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Income Tax Appellate Tribunal, BENCH “C”,MUMBAI
Before: SHRI B.R.BASKARAN & SHRI PAWAN SINGH
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH “C”,MUMBAI BEFORE SHRI B.R.BASKARAN, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA No.7182/Mum/2014 for (Assessment Year : 2009-10) M/s PID Pvt. Ltd. ACIT-11(1), Patel India Distributors, Mumbai. Film Centre Building, 68, Vs. Tardeo Road, Mumbai-400034. PAN: AAACP7054Q (Appellant) (Respondent)
ITA No.6122/Mum/2014 for (Assessment Year : 2010-11) ACIT-11(1), M/s PID Pvt. Ltd. Mumbai. Patel India Distributors, Vs. Film Centre Building, 68, Tardeo Road, Mumbai-400034. PAN: AAACP7054Q (Appellant) (Respondent)
Cross Objection No.23/Mum/2016 for (Assessment Year : 2010-11) M/s PID Pvt. Ltd. ACIT-11(1), Patel India Distributors, Mumbai. Film Centre Building, 68, Vs. Tardeo Road, Mumbai-400034. PAN: AAACP7054Q (Appellant) (Respondent)
Assessee by : Shri Rakesh Joshi (AR) Revenue by : Shri Maurya Pratap (DR) Date of hearing : 15.11.2016 Date of Pronouncement : 06.01.2017
Order Under Section 254(1) of Income Tax Act
2 ITA Nos. 7182, 6122/M/2014 & C.O. 23/M/16 M/s. PID Pvt. Ltd. PER PAWAN SINGH, JM: 1. These two appeals and one Cross Objection (C.O.) are filed against the order of Ld. Commissioner of Income-tax (Appeals) [for short ‘the CIT(A)] –3, Mumbai dated 20.10.2004 & 23.07.2014 for Assessment Year (AYs) 2009-10 & 2010-11 respectively. In both the appeals and C.O. as some common grounds are raised thus; all the cases were clubbed together, heard and are being decided by a consolidated order to avoid conflicting decision. 2. First we shall take up appeal filed by assessee for AY 2009-10. The assessee has raised the following grounds of appeal: 1. On the fact and circumstances of the case as well as in Law. The Learned CIT(A) has erred in confirming the action of Learned Assessing Officer in reopening the assessment completed u/s. 143(3) of the Income Tax Act, 1961, without considering the facts and circumstances of the case. 2. On the fact and circumstances of the case as well as in Law. The Learned CIT(A) has erred in confirming the action of Learned Assessing Officer in disallowing the Purchases amounting to Rs. 18,02,886/- by treating the same as alleged bogus purchases, without considering the facts and circumstances of the case. 3. Brief facts of the case are that the assessee filed return of income for relevant AY on 10.09.2009 declaring total income of Rs. 8,70,37,396/-. The assessment was completed u/s 143(3) on 28.12.2011 assessing the total income at Rs. 8,78,98,920/-. The AO made the addition of Rs. 8,61,352/- on the basis of adhoc disallowance on account of Motorcar Expenses, postage, telegram and Internet Charges and other Miscellaneous Expenses were made. Subsequently, the assessment was re-opened on 16.04.2013 and notice u/s 148 of the Act was issued. The following reasons of re- opening were recorded. “In this case an information was received from DGIT (Inv), Mumbai vide letter No. DGIT(INV)/ Corr. Field/2012-23 dated 26.12.2012 regarding details of the Hawala parties who have either accepted before Sales Tax Department that they have issued bogus bills or who does not exist. On such bills they (hawala parties) have not paid VAT to sales tax department. The Assessee , M/s PID Pvt Ltd, has carried out transaction with the Hawala parties mentioned below and before Sales Tax Authorities either they have accepted of issuing the bogus bills or they does not exist.
Sr. No. Name of parties Amount Rs. 1 Manav Impex 9,348
3 ITA Nos. 7182, 6122/M/2014 & C.O. 23/M/16 M/s. PID Pvt. Ltd. 2 Dhiren Mercantile Pvt Ltd 9,79,029
Thus the assessee has claimed excess expenses of Rs.9,88,377/- on the basis of bogus bills. Therefore, I have a reason to believe that the income of Rs. 9,88,377/- has escaped assessment and I am satisfied that this is a fit case for reopening of within meaning of section 147 of the Income tax Act. 1961.”
During the reassessment proceedings, the assessee was asked to produce the parties from whom the assessee purchases the material, so that genuineness of transaction can be verified by cross-examination. The observed that the assessee could not produce the parties from whom the assessee purchased the material. The AO recorded that the assessee purchased the material from the following parties: Sr.No. Name of the party Amount Rs 1 Disha Enterprises 8,14,779 2 Manav Impex 9,348 3 Dhiren Mercantile P Ltd. 5,99,067 4 Sachi Mercantile P Ltd. 3,79,692 Total Rs.18,02,886/- As the assessee has not produced any of the parties, thus the AO disallowed the aggregate amount of Rs. 18,02,886/-. The assessee filed appeal before the ld. CIT(A) challenging the re-opening as well as the addition made on account of alleged bogus purchases. However, no relief was granted to the assessee. Thus, the present appeal is filed before us. 5. We have heard the ld. Authorized Representative (AR) for assessee and the ld Departmental Representative (DR) for the Revenue and perused the material available on record. First ground of appeal relates to the reopening of the completed assessment. The ld. AR of the assessee not argued against the reopening thus this ground of appeal is considered as not pressed. In the result the reopening is upheld. 6. Ground No. 2 relates to confirming the disallowance of purchases. The ld AR for the assessee argued that the AO made the disallowance without giving the opportunity to cross examine the parties from whom the assessee made the purchase during the year. It was further argued that during the re-assessment the assessee filed copy of invoices, delivery challan, and bank statement regarding the payment to the parties. The assessee has successfully proved the genuineness of transaction. The AO as well
4 ITA Nos. 7182, 6122/M/2014 & C.O. 23/M/16 M/s. PID Pvt. Ltd. as ld. CIT(A) ignored the details and disallowed the entire purchases treating it as bogus purchases. The revenue authority concluded that assessee was unable to prove the genuineness of transaction by not producing the parties. The AO relied upon the information of third party that income of assessee has escaped assessment. The ld AR for the assessee relied on the decision of Hon’ble Gujarat High Court in Varshben Shantabhai Patel Vs ITO 281CTR 75 (Gujarat). On the other hand, ld. DR for the Revenue supported the orders of authorities below.
We have considered the rival contentions of the parties and further gone through the orders of the authorities below. The AO while making reassessment u/s 143(3) r.w.s. 147 of the Act, made the disallowance of cost of entire purchases made from four parties i.e. (1) Disha Enterprises (2) Manav Impex (3) Dhiren Mercantile P Ltd. & (4) Sachi Mercantile P Ltd. The AO not given any finding on the documentary evidence filed by assessee consisting invoices, delivery challan, bank statement etc. The AO has not recorded any satisfaction about the statement of account or the sales of the assessee. The main grievance of ld AR for the assessee is that no opportunity to cross examination was given to assessee. Considering the submissions of AR for assessee and keeping in view the Principles of Natural Justice, we deem it appropriate to restore this Ground of appeal to the file of AO to pass the order afresh in accordance with law, after giving the opportunity of cross examination of the parties. With this observation this ground of appeal is allowed for statical purpose.
In the result the appeal of the assessee is allowed for statical purpose.
In Appeal No.6122/Mum/2014 for AY 2010-11. The Revenue has raised the following ground of appeal: 1. “Whether on facts and in circumstances of the case and in law, the Ld. CIT(A) was correct in allowing sum of Rs. 2,28,03,319/- claimed as expenses u/s.36(1)(ii) on account of incentive commission paid to two shareholder Directors of the Company. 2. The Appellant prays that the order of CIT(A) on the above ground be set- aside and that of the Assessing Officer restored.”
The brief facts of the case for this year are that the assessee filed return of income for relevant AY on 18.09.2010 declaring total income of Rs. 6,90,60,798/-. The assessment was completed u/s 143(3) on 30.03.2013. While making the
5 ITA Nos. 7182, 6122/M/2014 & C.O. 23/M/16 M/s. PID Pvt. Ltd. assessment, the AO besides other addition/disallowance made the disallowance of Rs. 22,28,03,319/- on account of commission paid to two Director and further disallowed Rs. 31,91,485/- on account of bill issued by Dhiren Mercantile P Ltd. and Disha Enterprises holding it as bogus purchase. On appeal before the ld. CIT(A) the disallowance on account of bogus expenses/purchases was confirmed and the disallowance u/s 36(1)(ii) on account of commission to Directors was deleted. Thus, the Revenue has filed appeal against the deletion of disallowance u/s 36(1)(ii) and the assessee filed Cross Objection against sustaining the alleged bogus expenses/purchases.
We have heard the ld. DR for the Revenue and ld. AR for the assessee and perused the material available on record. The Ld. DR for the Revenue supported the order of AO and would argue that ld. CIT(A) wrongly deleted the disallowance u/s 36(1)(ii). It was further argued that the assessee-company paid the commission to Mr. Sanjay K. Patel and Miss. Anita S. Patel who are the Directors of the Company and distributed the dividend in the form of commission and therefore, the payments is covered by exceptions provided in section 36(1)(ii) and the same is not eligible for deduction. On the other hand, ld. AR of the assessee argued that the assessee- company consistently paying the incentive commission since 2001 as per its policy and the same has been allowed by the Revenue consistently. The Directors of the Company has disclosed the said amount in their returns of income and the Company has deducted the tax. The Directors whom such payment is made are responsible to the growth of the assessee-company. The growth of the company depends upon a competence and the skill of the Directors. The commission has been paid as per the terms which are linked to their performance. The commission payment has been approved by the Board of Director which is in commensurate to the growth of the Company. Ld. AR of the assessee further relied upon the following decisions: (i) Chrys Capital Investment Advisors (India) Ltd. Vs. Dy. CIT. (ii) OHM Stock Brokder Pvt. Ltd. Vs ITA No Mumbai ITAT (iii) New Silk Route Advisors Pvt. Ltd Vs Dy. CIT (iv) Arihantam Infra projects (P) Ltd. Vs. Joint Commissioner of Income Tax (v) Controls & Switchgear Contactors Ltd vs Dy. CIT (vi) Commissioner of Income Tax Vs Career Launcher India Ltd. (vii) AMD Metplast (P) Ltd Vs Dy. Commissioner of Income Tax
6 ITA Nos. 7182, 6122/M/2014 & C.O. 23/M/16 M/s. PID Pvt. Ltd. (viii) Asstt. Commissioner of Income Tax vs Pest Control (I) Pvt.Ltd. (ix) Shahzada Nand & Sons Vs CIT (x) Loyal Motor Services Co Ltd. Vs Commissioner of Income Tax (xi) Coil Company (P) Ltd. Vs. ACIT (xii) ACIT vs Bony Polymers (P) Ltd (xiii) ACIT vs Mandovi Motors (P) Ltd (xiv) Tata Sons Ltd vs. Commissioner of Income Tax (xv) Dalal Broacha Stock Broking (P) Ltd vs Addl. CIT
We have considered the rival contentions of the parties and further gone through the orders of authorities below. The AO while making the assessment observed that assessee-company has paid Rs. 2,28,03,319/- as commission to its two Directors who are majority share-holder of the assessee-company. The assessee was show caused by AO to explain why the amount of commission paid to its Directors should not be allowed u/s 36(1)(ii) of the Act being payment of bonus or commission for services rendered which could not have been payable to them as a profit or dividend, if it has not been paid as a bonus or commission. The assessee filed its reply dated 21.03.2012. In the reply, the assessee contended that the commission has been paid as per Industries Standard and Norms. The assessee has been making the similar payment from last many years and the AO has never raised objection in the past. It was further contended that similar other companies like Reliance and JSW Steel Ltd., Birla Group of Companies also paid certain commission to its Director. The contention of the assessee was not accepted by AO holding that the Directors have been distributed dividend in the form of commission and therefore, payment was covered by the exceptions provided in section 36(1)(ii) and the commission paid by the assessee to its Director was in lieu of the dividend and not eligible for deduction u/s 36(1)(ii). The ld. CIT(A) while considering the contention of the assessee hold that for allowable deduction u/s 36(1)(ii), the expenditure must be on account of bonus or commission paid to employee, the amount is paid for services rendered and the commission is not in lieu of payment or dividend. The AO has disallowed the commission invoking third ingredients that the commission has been paid in lieu of dividend. The ld. CIT(A) relied upon the decision of Special Bench of ITAT in case of Dalal Broacha Stock Broking P. Ltd. vs. ACIT (2011) 11 taxman.com 426/131ITD/M/ (Spl. Bench) and the decision of Delhi High Court in case of Career Launcher
7 ITA Nos. 7182, 6122/M/2014 & C.O. 23/M/16 M/s. PID Pvt. Ltd. India Ltd. After considering the decisions of Special Bench in Dalal Broacha Stock Broking P. Ltd. vs. ACIT (supra) and Delhi High Court in Career Launcher India Ltd. (supra) the ld CIT(A) concluded as under: “ 2.29 Keeping in view the ratio of the above decision, I am unable to concur with the AO that in the instant case, the commission paid to the two directors is in lieu of dividend, for the following reasons: (a) In the present case, commission has been paid as part of remuneration package to Mr. Sanjay K. Patel and Ms. Anita S. Patel. This is evidenced by Board Resolution in both the cases. As per the Board resolution in the case of Sanjay Patel, dated 29.03.2010, he would be entitled to a commission of upto 5% of the net turnover/sales with effect from F. Y. 2009- 1 O. This is in addition to basic salary of Rs.3,75,000/- per month plus house rent allowance, conveyance allowance, education allowance and medical reimbursement as per Board Resolution dated 11.04.2007. Likewise, Ms. Anita Patel is entitled to commission of upto 1 % of net turnover / sales as per Board Resolution dated 29.03.2010, apart from basic salary of Rs.50,000/- per month and other allowances. As per details supplied by the appellant, during the year commission has been paid as per Annexure. Thus the commission paid is in accordance with the Board Resolution; at the rate of 3% of turnover to Shri Sanjay K. Patel and at the rate of 0.75% of turnover to Ms. Anita Patel It is also clear that the commission is performance related. Hence the commission cannot be said to have been paid in lieu of dividend. This is in keeping with the ratio of decision of the Delhi High Court in the case of AMD Metplast P Ltd, cited supra. (b) Shri Sanjay Patel has been working with the assessee company since 1981. Under his guidance, the company was first to install cinevator in South Asia, which is a pioneering technology to convert digital input into prints. Shri Sanjay Patel was also instrumental in starting trading of Fuji Films in India. Under his leadership, the company has earned National award for best laboratory for the years 2008 and 2010. (c) Both the directors have been receiving commission since the F.Y. 2001-02. The case of the company was scrutinized u/s. 143(3) far A.Yrs. 2003-04 and 2004-05. It is only for the first time in A.Y. 2010-11 that commission paid to directors has been disallowed. In fact, as the assessee has pointed out, in the order u/s.147 for AY. 2008-09, which was passed on 08.11.2013 i.e. after the impugned order. no disallowance of commission has been made. The Delhi High Court in ITA NO.1672/201O, had held as follows: "on the facts of this case, The Income Tax Appellate Tribunal has allowed the payment of bonus and commission to the Employee-Directors of the assesse company under Section 36(1) (ii) of the Income Tax Act and one of the reasons given by the tribunal, which is specifically weighed with its, is that in the past similar commission was paid to the working directors and it was never disallowed. Mr. Aggarwal, learned counsel for the assessee has submitted that such a deduction is allowed under Section 36(1) (ii) of the Act for the past 30 years. In
8 ITA Nos. 7182, 6122/M/2014 & C.O. 23/M/16 M/s. PID Pvt. Ltd. view of this, we are of the opinion that no question of law arises. This appeal is dismissed." Therefore, even from that point of view, the disallowance of commission in the instant year cannot be upheld. (d) On perusal of the balance sheet of the appellant for the year ending 31.03.2010, it is seen that the entire share capital and reserve, amounting to Rs.40.74 crores has been appropriated towards fixed assets, investments and current assets; and only a sum of Rs.6.28 crores is lying in cash and bank accounts. Even here the audited accounts carry the note that deposits in the scheduled banks, amounting to Rs.4.38 crores are given as margin against bank guarantee and letter of credits issued by banks. Thus it is quite clear that there are no surplus funds which the company could have distributed as dividend. (e) Shri Sanjay Patel is having 89.52% share holding. The current year's profit after taxes is RS.6.47 crores. Therefore, hypothetically speaking, dividend to Shri Sanjay Patel should have been 5.82 crores. Instead Shri Sanjay Patel has received commission of' Rs.1,82.42,655/-. Likewise, Ms. Anita Patel has a shareholder of 10.13%, by which ratio she should have received a dividend of Rs. 60 lacs. Instead She has received commission of Rs.45,60,664/-. Thus, it is seen that the commission received by the directors is not in lieu of dividend. This view is supported by the Delhi High Court in the case of Career Launcher India Ltd, cited supra. (f) The decision of the special Bench in the case of Dalal Broacha Stock Broking P Ltd, apart from being a decision on facts, is superseded by the decisions of the Delhi High Court, cited supra, in the case of AMD Metplast P Ltd and Career Launcher India Ltd. In Godavari Devi Saraf 113 ITR 589, the Bombay High Court pithily observed that the Tribunal, being an all - India body, had to follow law laid down by the High Court of any State. A non - jurisdictional High .Court judgment was also binding on the Tribunal. This principle was followed by the Tribunal in Tej International 69 TTJ (Del) 650, Aurangabad Holiday Resorts 118 ITD 1 (Pune) and was also echoed by the Special Bench in Rishi Roop Chemical 36 ITD 35 (Del) (SB). In all of these, non-jurisdictional High court judgments were followed in preference to Special Bench judgments. 2.30 Hence, in view of the above cited reasons, disallowance of commission amounting to Rs.2,28,03,319/-cannot be sustained. We have also gone through the decision of Special Bench in Dalal Broacha Stock Broking P. Ltd. (supra) wherein it was held as under:
We have perused the records and considered the rival contentions carefully. The issue raised before us is regarding allowability of deduction on account of payment of commission of Rs. 1.20 Crores to the three employee directors under section 36(1)(ii). There is no dispute that the three Directors were shareholder employees who held the entire share capital of the company and were also related (father and sons). There is also no dispute that the commission had been paid to tor employees only and not to any other
9 ITA Nos. 7182, 6122/M/2014 & C.O. 23/M/16 M/s. PID Pvt. Ltd. employee. The issue is whether on the facts of the case, expenditure on account of commission can be allowed under the provisions of section 36(1)(ii).
7.2 For answering the question referred, we have to first deal with the object and scope of the provisions of section 36(1)(ii) which allows deduction on account of expenditure on payment of bonus or commission to employees subject to certain conditions while computing the income the head 'profits and gains from business or profession". These provisions were first incorporated under the Income-tax Act, 1922 (hereinafter referred to as the old Act). The provisios were in inserted subsequent to the judgment of Hon'ble Madras High Court in the case of R.E. Mahomed Kassim Rowther (supra). The Hon'ble Madras High Court in the said case had held that payment of any amount which was directly or indirectly dependent upon the earnings or the profits of the business, could not be allowed as business expenditure. The reasoning was that fit is computed only after deducting all expenses and, therefore, any payment made out of fit could not be considered as expenditure incurred for the purpose of earning of the profit. The old Act was amended by Income-tax (3rd Amendment) Act, 1930 and a new clause (viiia) was inserted in section 10(2) to allow expenditure on account of payment of bonus or commission to an employee and later, the said clause was renumbered as clause (x) of section 10(2). The said provisions of section 10(2)(x) are reproduced below as a ready reference: x) Any sum paid to an 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 Provided that the amount of bonus or commission is of reasonable amount with respect to: (a) pay of the employee and conditions of his service. (b) the profits of the business or profession for the year in question and (c) the general practice in similar business or profession. 7.2 The above provisions of section 10(2)(x) of the old Act were incorporated in the Income-tax Act, 1961 also without any changes as clause (ii) to section 36(1). Subsequently, the clause was amended and a new proviso was inserted as the first proviso and the existing proviso with some modifications was substituted as second proviso with effect from assessment year 1976-77. The amended provisions with effect from 1976-77 read as under :- 36(i)( ii) any sum paid to 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 a bonus or commission, Provided that the deduction in respect of bonus paid to employee employed in factory or other establishment to which provisions of payment of Bonus Act (521 of 1965) apply, shall not exceed the amount of bonus payable under the Act. Provide further that the amount of bonus (not being bonus referred to in the first proviso) or commission is reasonable with respect to : (a) pay of the employee and conditions of his service. (b )the profits of the business or profession for the year in question and (c) the general practice in similar business or profession .
10 ITA Nos. 7182, 6122/M/2014 & C.O. 23/M/16 M/s. PID Pvt. Ltd. 7.3 The provisions of section 36(1)(ii) were again amended by the Direct Tax Laws Amendment) Act, 1987 from assessment year 1988-89 and the two provisos were deleted. Thus, The provisions of section 36(1)(ii) applicable from 1988-89 which remained in force during the relevant year under consideration were as under :- 36(1)(ii) 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 . 7.4 The object behind the provisions of section 36(1)(ii) is to allow deduction on account of any expenditure on account of payment of bonus or commission to an employee even if the said payment is made out of profits of the assessee subject to the conditions mentioned in the section. This is an enabling provision which allows deduction on account of bonus or commission to employees. The reasonableness of payment or adequacy of services rendered by the employees is not relevant factors in deciding the allowability of deduction. The section allows deduction if the expenditure is: i) on account of bonus or commission; ii) is paid to an employee; iii) for services rendered and iv) is not in lieu of payment of dividend . 7. 5 The provisions of section 36( 1 )(ii) cover only the case of expenditure on account of bonus or commission paid to an employee. Any expenditure incurred on account of payment of commission to a person who is not an employee is not covered by the said provision. Such cases of expenditure on account of commission to non-employees will be governed by the provisions of section 37(1) which allow deduction on account of any expenditure which is incurred wholly and exclusively for the purpose of business subject to certain conditions. The criteria of "wholly and exclusively" is not relevant while considering deduction under section 36(1)(ii). The payment may be made out of commercial expediency which should be judged in the light of current socio economic thinking which encourages employers to share a part of the profits with the employees as held by Hon'ble Supreme Court in the case of Shahzada Nand & Sons (supra) while dealing with the provisions of section 36(1)(ii). The relevant portion of the judgment is reproduced below: " .... What is the requirement of commercial expediency must be judged, not in the light of the 19th centurylaissez faire doctrine which regarded man as an economic being concerned only to protect and advance his self-interest, but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves, etc., a part of it should in all fairness to the employees…” 7.6 The Authorized Representative for the assessee argued that provisions of section 36(1)(ii) are applicable only in the case of employees who are not shareholders. His argument was that the provision applicable when the payment of commission is in lieu of dividend is payable only in the case of shareholders, the provisions will not be applicable in case of shareholder employees. We are unable to accept such argument which can be relevant only when the of dividend to shareholders is compulsory. It is an undisputed fact that payment of dividend by a company is not compulsory and it is dependent upon the
11 ITA Nos. 7182, 6122/M/2014 & C.O. 23/M/16 M/s. PID Pvt. Ltd. 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 share holders also u/s 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(l)(ii) are also applicable 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 into 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 paid is 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 to only partners and shareholders as only in those cases, payment could be in lieu of profit or dividend. We therefore, reject the arguments advanced by the ld. AR that the provisions of section 36(1)(ii) apply only to non-shareholder employees. 7.7 As regards the rendering of services by the employees for payment of bonus/commission, the only requirement of section 36(1)(ii) is that some services should have been rendered. Adequacy of services is not a relevant consideration. It is not necessary that payment should be made commensurate to the rendering of services or there should be some extra services rendered for payment on account of bonus or commission. This proposition is supported by the judgment of Hon’ble Supreme Court in case of Shahzada Nand & Sons (supra). Relevant portion of the judgment is reproduced for ready reference: “Section 36(1 )(ii) of the Income-tax Act, 1961 does not postulate that there should be any extra services rendered by an employee before payment of commission to him can be justified as allowable expenditure. If services were in fact rendered by the employee, it is immaterial that the services rendered by the employee was in no way greater or more onerous than the services rendered by him in the earlier years. Of course, the circumstances that no additional services were rendered by the employee, would undoubtedly be of some relevance in determining the reasonableness of the amount of commission but it would have to be considered along with other circumstances." 7.8. Thus any expenditure on account of payment of bonus or commission to an employee for some services rendered will be an allowable deduction subject to the condition that the payment of bonus or commission should not be in lieu of dividend. This condition, as pointed out earlier, is relevant only in case of shareholder employees as dividend is payable only in ease of shareholders. Further, reasonableness of the payment is no longer a requirement as per the amended provisions of section 36(1)(ii) applicable from assessment year 1988-89. The ld. AR for the assessee has argued that the expression "payable" used in section 36(1)(ii ) meant that the shareholder should have right to receive the dividend. It was submitted that payment of dividend was discretionary to be decided by the management of the company and not compulsory. Therefore, it could not be said that the dividend was payable in case of the employee directors. Accordingly, it was argued that since the dividend was not payable in case of the assessee company, the claim could not be disallowed under section 36(1)(ii). We are unable to accept the arguments advanced. In our view the word "payable" used in section 36(1)(ii) does not mean statutorily payable or legally payable. Since payment of dividend is discretionary and not compulsory, any such construction will lead to absurd results. The word "payable" in our view means that dividend would have been declared by any reasonable management, on the facts and
12 ITA Nos. 7182, 6122/M/2014 & C.O. 23/M/16 M/s. PID Pvt. Ltd. circumstances of the case considering the profitability and other relevant factors and become payable to shareholders. Therefore, after considering the entirety of the facts and circumstances of the case if a reasonable conclusion can be drawn that the dividend was payable by the company and if the assessee company instead of paying dividend had paid commission to their employee shareholders, such payment of commission will be in lieu of dividend and the claim of deduction will not be allowable under section 36(1)(ii).” 12. We have seen that the ld. CIT(A) examined the roles of Director, the balance-sheet of the assessee-company, share holding of Director and the amount of commission paid to its Directors and the past history of the assessee company and granted the relief to the assessee. Thus, in view of above discussed factual and legal position, we do not find any infirmity or illegality in the order passed by ld. CIT(A).
In the result, appeal of the Revenue is dismissed.
In C.O. No.23/Mum/2016 in ITA No.7182/M/2016 for AY-2010-11. The assessee has raised the following grounds of appeal: The following grounds of Appeal are without prejudice to each other: - 1. On the fact and circumstances of the case as well as in Law, the Learned CIT (A) has erred in confirming the action of Learned Assessing Officer in disallowing the claim of purchase of Rs. Rs.3,67,7341 - from M/s Dhiren Mercantile Pvt Ltd & Rs.28,23,751/- from M/s Disha Enterprises by treating them as alleged bogus purchases merely on the basis of statement given before the MVAT authorities, without considering the facts and circumstances of the case. 2. On the fact and circumstances of the case as well as in Law, the Learned CIT(A) has erred in confirming the action of Learned Assessing Officer in passing order without allowing cross examination to such parties as was requested by the appellant. Order passed without allowing cross examination is in violation of principles of natural justice and thus void in law and needs to be quashed. 14. The ld AR for the assessee in support of cross objections argued that AO made the disallowance without giving the opportunity of cross examination of the parties. It was further argued that the assessee filed the copies of invoices along with the delivery challans, details of year wise profitability of the company and the statement of the parties recorded before the sale tax authority. The ld AR for the assessee vehemently argued that the lower authorities violated the Principle of Natural Justice by denying the opportunity of cross examination. On the other hand the ld DR for the revenue supported the order of the authorities below and would argue that the assessee was given ample opportunity by the lower authorities. The assessee was indulging in transactions with the hawala traders.
13 ITA Nos. 7182, 6122/M/2014 & C.O. 23/M/16 M/s. PID Pvt. Ltd. 15. We have considered the rival contentions of the parties and seen the orders of the authorities below. We have seen that the assesses has raise similar ground in ITA No.7182/M/2014 for AY 2009-10, which we have restored to the file of AO for fresh adjudication. Hence, this appeal is also restored to the files of AO with similar directions.
. In the result the Cross Objection of the assessee is allowed for statical purpose. Order pronounced in the open court on this 6th day of January, 2017. Sd/- Sd/- (B.R. BASKARAN) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 06/01/2016 S.K.PS Copy of the Order forwarded to :
The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. BY ORDER, 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. (Asstt.Registrar) स�या�पत��त //True Copy/ ITAT, Mumbai