Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH, JM & SHRI MANOJ KUMAR AGGARWAL, AM
Per Manoj Kumar Aggarwal (Accountant Member) 1. These are cross appeal by assessee as well as revenue for Assessment Year [AY] 2011-12 which contest the order of Ld. Commissioner of Income-Tax (Appeals)-17 [CIT(A)], Mumbai, Appeal No.CIT(A)-17/IT/246/13-14 dated 18/03/2015. The assessment for impugned AY was framed by Ld. Deputy Commissioner of Income Tax- 8(2) [AO] u/s 143(3) on 30/11/2013. The registry had noted that the appeal of the revenue has been filed with a delay of 22 days. However, the revenue has filed revised Form 36 rectifying the date of communication of the impugned order. We find that calculating period of limitation as per revised Form 36, there is no delay in filing the appeal and therefore, the same appears to be in order. No objection is raised against the same by Ld. Counsel for assessee [AR]. Hence, finding the appeal in order, we proceed further to decide the same on merits. 2.1 The assessee, in has raised the following grounds of appeal:- 1. “The Learned Commissioner Of Income Tax (Appeal) erred in not deleting the service tax Rs.3,11,135/- on the commission, which was not debited to the P &L A/c and claimed as service tax input credit, impliedly confirming the addition.
2. The Learned Commissioner of Income Tax (Appeal) erred in upholding the decision of the Learned AO as regards the commission of Rs.80,64,887 paid to the two directors and M/s. Mercurial Corporate Pvt. Ltd and in upholding the addition/disallowance.
3. The Learned Commissioner of Income Tax (Appeal) failed to appreciate that the commission is paid on the basis of the services rendered and not as per the shareholding which is a basis for distributing dividend.
4. The Learned Commissioner of Income Tax (Appeal) failed to appreciate that the commission of Rs.50,44,56/- paid to the two directors is also part of the remuneration paid to the directors and accordingly is allowable as such.
ITA.No.3281 & 3489/Mum/2015 Microtrol Sterilisation Services Private Limited Assessment Year-2011-2012 2.2 The revenue, in
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to delete the disallowance of the excess remuneration paid to the directors of the company under section 40A(2) of the IT Act without appreciating the fact that the AO has formed opinion on the facts that payment of remuneration to unreasonable with reference to the line of business of the assessee”.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the ceiling limit specified under Section 198 of the companies Act for remuneration to directors in the Public limited companies cannot be taken as a benchmark for deciding unreasonableness of the remuneration paid to the directors of the company under section 40A(2) of the IT Act.”
The other grounds raised in revenue’s appeal have not been pressed during hearing before us and hence, the same are dismissed as being not pressed. 3.1 Briefly stated the assessee being resident corporate assessee engaged in sterilization business was assessed for impugned AY on 30/11/2013 u/s 143(3) at Rs.6,94,71,050/- as against returned income of Rs. 5,37,82,810/- e-filed by the assessee on 22/09/2011. The assessee has suffered addition of Rs.1,24,94,330/- on account of salary and commission paid to directors/shareholders and Rs.31,49,000/- on account of commission paid to outsiders and these additions are the subject matter of this appeal. 3.2 During assessment proceedings, it was noted that the assessee paid remuneration and commission to directors/shareholders as per the following details:- Sl.No. Name of the Name of the No of Remuneration Commission Total director shareholders shares held
1. Bansidhar Bansidhar Dhurandhar 20,700 28,80,000 26,84,832 55,64,832 Dhurandhar
2. Vikram B Vikram B Kalia 33,200 28,80,000 23,59,324 52,39,324 Kalia ITA.No.3281 & 3489/Mum/2015 Microtrol Sterilisation Services Private Limited Assessment Year-2011-2012
3. Mohini Kalia Mohini Kalia 21,100 28,80,000 - 28,80,000
4. Surekha Surekha Dhurandhar 34,000 24,48,000 - 24,48,000 Dhurandhar
5. Nishad Nishad Dhurandhar 3,400 3,82,600 - 3,82,600 Dhurandhar 6 - Mercurial Corporate Pvt 20,000 - 33,31,866 33,31,866 Ltd TOTAL 1,11,47,600 83,76,022 1,95,23,622 The above payments, in the opinion of Ld. AO, were covered by the provisions of Section 40A(2) read with Section 36(1)(ii). The Ld. AO also noted that the provisions of Section 198 of The Companies Act, 1956 put a ceiling of 11% of net profits on overall remuneration that could be paid to the directors and managers. Accordingly, the assessee was asked to justify the salary/commission payment in terms of Section 40A(2) and also asked to provide the details of services obtained against commission payment. The assessee pointed out that the assessee was in specialized line of business and the directors were handling promotional aspect of the business. Further, commission was paid to two directors based on sales achieved by the respective branches being controlled by them. It was also pointed out that the provisions of Section 198 of the Companies Act, 1956 were applicable only to public limited companies and could not be applied to assessee since it was private limited company. However, not convinced, Ld. AO disallowed commission aggregating Rs.83,76,022/- paid to three parties by applying the provisions of Section 36(1)(ii), Section 37(1) & Section 40A(2) since the impugned payments, in the opinion of Ld. AO, were made in the garb of dividend and moreover, the assessee could not substantiate the work done by the respective parties so as to be entitled to get the impugned commission.
ITA.No.3281 & 3489/Mum/2015 Microtrol Sterilisation Services Private Limited Assessment Year-2011-2012 3.3 Similarly, the salary payment of Rs.1,11,47,600/- to five persons as enumerated in the above table was restricted to Rs.70,29,292/-, being 11% of net profits achieved by the company in terms of Section 198 of the Companies Act. 3.4 The aggregate disallowance, thus worked out by Ld. AO in this manner, amounted to Rs.1,24,94,330/- which comprised of commission disallowance of Rs.83,76,022/- and salary disallowance of Rs.41,18,308/-. 3.5 Apart from above disallowance, the Ld. AO made another disallowance of Rs.31.49 Lacs being commission paid to various outsider parties since the assessee could not substantiate the nature of services being received by the assessee from the said party. 4.1 Aggrieved, the assessee contested the same with partial success before Ld.CIT(A) vide impugned order dated 18/03/2015 where the assessee pointed out that it achieved sales of Rs.25.66 Crores against which it has debited commission only for Rs.31,49,318/-. The figures of Rs.83,76,022/- taken by Ld. AO included Service Tax of Rs.3,11,135/- which was never debited to the Profit & Loss Account and the balance amount of Rs.80,64,887/- comprised of commission of Rs.30,20,731/- paid to a sister concern namely Mercurial Corporate Services Private Limited and balance Rs.50,44,156/- as commission paid to two directors as part of their remuneration. It was further pointed out that the two directors and said entity had combined shareholding of 51.67% and commission was not based on their shareholding but was paid on the basis of services actually rendered by them. The attention was also drawn to the fact that total salary & commission paid to the directors was ITA.No.3281 & 3489/Mum/2015 Microtrol Sterilisation Services Private Limited Assessment Year-2011-2012 Rs.1,61,32,156/- and not Rs.1,11,47,600/- as wrongly taken by Ld. AO. Reliance was placed on several judicial pronouncements and CBDT Circular No.6P dated 06/07/1968 for the contention that disallowance was not justified in terms of Section 40A(2). 4.2 The Ld. CIT(A) after appreciating the nature of assessee’s business confirmed addition of Rs.83,76,022/- on account of commission on the premises that the assessee could not prove factum of receipt of services with cogent material. However, Ld. CIT(A) deleted addition of Rs.41,18,308/- qua salary payment by placing reliance on the cited CBDT circular, various judicial pronouncements and upon noticing that the provisions of Section 198 of the Companies Act, 1956 were not applicable to the assessee company. 4.3 Qua disallowance of Rs.31.49 Lacs on account of commission paid to outsiders, the assessee pointed out that this amount included an amount of Rs.30,20,731/- which was a part of the earlier disallowance of Rs.83,76,022/- and hence there was a double disallowance. It was further demonstrated that the balance commission was paid to three independent parties against receipt of services and therefore, no disallowance was justified. The Ld. CIT(A) concurred with the same and deleted the addition of Rs.31.49 Lacs.
Aggrieved, the revenue as well as assessee is in appeal before us. The assessee is aggrieved by confirmation of addition to the extent of Rs.83,76,022/- whereas revenue is aggrieved by deletion of addition of Rs.41,18,308/- on account of director’s salary paid by the assessee.
The Ld. Counsel for Assessee [AR] contended that commission paid to the directors was part of remuneration and the same was based ITA.No.3281 & 3489/Mum/2015 Microtrol Sterilisation Services Private Limited Assessment Year-2011-2012 upon the performance of respective branches being controlled by them and had no correlation with their respective shareholding and therefore, disallowance was not justified. The attention is drawn to the fact that the payment of salary and commission, in this manner, is regular feature and is being paid by the assessee over past several years and the same has been accepted by the revenue. Per Contra, Ld. DR contended that the assessee paid heavy salary and commission to directors without corroborating the receipt of services with bringing on record any cogent material / evidence to substantiate the same.
We have carefully heard the rival contentions and perused relevant material on record. For ease of convenience, we deal with the issue in two parts i.e. allowability of Salary & Commission to directors and allowability of Commission to sister concern.
As emanating from records, the assessee has made salary & commission payment to directors in the following manner:- Sl.No. Name of the director / No of shares % of Remuneration Commission Total shareholder held Shareholdings 1 Bansidhar Dhurandhar 20,700 23.21% 28,80,000 26,84,832 55,64,832 2 Vikram B Kalia 33,200 23.21% 28,80,000 23,59,324 52,39,324 3 Mohini Kalia 21,100 14.75% 28,80,000 - 28,80,000 4 Surekha Dhurandhar 34,000 23.77% 24,48,000 - 24,48,000 5 Nishad Dhurandhar 3,400 2.37% 3,82,600 - 3,82,600 TOTAL 1,14,70,600/- 50,44,156/- 1,65,14,756/- As evident from Annual Report of the Company placed on Page No. 18 of the paper book, the company has only four directors and Nishad Dhurandhar is not the director of the company. Secondly, it is noted that commission has been paid only to two directors and the same is not in proportion to their shareholdings as evident from perusal of above table.
ITA.No.3281 & 3489/Mum/2015 Microtrol Sterilisation Services Private Limited Assessment Year-2011-2012 Further, the directors, in their respective return of income, as evident from placed on Page Nos. 74 to 77 of the paper book, have reflected the aggregate payment as above under the head ‘salary income’ and all the directors fall in the highest tax bracket. The assessee is making the salary and commission payment, in similar manner, to the directors since AY 2004-05, the details of which are available on Page-73 of the paper book.
On the basis of above facts, we find that the provisions of Section 36(1)(ii) has no applicability since the commission payment are not in proportion to the respective shareholdings and moreover, the commission has been paid only to two directors out of four directors. The assessee has asserted that the commission has been paid in proportion to the performance achieved by respective branches being controlled by them and this fact is nowhere controverted by the revenue. Undisputedly, the provisions of Section 198 of the Companies Act, 1956 could not be applied to assessee since the same was applicable only to Public Companies and not to Private Companies. Lastly, in terms of provisions of Section 40A(2)(a), the disallowance could be made only if the Assessing Officer was of opinion that such expenditure was excessive or unreasonable having regard to the fair market value of goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom. However, the revenue is unable to point out as to how the payment were excessive or unreasonable having regard to fair market value of such services.
ITA.No.3281 & 3489/Mum/2015 Microtrol Sterilisation Services Private Limited Assessment Year-2011-2012 10. Finally, at this juncture, we are inclined to reproduce the observation made by jurisdictional Hon’ble Bombay High Court in the case of CIT Vs. V.S.Dempo & Co. (P.) Ltd. (336 ITR 209):- “In this connection, the fact that the assessee as well as its subsidiary which is the seller are in the same tax bracket and pay same rate of tax is a fact which assumes importance. Admittedly, it is not a case of tax evasion inasmuch as if the rate would have been less, the assessee’s profit would have been more, but the profits of the seller would have been less and both being taxable at the same rate, there would be no difference in the aggregate tax payable by the assessee and its subsidiary.