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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & N.K. PRADHAN & SHRI
Date of Hearing : 25.08.2016 Date of Pronouncement : 23.09.2016 O R D E R SAKTIJIT DEY, JM:
These cross appeals by the assessee and Revenue are against the common order of Ld. CIT(A)-22, Mumbai dated 15.01.2014 for the Assessment Year (AY) 2011-12.
The only issue in dispute in assessee’s appeal is in relation to disallowance of Rs. 39,61,235/- u/s 14A r.w. Rule 8D.
Briefly, the facts are the assessee-company is engaged in trading & dealing in shares, Securities, Currency & Commodity Derivatives. For the year under consideration, assessee filed its return of income on 27.08.2010 declaring income of Rs. 1,04,66,701/-. During the assessment proceeding, the AO noticed that in the relevant previous year assessee had earned exempt income by way of dividend amounting to Rs. 6,30,349/- and the assessee suo- moto has disallowed expenditure of Rs. 31,517/- being 5% of the dividend income u/s 14A of the Act. It was also submitted by the assessee that it had not incurred any specific expenditure for earning the dividend income. The AO however, did not find merit in the submissions of the assessee. He was of the view that disallowance u/s 14A has to be made in terms of the procedure laid down under Rule 8D. Thus, the AO applying Rule 8D of the Rules, worked out disallowance u/s 14A at Rs. 39,61,235/-. Being aggrieved of such disallowance assessee preferred an appeal before the CIT(A). Before the First Appellate Authority (FAA), it was argued by the assessee that since the shares, securities, mutual funds were held as stock-in-trade by the assessee no disallowance u/s 14A can be made. Ld. CIT(A) however, was not convinced with the submissions of the assessee. Relying upon a decision of the ITAT, Mumbai (3rd Member) in case of M/s B.H. Securities Pvt. Ltd., the ld. CIT(A) sustained the disallowance by holding that even where shares are held as stock-in-trade, disallowance u/s 14A can be made.
The ld. AR submitted before us that the issue is now settled in favour of the assessee by virtue of the decision of the Hon’ble Bombay High Court in case of CIT vs. India Advantage Securities Ltd. (380 ITR 471). The Ld. AR submitted, at best, keeping in view the provisions of Rule 8D(iii) disallowance can be made @ 10% of the dividend income earned. The ld. DR, though, agreed that the issue is covered by the decision of the Hon’ble jurisdictional High Court, however, he relied upon the observations of AO and CIT(A).
We have considered the submissions of the parties and perused the materials on record. There is no dispute that the transaction in share, securities, mutual funds has been undertaken as a trading activity by the assessee and the income derived therefrom has been shown under the head “Business Income”. As can be seen, it is the contention of the assessee from the stage of assessment proceeding itself that no disallowance u/s 14A can be made in respect of the share, securities, mutual funds etc. held as stock-in- trade. We find, aforesaid issue has been decided in favour of the assessee by the Hon’ble jurisdictional High Court while upholding the order of the ITAT in case of CIT vs. India Advantage Securities Ltd.(supra) laying down the proposition that no disallowance u/s 14A can be made in respect of income earned from shares, securities, mutual funds, held as stock-in-trade. However, applying the principle laid down in the case of CIT vs. India Advantage Securities Ltd.(supra), we direct the AO to disallow an amount of 10% of the dividend income to comply with the provisions of section 14A. Ground raised by the assessee is partly allowed.
In this appeal, the only issue raised by the Department is against the decision of the CIT(A) in deleting the addition made by the AO u/s. 40A(2)(b) of the Act on account of performance bonus paid to the Director of the Company.
Briefly, the facts are in course of assessment proceeding, the AO noticed that assessee had paid Rs. 10 Crores as performance bonus to one of its Director in addition to remuneration paid to him. He also observed, share holding of the Director in the company is 91%. Therefore, he called upon the assessee to justify payment of such huge performance bonus to the Director.
Though, assessee submitted it’s explanation justifying the payment of performance bonus. However, the AO rejecting the explanation of the assessee hold that quantum of performance bonus paid to the Director is not reasonable in terms of section 40A(2)(b) of the Act. Accordingly, he disallowed the expenditure. Being aggrieved of such disallowance, assessee preferred appeal before the CIT(A).
Ld. CIT(A) after considering the submissions of the assessee found that in assessee’s own case for AY 2008-09, the Tribunal while deciding identical nature of dispute relating to disallowance of performance bonus paid to the Director has allowed the assessee’s claim, therefore, following the decision of the ITAT, Ld. CIT(A) deleted the addition. Ld. Counsels appearing for both the parties have agreed before us that issue in dispute is covered by the decision of the ITAT in assessee’s on case for AY 2008-09.
We have considered the submissions of the parties and perused the material on record. As could be seen, the dispute involved in the present appeal is disallowance of payment of performance bonus of Rs. 10 Crores to a Director of the company viz; Shri Ravindra R. Dharamshi by invoking the provisions of section 40A(2)(b) of the Act by AO. It is further observed, similar disallowance was also made by the AO in AY 2008-09. When the issue came up for consideration before the ITAT in AY 2008-09 in dated 10.06.2011, the ITAT after considering the submissions of the parties in the context of facts and materials on record deleted the addition holding as under:
“11. We have considered the rival submissions and also perused the relevant material on record. It is observed that the performance bonus of RS.B.5 crores paid by the assessee company to its director Shri Ravindra Raichand Dharamshi has been disallowed by the authorities below to the extent of Rs. 4.25 crores on the ground that the same to that extent was excessive and unreasonable and that this excess payment was made by the assessee company in order to avoid dividend distribution tax. It is, therefore, important to ascertain whether the amount of Rs.8.5 crores paid by the assessee company to its director on account of performance bonus is excessive and unreasonable or not in the facts and circumstances of the case. The first objection raised by the authorities below in this, regard is that (;1e decision to pay performance bonus of Rs.8.5 crores was taken in the board meeting held in February, 200B on the basis of unaudited financial results for the three quarters ending 31.12.2007 'which disclosed a net profit of Rs.6.61 crores only which did not justify the payment of performance bonus of Rs. 8 3 crores. It has also been alleged by the. Assessing Officer that the decision to pay performance bonus was an after thought and it was done to avoid the dividend distribution tax. However, as rightly submitted by the learned counsel for the assessee, the entire performance bonus was paid by the assessee company to the concerned director on 31st March, 200B itself and keeping in view this undisputed position; it cannot be said that the decision to pay performance bonus was an after thought. We also find merit in the argument of the learned counsel for the assessee that even though the unaudited financial results for the 3 quarters ending 31st Dec.2007 were available for consideration in the Board Meeting held In the month of February 2008, the Directors must have been aware of the financial performance of the assessee company in the month of January 2008 as well as the projections for the remaining 2 months while deciding the quantum of performance bonus to be paid to the concerned director. In this regard, the learned counsel for the assessee has prepared and furnished a statement giving month-wise profitability position for the month of January, February and March 2008 which clearly shows that a profit of Rs. 537 crores was earned by the assessee company in the month of January 2008 itself making the total profit earned for the period of 10 months ending January 2008 to Rs. 12.52 crores. This makes it clear that the payment of performance bonus of Rs.8.5 crores was fully justified on the basis of profit earned by the assessee company upto January 2008 of which the directors were expected to aware of while taking the decision to pay performance bonus of Rs. 8.5 crores to the concerned director.
12. In any case, the performance .bonus of Rs.8.5 crores was paid to the concerned director for the financial year 2007-08 and the reasonability of the same, therefore, has to be ascertained keeping in view the financial performance of the assessee company for the entire year as a whole. In this regard, it is noted from the audited Profit and Loss Account of the assessee company placed at page No.2 of the paper book that a total profit of Rs. 15.69 crores was eamed by the assessee for the year under consideration before payment of performance bonus to the director and even after the said payment, a net profit before tax of the assessee company was Rs. 7.19 crores. After making provision of tax of Rs. 2.52 crores, the net profit of the assessee company after tax was Rs 4.667 crores which as compared to the paid up capital of Rs. 1 crores gave a fabulous rate of return. It may be pertinent to note here that there was no major expenditure incurred by the assessee company under any head including salary and remuneration paid to others except the Executive Director to whom performance bonus of Rs. 8.5 crores was paid in addition to salary of Rs.30 lakhs. AO these facts and figures of the present case clearly show that the huge profit was earned by the assessee company mainly as a result of efforts of the said Executive Director utilizing his skills, expertise and experience in the field and it, therefore, cannot be said
that the performance bonus of Rs.8.5 crores paid to the said director was excessive or unreasonable.
Moreover, as submitted by the learned counsel for the assessee, the major amount of profit earned by the assessee company to the extent of Rs. 8.38 crores was earned from F & 0 transactions and the fact that jobbers for such transaction are paid charges to the extent of 50% of the profit as per the prevailing market practice further shows that the performance bonus paid by the assessee company to the director which is about 55% of the profit is fair and reasonable. As noted by the Assessing Officer at page No.5 of the assessment orders similar performance bonus of Rs. 5 crores was paid to the director in the immediately succeeding year against the profit of Rs. 9.40 crores and the same being 53% of the profits further shows that payment of performance bonus at 55% of the profits in the year under consideration was fair and reasonable and it was certainly not the decision taken as an after thought to avoid payment of distribution tax. While making the disallowance out of performance bonus, the A.O. has invoked the provisions of section 4OA(2)(a). It is settled position of law that for making a disallowance by invoking the provisions of section 40A(2)(a), the onus Is on the department to show that the payment of expenditure made by the assessee which is sought to be disallowed is excessive and unreasonable. In the present case, noting has been brought on record by the A.O. to show that the performance bonus of Rs.8.5 crores paid by the assessee company to its director was excessive and unreasonable and therefore, the onus that lay on the department to justify the disallowance made by invoking the provisions of section 40A(2)(a) was not discharged. As such considering all the facts, and circumstances of the case, we are of the view that the disallowance made by the Assessing Officer out of performance bonus paid to the director to the extent of Rs. 4.25 crores and confirmed by the learned CIT(A) is not sustainable. In that view of the matter, we delete the said disallowance and allow ground Nos. 3 and 4 of the assessee's appeal.”
We have noted, Ld. CIT(A) has given a factual finding that in the impugned AY, the AO has not established that the payment of performance bonus to the Director is unreasonable to enable the appellate authorities to take a different view.
Before us, also the department has not brought any material to demonstrate that the facts relating to the disallowance of performance bonus in the year under consideration is in any way different from the AY 2008-09.
That being the factual position, respectfully following the decision of the Co- ordinate Bench in assessee’s own case for the AY 2008-09 as referred to above, we uphold the order of CIT(A) by dismissing the ground raised.
In the result, assessee’s appeal is partly allowed and the Department’s appeal is dismissed.
Order pronounced in the open court on this 23rd day of September, 2016.