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Before: Shri I.C. Sudhir & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the Revenue against the order dated 28.02.2014 of ld. CIT(A)-IV, New Delhi for the assessment year 2006-07 on the following grounds : “
1. On the facts and in the circumstances of the case, the CIT(A) has erred in law and on facts by allowing the claim of deduction u/s 80IA(Erstwhile 80IB) by failing to appreciate that unit-II is merely reconstruction of already existing business unit-I of the assessee and hence not eligible for such deduction.
2. On facts and in the circumstances of the case, the CIT(A) has erred in deleting the addition of Rs. 12,00,000 made by the AO, disallowing bonus/commission paid to the directors of the company without appreciating that the same could have been paid as dividend if not paid as ITA No. 2951/Del./2014 2 bonus/commission as the assessee was having profits of Rs.4.65 crores during the relevant period.”
As emerged from the above grounds of appeal, the Revenue has challenged the deletion of addition made by the AO on account of – (i). disallowance of deduction u/s. 80IA Rs.1,23,60,580/- (ii). disallowance of commission paid to directors Rs.12,00,000/-
The brief facts, relevant to the first issue, are that the as per 3CD report, the assessee had claimed deduction u/s. 80IB (erstwhile 80IA) to the extent of Rs.1,23,60,580/- on the consolidated profits of all the units. The AO noticed that the assessee company started its production in 1990 and was eligible for deduction u/s. 80I(IA) for ten years. It, however, opened a new unit as unit No.II, which started same production in September, 1997. The assessee company claimed that it had surrendered its manufacturing license in respect of Unit No. I in F.Y. 1999-2000 and started job work of Unit-II. The AO observed that in the year in which the deduction in respect of Unit-I was lapsing, the assessee company surrendered the manufacturing right of Unit-I and started doing job work of Unit –II by using the facilities and workers of Unit-I. It was also observed that the Unit-II of the assessee company was utilizing the facilities, machinery and workers of Unit-I for carrying out its manufacturing activities, which amounts to reconstruction of the business of assessee company in a manner to increase the profit of Unit-II for making it
ITA No. 2951/Del./2014 3 eligible for deduction u/s. 80IA for complete 10 years. Therefore, resorting to the provisions of sub-sec.(2) of section 80IA, which speaks that the industrial undertaking shall not be formed by split up or the reconstruction of a business already in existence and also shall not be formed by transfer of a new business of machinery or plant previous used for any purpose, the AO disallowed the claim of assessee for deduction u/s. 80IB of Rs.1,23,60,580/-. The AO also observed that in the present scenario, similar disallowance was also made in A.Yrs. 2001-02 to 2003-04 and 2005-06. In appeal, the ld. CIT(A) deleted the disallowance observing as under : “5.2 Before me, the Ld. AR for the appellant submitted that the AO was not justified in making the disallowance. It was submitted that the issue is covered in favour of the appellant by the order of CIT(A) as well as by the ITAT for the A.Y. 2000-01, 2001-02, 2002-03, 2003-04 and 2005-06. The Ld. AR submitted a copy of ITAT order B Bench dt. 09.09.2011 in support of his claim. 5.3. I have carefully considered the submissions of Ld. AR and perused the order passed by the AO. I have also perused the order of the Ld. CIT(A) as well as of the Hon'ble ITAT. I find that the Hon'ble ITAT vide their order dt. 9.9.2011 has decided the issue in favour of the appellant by giving following findings: "5. We have heard rival contentions and gone through the entire material available on record. The CIT(A) has passed detailed order listing out all the facts and contentions along with case laws. For the sake of brevity, we are not inclined to reproduce them. It has not been disputed by the department that for two initial years i.e. 1998- 99 and 1999-2000, both units I & II were independently manufacturing and unit II was set up by separate new machineries. Thus unit II cannot be held to be a unit established by reconstruction of business. For two years it was an independent
ITA No. 2951/Del./2014 4 business of the assessee set up by new plant & machinery and on which AO himself allowed deduction u/s 80-IA on these findings. 5.1 Once it is so, merely because in subsequent years Unit II got some of its manufacturing activities executed by Unit I on job work basis will not reverse the clock. It cannot be held that what was new and independent business stands transformed into a reconstructed old business, because of job work. Therefore, independent status of Unit II cannot be altered as proposed by AO due to job work executed by Unit I. Various authorities have clearly held that the business of manufacturing is sum total of various activities including procurement of order, design, specifications and manufacturing of goods as per their designs, supply, dispatch as per the satisfaction of customer and activities of completion of sales etc. Merely because the assessee gets the fabrication work done as per its design from Unit I, it will not tantamount to a finding that the assessee has not carried out the manufacturing activities. Our view is fortified by the ratio of decision of Hon'ble Supreme Court in the case of Textile Machinery Corpn. Ltd. (supra) and the order of ITAT in the case of Associated Capsules (P) Ltd, (supra). The allegation of the department that the assessee diverted the manufacturing activities to Unit I will an intention to avoid tax, cannot be accepted as the law accepts and recognizes the legitimate planning of affairs of business by the assessee. The law does not forbid utilization of manufacturing facilities of one unit by other on job work basis. Therefore, the arrangement of the assessee cannot be treated as illegitimate or unjustified. The contention of the assessee that it has claimed deduction u/s 80-IA on the net profits worked out after adjusting the losses of Unit I with profits of Unit II, has not been disputed by the department. With all these facts on record, we are unable to hold that the assessee was indulging in any avoidance of tax. In the entirety of facts and circumstances we find no infirmity in the order of CIT(A) allowing the claim of the assessee. Accordingly we uphold the order of CIT (A) on this court for all the assessment years under consideration". 5.3.1. I find that the AO has made disallowance on the basis of disallowance made during the year 2001-02, 2002-03, 2003-04 & 2005- 06. There is no change in the facts and circumstances of the case this year. As quoted above the Hon'ble ITAT vide their order dt. 09.09.2011 has decided the issue in favour of the appellant. Respectfully following the ITA No. 2951/Del./2014 5 above order of the Hon'ble ITAT in appellants own case for earlier years, this issue is decided in the favour of the appellant in this year also. This ground of appeal is allowed.”
3. Having considered the submissions of both the parties in the light of above decision of ITAT, we find that the Revenue has failed to adduce any material on record to take a view different from that taken by ITAT in the case of assessee for earlier years. We, therefore, find no justification to discard the findings of the ld. CIT(A) reached on the basis of earlier decision of Tribunal, noted above. Ground No. 1 raised by the Revenue on this issue is, therefore, dismissed.
4. The brief facts relevant to second issue are that the assessee paid Rs.12 lacs to its directors as commission/bonus. These directors were also the share holders in the assessee company. The AO noticed that the assessee company has declared profit of Rs.4,65,88,411/-, but dividend of only Rs.50 lacs has been distributed among the share holders. The assessee had siphoned off its profits to the alleged commission/bonus. It was observed that bonus would not have been payable to the directors as profits or dividend had it not been paid as bonus/commission as contemplated u/s. 36(1)(ii) of the Act. Reliance was placed on the decision of Bombay High Court in Loyal Motor Service Co. Ltd. vs. CIT, 14 ITR 647. The ld. CIT(A) has deleted the addition vide impugned
ITA No. 2951/Del./2014 6 order, which has been challenged by the Revenue by way of ground No. 2 of appeal.
We have heard the submissions of both the parties and have gone through the material on record.
The ld. DR relying on the order of Assessing Officer, submitted that the ld. CIT(A) was not justified in deleting the addition ignoring the fact that the profit of the assessee was siphoned off in disguise of bonus/commission. The AO took correct view in the light of decision of Hon’ble Bombay High Court in Loyal Motor Service Co. Ltd. vs. CIT (supra), which the ld. CIT(A) ignored while deleting the addition.
The ld. AR of the assessee, on the other hand, relying on the impugned order, submitted that the ld. CIT(A) was quite justified in deleting the addition. The ld. CIT(A) apart from relying the first appeal order dated 18.02.2013 for A.Y. 2008-09 whereby similar disallowance was deleted, also gave cogent reasoning as under : “I also find that the amount paid to the directors as commission is taxable in hands of the directors at normal rate. Had it been paid as dividend, same would have been tax free in the hands of the directors and the appellant company would have been required to pay only dividend tax
ITA No. 2951/Del./2014 7 which is at lower rate than the tax payable by the directors on the income received as commission. Considering the above facts and circumstances of the case, I hold that the AO was not justified in making the disallowance of Rs.12,00,000/- and hence, the same cannot be sustained. The addition is therefore, directed to be deleted.”
The ld. Counsel for the assessee also relied on the decision of Hon’ble Delhi High Court in the case of CIT vs. Career Launcher India Ltd., 358 ITR 179 (Del.).
Having considered the rival submissions in the light of relevant record on file and the case laws cited by both the parties, we find no justification to discard the findings reached by the ld. CIT(A) in the impugned order. The Revenue has failed to rebut the findings of the ld. CIT(A), as reproduced above, which alludes that there was no any ulterior motive of the assessee behind payment of bonus/commission to the working directors of the company. Moreover, the issue has been well decided in favour of the assessee by Hon’ble Delhi High Court in the case of CIT vs. Career Launcher India Ltd. (supra) after considering the decision of Hon’ble Bombay High Court in Loyal Motor Service Co. Ltd. vs. CIT (supra) as under : “14. The next question that is common to the assessment years 2005-06 and 2006-07 relates to the allowance of the bonus paid to directors of the assessee-company.
ITA No. 2951/Del./2014 8
In the assessment proceedings for the assessment year 2005-06, the AO took the view that sec.36(1)(ii) was applicable to the payment of bonus of Rs.32,22,000/- to the directors of the company and it was to be disallowed because it would have been payable to the directors as dividends had it not been paid as bonus. The assessee explained that the payment of bonus was supported by board resolutions, that the directors were full-time employees of the company drawing salary, that all of them were management graduates from IIM, Bangalore and therefore it would not be correct to say that the bonus would have been payable as dividends so as to attract section 36(l)(ii). It was submitted that dividends were not being paid in the guise of bonus and in support of the claim it was pointed out that the payment of bonus was not in any way related to the shareholding of the directors. The relevant shareholding details and the bonus payment in respect of each director were given to the AO which he has reproduced in paragraph 3 of the assessment order.
These submissions were however rejected by the AO who held that on a proper reading of the section it was clear that if the company could have declared dividend on the shareholding but had not done so, then any payment of bonus/commission to the directors was hit by the section. He noted that no dividend was declared by the company despite substantial profits. According to him, the company was avoiding 13.5% dividend distribution tax and some more tax on income since individuals pay 5% less tax than companies, and thus the total tax avoided came to about 20% because of the payment of the bonus to the directors. He therefore disallowed the entire payment of bonus. 17. In the assessment year 2006-07, for substantially the same reasons the AO disallowed the entire bonus payment of Rs.37,44,000 to the directors. 18. The CIT(A) in his consolidated order for the two years upheld the disallowance. In the further appeals preferred by the assessee before the Tribunal, it was held, agreeing with the assessee, that if the assessee had paid dividend on the shareholding of the directors then such payment would have been more than the bonus paid and therefore sec,36(1)00 was not applicable. The Tribunal referred to two directors specifically and noted that having regard to their shareholding, they would have been entitled much higher amounts as dividends than the amounts paid to them as bonus. It also recorded a finding that none of the directors would have ITA No. 2951/Del./2014 9 received bonus as dividend in case bonus was not paid. It also noted that the payment of bonus was supported by a board resolution.
The revenue's contention that the Tribunal erred in allowing the bonus payment to the directors cannot be accepted. It has not disputed the facts viz., (a) that the payment was supported by board resolutions and (b) that none of the directors would have received a lesser amount of dividend than the bonus paid to them, having regard to their shareholding. Further, the directors are full-time employees of the company receiving salary. They are all graduates from IIM, Bangalore. Taking all these facts into consideration, it would appear that the bonus was a reward for their work, in addition to the salary paid to them and was in no way related to their shareholding. The bonus payment cannot be characterised as a dividend payment in disguise. The Tribunal has found that having regard to the shareholding of each of the directors, they would have got much higher amounts as dividends than as bonus and there was no tax avoidance motive. The quantum of the bonus payment was linked to the services rendered by the directors. It cannot therefore be said that the bonus would not have been payable to the directors as profits or dividend had it not been paid as bonus/commission.
The issue has been considered by this Court in AMD Metplast Pvt. Ltd vs DCIT (2012) 341 ITR 563 in the light of the judgment of the Bombay High Court in Loyal Motor Service Co. Ltd vs CIT (1946) 14 ITR 647. It was observed that the judgment of the Bombay High Court (supra) does not assist the revenue and that so long as the bonus or commission is paid to the directors for services rendered and as part of their terms of employment it has to be allowed and sec.36(l)(ii) does not apply.
Having regard to the above legal position and the factual findings recorded by the Tribunal, we are unable to say that the Tribunal erred in holding that the bonus payment was allowable u/s.36(l)(ii) of the Act. The substantial questions of law are answered in the affirmative, against the revenue and in favour of the assessee for both the years.”
Respectfully following the above decision of Hon’ble Delhi High Court and finding the conclusion reached by the ld. CIT(A) as reasonable, we are not ITA No. 2951/Del./2014 10 inclined to interfere with the impugned order. Accordingly, the appeal of the Revenue deserves to be dismissed, being devoid of merits.