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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI D.S.SUNDER SINGH
आदेश / O R D E R PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:
These cross appeals are appeal filed by the assessee and the Revenue against Order dated 15.09.2015 of Commissioner of Income Tax (Appeals)-3, Chennai, in for the AY 2011-12. ITA ITA No.43/Mds/2016 AY 2011-12 [Revenue’s appeal] 2.0 Delay:
The Revenue has filed the appeal with delay of 14 days and filed the affidavit explaining the reasons for filing the appeal beyond due date. The Ld.AR did not make any objections for condoning the delay. Therefore, the delay is condoned.
3.0 All the grounds of the appeal are related to the addition made in respect of deduction u/s.80IA. During the assessment proceedings, the AO found that the assessee has claimed the deduction of Rs.39,14,827/- for the income generated from the wind mills u/s.80IA. The assessee has erected the wind mills and commenced the power generation during the Assessment Year 2003-04 but claimed the deduction first time in the year under consideration. According to the assessee the initial assessment year in the block of ten assessment years out of first fifteen assessment years from the date of establishment of the eligible unit should be reckoned from the first year of claim of such deduction by the assessee and not based on the establishment of the eligible unit. The assessee has claimed the deduction u/s.80IA treating the AY 2010-11 and reckoned the ITA No.2240/Mds/2015 & :- 3 -: same as the initial assessment year of the claim for its wind energy generated from the wind mill.
4.0 According to the AO, as per Sec.80IA(5) of IT Act, the unit of wind mill has to be treated as separate and independent unit, for computing the income and set off of losses as if such eligible business is only the source of income. Right from the commencement of the business, the business losses, depreciation and the investment allowance if any of early years which were set off against the earlier income of other units should be taken into account for determining the quantum of deduction admissible u/s.80IA. Even though they might have been set off against the profits of the tax payer from the other sources. The same should be brought forward notionally and to be set of against the income of 80IA unit and the balance should be allowed as deduction u/s.80IA.
Accordingly, the AO was of the view that the amount of Rs.39,14,827/- claimed by the assessee as deduction u/s 80IA was incorrect claim and required to be disallowed. During the assessment proceedings, the assessee relied on the decision of the Hon’ble jurisdictional High Court in the case of Sri Velayudha Swamy Spinning Mills Pvt. Ltd. 231 ITR 368(Mad). The AO made the addition stating that the issue has not reached finality since the Department in appeal before the Hon’ble Supreme Court.
ITA No.2240/Mds/2015 & :- 4 -:
5.0 Aggrieved by the order of the AO, the assessee went on appeal before the Ld.CIT(A) and the Ld.CIT(A) allowed the assessee’s appeal following the Hon’ble jurisdictional High Court decision cited supra.
Aggrieved by the order of the Ld.CIT(A) the revenue is in appeal before us.
6.0 We heard both the parties and perused the material placed before us.On identical facts the Hon’ble jurisdictional High Court decided the issue in favour of the assessee in the case law cited supra which was relied upon by the assessee as well as the Ld.CIT(A). Respectfully following the decision of the Hon’ble jurisdictional High Court, we do not find any infirmity in the order of the Ld.CIT(A) and the same is upheld.
7.0 In the result, the appeal of the Revenue is dismissed. AY 2011-12 [Assessee’s appeal] 8.0 In assessee’s appeal, the assessee has raised the following grounds:
The order of The Commissioner of Income Tax (Appeals) 3, Coimbatore dated 15.09.2015 in l.T.A.No.36/2014-15 for the above mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case.
The CIT (Appeals) erred in confirming the disallowance of freight payments as per section 40A(3) of the Act in computation of taxable total income without assigning proper reasons and justification.
The CIT (Appeals) went wrong in recording the findings in this regard in para 6.2.1 of the impugned order without assigning proper reasons and justification.
The CIT (Appeals) erred in sustaining the disallowance of commission paid in invoking section 36(1) (ii) of the Act in the computation of taxable total income without assigning proper reasons and justification.
The CIT (Appeals) went wrong in recording the findings in this regard in paras 6.3.2 and 6.3.3. of the impugned order without assigning proper reasons and justification.
ITA No.2240/Mds/2015 & :- 5 -:
The CIT (Appeals) failed to appreciate that the decision relied upon was applied out of context and ought to have appreciated that the provisions of section 36(1)(ii) had no application to the facts of the case thereby vititing the decision rendered.
The CIT (Appeals) failed to appreciate that in any event the factual findings in para 6.3.2 were perverse and supported by material evidence available on record. 7. The CIT (Appeals) failed to appreciate that there was no proper opportunity given before passing of the impugned order and any order passed in violation of the principles natural justice would be nullity in law. 8. The Appellant craves leave to file additional grounds/arguments at the time of hearing.
9.0 All the the above grounds are related to two additions i.e. disallowance u/s.40A(3) and the disallowance of commission u/s.36(i)(ii) of IT Act.
10.0 The first issue is related to the disallowance of Rs.2,80,620/- u/s.40A(3) of IT Act. The AO during the assessment proceedings observed that the assessee has made the payment of Rs.2,80,620/- in violation of the provisions of Sec.40A(3) of IT Act exceeding Rs.20000/-.
During the assessment proceedings, the assessee explained before the AO that the payments were made towards the freight charges and in respect of freight charges, the act has been amended enhancing the limit up to Rs.35,000/- w.e.f. 01.10.2009 and no payment was made in excess of Rs.35000/- hence no addition is called for. However, the AO found from the Profit & Loss A/c from the schedule of Purchase of raw material, the assessee has shown separately the “cotton purchase interstate” – Rs.9,98,98,969/- and the “carriage inward Cotton” Rs.19,00,300/- and the said cash payment of more than Rs.20,000/- were found to be included in the party wise Purchase ledger account for cotton purchases
ITA No.2240/Mds/2015 & :- 6 -: interstate. Hence, the AO viewed that since the payment for freight charges were already included in purchases account the assessee’s contention that the payment was made for freight was not correct and accordingly, disallowed the sum of Rs.2,80,620/- u/s.40A(3) of IT Act.
11.0 Aggrieved by the order of the Ld.CIT(A), the assessee went on appeal before the Ld.CIT(A) and the Ld.CIT(A) accepted the finding of the AO that the cotton purchases- interstate relates to the exclusive purchases made by the assessee which included in the cash payments for the freight and the payment of Rs.2,80,620/- was related to the cotton purchases in cash and accordingly, confirmed the addition made by the AO.
12.0 Aggrieved by the order of the Ld.CIT(A) the assessee is in appeal before us.
During the appeal, the Ld.AR argued that the payments made in cash were related to the lorry hire payments towards the carriage inwards. The lorry drivers do not accept the cheque payments and they only accept the cash payments. The entire payment was made towards the lorry hire and each payment did not exceed Rs.35,000/-. The date wise details of payments with invoices were furnished by the assessee.
The Ld.AR has taken us to Paper Book Page No.203 wherein in the Dispatch Advice, the lorry fare was separately mentioned by the supplier
ITA No.2240/Mds/2015 & :- 7 -: advising the assessee to make payment on delivery. The Ld.AR submitted that the cotton purchase interstate consists of the payment for purchases as well as the separate payment for lorry freight. All the vouchers were produced before the AO at the time of assessment but the AO incorrectly concluded that the cash payments were made for purchases which is not correct. On the other hand, the Ld.DR relied on the orders of the lower authorities.
13.0 We heard the rival submissions and perused the material placed before us.
The assessee made the cotton purchase interstate and raised the bills for goods purchased from the supplier as well as for the freight separately by the supplier. On dispatch of the goods, the supplier advised the assessee to make the freight payment separately. Each payment was less than Rs.30,000/-. W.e.f. 01.10.2009, the cash payments for freight is permitted up to Rs.35,000/- on each occasion. Since the cash payments were made less than Rs.35,000/- and permitted by the law, we do not find any violation of the provisions of Sec.40A(3) and the addition made by the AO is deleted and the orders of the lower authorities are set-aside.
The appeal of the assessee on this ground is allowed.
ITA No.2240/Mds/2015 & :- 8 -:
14.0 The next issue in the appeal of the assessee is the disallowance of commission u/s.36(i)(ii) of IT Act. The AO disallowed a sum of Rs.52,94,460/- paid to two Directors viz., Shri R.Venkatapathi & Shri V.Rajendran. Both of them are the Directors of the company. The amount of Rs.59,94,960/- was paid as a commission @10% on net profit.
The AO called for the explanation from the assessee as to why the commission should not be disallowed and the assessee submitted reply to the AO stating that all the managerial administrative and marketing functions of the company are being handled by both the Directors. The AO not being impressed by the explanation of the assessee, made the disallowance of the commission observing that the commission is paid in lieu of dividend to the Directors. The AO further stated that the company being a Pvt. Ltd. Company, if the dividend is paid, the company has to pay the dividend tax and to evade the dividend tax, profits of the company were reduced by way of payment of commission to the Directors. The company has not established the services rendered by the Directors and hence the AO disallowed the commission paid to the Directors.
15.0 The assessee went on appeal to the commissioner and the Ld.CIT(A) confirmed the addition made by the AO stating that Dr. Rajendran one of the Directors is a professional and earning income of Rs.43.60 lakhs and has little time to look after the company affairs. Similarly, Shri Venkatapathi, Chairman is 70 years old and cannot spare the time for the ITA No.2240/Mds/2015 & :- 9 -: company. Therefore, the Ld.CIT(A) was of the view that the assessee has not brought on record any evidence to establish that both the Directors have rendered the services to the assessee company and accordingly, confirmed the addition made by the AO.
16.0 Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before us.
Appearing for the assessee, during the appeal, the Ld.AR argued that the AO has invoked the provisions of Sec.36(1)(ii) of the IT Act, which is made applicable in the case of the employees but not applicable in the case of the Directors. Both the Directors are Income Tax assessee’s regularly filing the returns. The income received in the form of commission is offered to tax. In the company, no Senior officials are appointed in the top level to take the policy decisions and to look after day-to-day running of the affairs. Both the Directors are rendering the services to the company and because of the Director’s continuous dedicated service, the company is running without any impediment and smoothly. Since the Directors have offered the income in their hands and its taxed in the hands of the Directors the contention of the AO that the commission payment was made with an intention to avoid dividend distribution tax in misinterpretation of the fact. Therefore, the Ld.AR contended that the commission paid is genuine and reasonable which should be allowed as deduction.
ITA No.2240/Mds/2015 & :- 10 -:
17.0 On the other hand, the Ld.DR argued that one of the Director is drawing salary from the company and he is employee of the company and Sec.36(1)(ii) is applicable to the employed Director. Another Director cannot perform the functions effectively and participate due to old age.
Further it was argued that Dr.Rajendran is fully engaged in profession, have little time to spare for company’s affairs. Therefore, the Ld.DR argued that as observed by the AO, the commission is paid with an intention to avoid the dividend distribution tax and very much within the provisions of Sec.36(1)(ii) of IT Act and the AO has rightly disallowed the commission paid and no interference is called for.
18.0 We heard the rival submissions and perused the material placed before us.
Shri Rajendran & Shri Venkata Chalapathi both of them are the Directors of the company and having substantial shareholding. The Directors are being paid commission @10% on the profits derived by the company, which is approved by the Annual General Meeting of the company and special resolution was passed authorizing the company to make the payments of commission. Both of them are well experienced in the spinning mill and the spinning mill involves timely procurement of cotton, yarn sales, policies, etc. The cotton yarn prices are highly volatile and timely decision has to be taken to keep tab with the fluctuation of ITA No.2240/Mds/2015 & :- 11 -: prices of cotton. There are lot of other managerial and administrative functions involved in running the company which require quick decision making process managerial, administrative, marketing functions at the top level. The company is a Pvt. Ltd. company founded and promoted by the Director and Chairman who is having vast experience in this line of trade.
The Ld.AR has submitted Paper Book containing the details of salaries and wages paid and there were no senior managerial functionaries appointed in this company except the staff at the level of Supervisors, factory assistants and accounting persons. The company has achieved the sales of Rs.1506.65 lakhs in the year under consideration. In 2001-02, the sales were Rs.416.34 lakhs and net profit was Rs.1.24 lakhs and the sales have raised to Rs.1506.65 lakhs for the AY 2011-12 and the profits are increased to Rs.209.79 lakhs. From the financials of the company and the submissions made by the assessee and work flow chart, we agree with the Ld.AR that both the Directors are spending sufficient time and energy in day to day running of the company and improving the performance.
18.1 Neither the AO nor the Ld.CIT(A) have brought on record any evidence to hold that though Mr.Venkata Chalapathi is 70 years old, incapable of running the company. Similarly, though Mr. Rajendran is a professional having income of Rs.43.63 lakhs there is no evidence to show that he is not sparing the time in running the company. The AO has not given any finding regarding who is running a company, who is taking the ITA No.2240/Mds/2015 & :- 12 -: crucial managerial decisions and who are controlling and managing the affairs of the company. As per the evidences placed before us we hold that both the Directors are controlling and managing the affairs of the company and rendering the services which required to be remunerated properly.
18.2 The contention of the AO that the commission is paid in lieu of dividend is also not acceptable, since both the Directors are in the high tax bracket and admitted the income and paid the taxes. If the dividend is taxed in the hands of the company, the same is exempt in the hands of the recipient. The assessee relied on the decision of the Hon’ble Delhi High Court in the case of AMD Metplast v. DCIT (2012) 341 ITR 0563 wherein the Hon’ble Delhi High Court in Para No.11 upholding the payment of the commission held as under:
We fail to understand how the aforesaid observations assist and help the Revenue in the factual matrix of the present case. Ashok Gupta is the Managing Director and in terms of the Board resolution is entitled to receive commission for services rendered to the company. It is a term of employment on the basis of which he had rendered service. Accordingly, he was entitled to the said amount. Commission was treated as a part and parcel of salary and TDS has been deducted. Ashok Gupta was liable to pay tax on both the salary component and the commission. Payment of dividend is made in terms of the Companies Act, 1956. Dividend has to be paid to all shareholders equally. This position cannot be disputed by the Revenue. Dividend is a return on investment and not salary or part thereof. Herein the consideration in the form of commission which was paid to Ashok Gupta was for services rendered by him as per terms of appointment as a Managing Director.
18.3 In the instant case, the commission is paid for the services rendered by the Directors. The Ld.DR has demonstrated during the appeal, that the company is running but for the Directors and the crucial decisions and key functions are being discharged by the Chairman and Directors. Therefore,
ITA No.2240/Mds/2015 & :- 13 -: we are of the considered opinion that the case law relied upon by the assessee is squarely applicable in the assessee’s case and the payment of commission is reasonable which cannot be denied by the Revenue. The Revenue has not demonstrated that the payment of commission is excessive or unreasonable. Therefore, we allow the appeal of the assessee and delete the addition made by the AO. The assessee’s appeal on this ground is allowed.
19.0 In the result, the appeal of the assessee is allowed.
20.0 in the result, the appeal of the Revenue is dismissed and the appeal of the assessee is allowed.
Order pronounced in the Open Court on 8th June, 2017, at Chennai.