PRABHUDAS LILLADHER P. LTD.,MUMBAI vs. A.C.I.T.CIR.4(2), MUMBAI

Assessee by : Shri Vipul Joshi (AR) Revenue by : Shri R.A. Dhyani (DR) Date of hearing : 11.08.2016 Date of Pronouncement : 21.09.2016 O R D E R PER PAWAN SINGH, JM:

1. 1. These two cross appeal are directed against the order of CIT(A)-9, Mumbai dated 09.08.2012 for Assessment Year (AY) 2007-08.

2. Brief facts of the case related with the grounds of appeals are that assessee-company is engaged in the business of share trading (brokerage) filed its return of income for the relevant AY on 29.10.2007 declaring total income of Rs. 7,71,36,159/-. The return of income was selected for scrutiny. The AO while framing the assessment, besides other addition/disallowance made the disallowance u/s 88E of Rs. 16,69,848/-, disallowance of Rs. 32,50,000/- u/s 36(1)(ii) on account of commission/ex-gratia payment to Directors of assessee-company, addition of Rs. 1,20,10,416/- u/s 68, addition on account of dividend income of Rs. 4,35,268/- and further disallowed a sum of Rs 1.00 lacs out of advertisement expenses by treating as capital expenditure and in the assessment order dated 30.12.2009. Feeling aggrieved of the order of AO, the assessee filed appeal before the CIT(A). The ld CIT(A) while deciding the appeal of assessee restricted the addition of dividend income to 5% and advertisement expenses was treated as revenue expenditure and sustained the addition u/s 88E, u/s 36(1)(ii) and 68 of the Act. Thus the assessee has appeal against sustaining of addition u/s 88E, 36(1)(ii) and 68 of the Act filed the present . The assessee has raised the following grounds of appeal in “1.1 The learned Commissioner of Income - tax (Appeals) - 9, Mumbai ["the Ld. CIT (A)] erred in confirming the action of the Addl. CIT-4 (2), Mumbai ["the A.O."] in restricting the rebate u/s. 88E to Rs. 16,69,848/-, as against Rs. 30,78,479/- claimed by the Appellant. 1.2 It is submitted that in the facts and the circumstances of the case, and in law, no such restriction was called for. 1.3 Without prejudice, it is submitted that, in the alternative, the re- computation of the rebate as done by the A.O. is not in accordance with the law and is arbitrary and excessive. 2.1 The Ld. CIT (A) erred in confirming the disallowance of ex-gratia paid to the directors of the Appellant's Company, amounting to Rs. 1,35,00,000/-, u/s. 36. (1) (ii) of the Act. 2.2 It is submitted that in the facts and the circumstances of the case, and in law, no such disallowance was called for. 2.3 Without prejudice, it is submitted that, in the alternative, the expenditure was fully allowable u/s. 37(1) of the Act. 3.1 The Ld. CIT(A) erred in confirming the addition of Rs. 1,17,10,416/, being security deposits received from sub - brokers, u/s. 68 of the Act. 3.2 It is submitted that in the facts and the circumstances of the case, and in law, no such addition was called for.” The revenue being aggrieved of the order of Ld. CIT(A), has challenged the restricting the disallowance of dividend income to 5% and treating the advertisement expenses as revenue expenditure in raising the following grounds of appeal 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O to restrict the disallowance to the extent of 5% of the dividend earned. 2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in treating advertisement expenses as revenue expenditure even when the assessee is getting enduring benefit. 3. "On the facts and in the circumstances of the case, the impugned order of the Ld.CIT(A) is contrary to law to be set aside and that of the Assessing Officer be restored."

3. We have heard the Authorised Representative (AR) of assessee and Departmental Representative (DR) for Revenue and perused the material available on record. First we are taking ITA No. 6653/Mum/2012 filed by the Revenue. Ld. AR of the assessee argued that the appeal of Revenue being ITA No. 6653/Mum/2012 is not maintainable in view of the Circular prescribed by the Central Board of Director Taxes(CBDT) vide its Circular No.21/2015(F.No.142/2007-ITJ (Pt.) dated 10th December, 2015. Wherein the Revenue is precluded for filing the appeal wherein tax effect involved in the case is less than Rs. 10 Lakhs. Ld. DR for Revenue fairly conceded that tax effect in their appeal is less than Rs. 10 Lakhs. Keeping in view the relevant submission of the parties, the appeal filed by the Revenue is dismissed as not maintainable.

4. Ground No.1 raised in the appeal is with regard to disallowance of rebate u/s 88E of Rs. 14,08,631/-. Ld. AR of assessee argued that the assessee has made the detailed submission before the AO as well as CIT(A). And the authorities below erred in calculating the amount of common expenditure and amount of expenditure attributable to security transaction. The authorities below failed to appreciate that there were other expenditure which cannot be said to be attributable to the securities transaction and if all other expenses of expenditure is properly appreciated the expenditure attributable to security transaction comes to Rs. 9,14,213/- and accordingly rebate comes to Rs. 28,70,095/- which should be allowed to the assessee. Ld. ld AR of the assessee further drawn our attention about the expenses attributable to the security transaction which are available on page no. 118 and 119 of the Paper Book (PB) filed before us. Ld. AR of the assessee further argued that the written submission dated 03.08.2012 which was filed before the CIT(A) were not considered before passing the impugned order. Ld. DR for revenue argued that the CIT(A) considered all the relevant documents filed before him and the submission made by way of written submission.

We have considered the rival contentions of the parties and find that Ld. CIT(A) has not discussed the written submission dated 03.08.2012 and 16.03.2011 and the details of expenses attributable to security transaction furnished by the assessee in the impugned order. Thus, we set-aside the finding of Ld. CIT(A) and restored this ground of appeal to the file of AO to verify the actual expenditure attributable to the security transaction and pass the appropriate order after giving an opportunity to the assessee in accordance with law. Thus, this ground of appeal is allowed for statistical purpose.

5. Next ground for our consideration is disallowance on account of ex-gratia paid of Rs. 1.35 Lakhs paid to its Director. Ld. AR of the assessee argued that the first and second proviso attached to Clause-(2) of sub-section 1 of section 36 was deleted w.e.f. 01.04.1989 and the decision of the Ld. CIT(A) is based on the second proviso of section 36(1)(ii) of the Act (para 6.8.3 of the order). Ld. AR of the assessee further relied upon the decision of Delhi High Court in CIT vs. Convertech Equipments (P.) Ltd. [2013] 217 taxman 115 (Del.) , and the decision of Co-ordinate Bench of Mumbai Tribunal in New Silk Route Advisers (P.) Ltd. vs. DCIT [2015] 55 taxman.com 540. Ld. DR for Revenue supported the orders of authorities below. We have considered the rival contention of the parties and perused the order of authorities below. The AO while making the disallowance observed that the assessee-company declared dividend income as Nil, during the year under consideration. The assessee earned around Rs. 7.11 Crores as a profit, there are four shareholders all are Directors of the assessee-company and Rs. 1.35 Crore was paid to them as commission/ex-gratia. If the commission/ex-gratia had not been paid, it was clearly payable as dividend to them but instead of paying dividend, they opted to distribute the profit among themselves in the form of commission/ex-gratia and thus commission/ex-gratia paid to them falls under the exception provided u/s 36(1)(ii) of the Act. Ld. CIT(A) while considering this ground also concluded that assessee’s case is not covered by the second proviso to section 36(1)(ii) of the Act, and further held that no material or evidence were placed before him to prove that ex- gratia payment was in accordance with practice prevailing at the relevant time. The Hon’ble Delhi High Court in case of Convertech Equipments (P.) Ltd. (supra) while relying upon the decision of Hon’ble Bombay High Court in Loyal Motors Services Co. Ltd. vs. CIT [1946] 14 ITR 647 hold that if the commission found to be paid for services rendered by the Director as per the term of the appointment, cannot be said to be distribution of dividend or profit in the guise of commission. It was noticed that while commission was paid as a form of remuneration for actual services rendered, dividend is a return on investment and is paid to its entire shareholder equally. It was held that if the commission is paid for actual services rendered, section 36(1)(ii) will not apply. Further, in case of Coil Company Pvt. Ltd. (supra), the Co-ordinate Bench of Delhi Tribunal held that merely because the assessee has not distributed the dividend from very inception, it did not mean that said commission payment would take colour of dividend and thus disallowance u/s 36(1)(ii) of the Act could not be made. We have seen that the authorities below have not discussed the term of contract of the appointment of the Director and the nature of services rendered by them. During the course of submission before us, ld. AR of the assessee has not shown us the term of contract of employment and the nature of services rendered by the Directors. While perusing the PB, we find that copy of service agreement is placed on record in the PB at page 120 to 126. While going through these documents at page 120 to 126 of PB are the copy of Resolution providing certain benefits to Shri Dilip Bhat (page no. 120 – 121), to Mrs. Amisha Vora (page no. 122-123) and (page no. 124 to 126) referred the Resolution with regard to term and condition for Shri Arun P. Sheth. No evidence was filed on record to show if these resolutions were approved by competent authorities under Company law. As the lower authorities failed to discuss about the term of appointment and the services rendered by the Director, hence, we deem it appropriate to restore this issue to the file of AO to re-consider the issue and pass the order in accordance with law after considering all the service contract if any executed between the assessee company and the directors and other material including the services rendered by the Director. Thus this ground of appeal is allowed for statistical purpose.

6. Ground No.3 for our consideration is confirmation of addition u/s 68 of the Act. Ld. AR of the assessee argued that during the first appellate stage CIT(A) called the remand report from the AO. The AO during the remand proceeding not called the assessee for furnishing further information for furnishing the additional evidence. The AO furnished the remand report without giving any opportunity to the assessee. Ld. AR further argued that CIT(A) has not referred its submission while deciding the issue raised before him. Ld. DR for the Revenue supported the order of authorities below. DR further argued that the assessee has not furnished the sufficient evidence and the persons from whom the assessee taken security deposit not turned up with notice u/s 133(6) were issued. Even during the remand proceeding, the notice u/s 133(6) were issued to 34 parties out of which only 4 persons turn up. The AO gave its remand report after considering the material supplied to him.

is also restored to the file of AO. The AO is directed to examine all the confirmation, memorandum of understanding entered by assessee with various sub-brokers and to pass fresh order in accordance with law. Since, the matter pertains to AY-2007-08, the assessee is directed to furnish all the documentary evidence and written submission altogether instead of filing in piecemeal before him. The AO shall consider and provide adequate opportunity to the assessee before passing order in accordance with law.

9. In the result, appeal filed by assessee is partly allowed and the appeal of the Revenue is dismissed as not maintainable by virtue Circular no. No.21/2015(F.No.142/2007-ITJ (Pt.) dated 10th December, 2015.