. In the present case, it is admitted that both the directors who are paid identical amount of commission were also holding the identical quantum of the shareholding in the above company. As explained, company paid commission of INR 20,000,000, Rs. 1 Crore each to two shareholders, who are also the directors and the shareholder of the company are having equal share. Therefore, it is apparent that the facts stated in the case before the honourable Delhi High Court and the facts before us are quite different. Hence, reliance placed on that decision of the honourable Delhi High Court is misplaced. 30. The assessee has also placed reliance upon the decision of the coordinate bench in ITA number 2201/PN/2012 dated 30/11/2015 in case of anthem infra projects private limited vs joint Commissioner of income tax. We have also carefully perused the facts of that particular case. The facts as stated in paragraph number 16 of the order where the assessee has paid Rs. . one crore on account of commission to three main directors. In para number 11 of the order, it is mentioned that the commission was not paid in shareholding pattern but was paid on account of services rendered by the directors of the assessee company. Further in para number 9 it is also mentioned that the remuneration was paid to only 3 directors out of 6 who had substantial shareholding in the company therefore it is apparent that the commission was paid to the directors would not have been earned by them in the capacity of the shareholder as dividend. Therefore, the facts of that case are quite different from the facts before us. 31. Further more in special bench decision of „Dalal Broacha Stock broking V. Additional Commissioner of Income Tax, Mumbai‟ – (2011) 10 ITR (Trib) 357 (Mumbai) (SB) the assessee company during the relevant year had paid commission to the tune of Rs.40 lakhs to the three working directors. They are the only shareholders of the company and owned the entire share capital. During the assessment proceedings, the Assessing Officer asked the assessee to explain as to why the claim of expenditure on account of the commission should not be disallowed as the assessee earned substantial

profits and the same amount could have been distributed as dividend. The assessee submitted that the commission was not in lieu of profit or dividend as the payments had been made to the directors for the hard work they had put in improving the profits of the company. Since it wanted to improve its net worth to attract FIIs the company was not declaring dividend. The three directors were holding shares at 50%, 25% and 25% and therefore the case the amount of commission had been distributed as dividend, they would not have got the same amount as dividend. It held that the payment of dividend by a company is not compulsory and it is dependent upon the profitability and other conditions of the business. Therefore, in cases, where dividend is not payable, the payment of bonus or commission can be allowed as deduction in case of employee shareholders also under Section 36(1)(ii) as in that case it could not be said that payment of bonus or commission is in lieu of dividend. Thus the provisions of Section 36(1)(ii) are also applicable to share holder employees subject to the condition that payment is not made in lieu of dividend. The provisions of Section 36(1)(ii) can be split in two parts. The first part viz., „any sum paid to an employee as bonus or commission for services rendered‟ is an enabling provision. This part applies to all employees. The second part is a disabling provision which provides that „if the sum so paid in lieu of profit or dividend‟, it cannot be allowed as deduction. This part applies only to employees who are partners or shareholders. Thus, in so far allowability of expenditure on account of bonus or commission under Section 36(1)(ii) is concerned, it applies to all employees including shareholder employees. The disallowability is restricted only shareholders as only in those cases, payment could be in lieu of profit or dividend. The special bench, therefore, rejected the arguments of the assessee that the provisions of Section 36(1)(ii) apply only to non shareholder employees. The legal position is that any expenditure on account of payment of commission to an employee will be allowable as deduction under the provisions of Section 36(1)(ii) irrespective of the fact whether the employee is a shareholder or not or whether the commission has been paid for some extra services or for the some services. Only condition is that the payment is not in lieu of dividend. In case extra services have been rendered for payment of commission, it will be one of the

relevant factors to consider while deciding whether the case is covered by exception provided in Section 36(1)(ii) i.e., whether the payment of commission is in lieu of dividend. According to us, both the directors would have got the above amount of dividend had there not been any payment of such bonus or commission by the assessee company. 32. Further the claim of the assessee that the issue has been squarely covered by the decision of the coordinate bench in assessee‟s own case for the assessment year 2007 – 08 is also of no consequence as noted by the learned CIT appeal that the disallowance was under section 40A (2) of the act in that year. Similarly for assessment year 2012 – 13 the learned CIT – A has allowed the claim of the assessee in his appeal order is also of no consequence as because the learned CIT – A has relied upon the decision of the honourable Delhi High Court in case of CIT vs carrier launch a private limited, the facts of that case were quite distinct and different as we have already pointed out. Therefore, we confirm the order of the lower authorities. 33. In view of above facts we do not find any infirmity in the order of the lower authorities. Accordingly, the ground number 4 of the appeal of the assessee is dismissed. 34. Accordingly, appeal of the revenue is dismissed and appeal of the assessee is partly allowed. Order pronounced in the open court on 28/02/2019. -Sd/- -Sd/- (H.S.SIDHU) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 28/02/2019 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi Date of dictation Page | 18