TRIVECTOR ORIGIO SCIENTIFIC P.LTD,MUMBAI vs. DCIT 10(3), MUMBAI

This appeal, filed by the assessee company, being 06-03-2014 passed by learned Commissioner of Income Tax (Appeals)- 22, Mumbai (hereinafter called “the CIT(A)”), for the assessment year 2010-11, the appellate proceedings before the CIT(A) arising from the assessment order dated 16-01- 2013 passed by the Assessing Officer(hereinafter called “the AO”) u/s 143(3) of the Income Tax Act,1961(Hereinafter called “the Act”).

The grounds raised by the assessee company in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) read as under:-

The assessee company is engaged in business of Trading in goods and equipment related to infertility management and also as commission agents.

The only issue in dispute is with respect to payment of commission to employees being Rs.2,50,000/- being paid to Mr. Uday Kolhe and Rs.50,000/- to Mr. Unni, who are employees of the assessee company.The assessee was asked by the AO to prove genuineness of the transaction and details of name , address of the parties, transactions entered into by the assessee company with them, comparison of the transaction with them for last year and copy of ledger account for this year and preceding year, during the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act. The assessee company submitted that payment of commission is made to employees being Rs.2,50,000/- paid to Mr. Uday Kolhe and Rs.50,000/- to Mr. Unni, who are employees of the assessee company.The assessee company has not explained the nature of services rendered by them and purpose of the commission paid to them. As per AO , the payment of commission is hit by the provisions of Section 36(1)(ii) of the Act and is covered by the decision of Special Bench of the Tribunal in the case of Dalal Broacha Stock Broking Private Limited v. Addl. CIT in against the assessee, ITA 3115/Mum/2014 3 vide assessment orders dated 16.01.2013 passed by the AO u/s. 143(3) of the Act.

Aggrieved by the assessment orders dated 16.01.2013 passed by the AO u/s. 143(3) of the Act, the assessee filed an first appeal with the CIT(A).

The assessee contended before the CIT(A) that the commissions are paid to employees of the company. The letter of employment was enclosed and complete details such as name, address and PAN of the employees were furnished. The copies of ledger extract of the company’s books of accounts were submitted wherein the said liability was duly reflected. The assessee company contended that the expenses were incurred wholly and exclusively for the purposes of business. The copies of confirmation from both the employees were submitted along with PAN, return of income,Form No. 16 with details of salary paid including commission.The assessee company distinguished the decision of Special Bench of the Tribunal in the case of Dalal Broacha Stock Broking Private Limited (supra) whereby it was contended that these employees are not shareholder/ directors of the company while in the case of Dalal Broacha Stock Broking Private Limited (supra) , the commission was paid to employee-directors of the company who were the only shareholders of the said company. The assessee company submitted that the commissions were paid to employees of the company who were neither shareholders nor directors of the assessee company and they were getting fixed salary and commissions/bonus for their performance. The commission is not paid in lieu of profits or dividend. The tax has been deducted at source and deposited with government on these payment of commission to these employees . These commissions are duly included in the salary. These employees have followed up with customers, getting orders and follow up for obtaining payments and thus have rendered services to the assessee company. Adequacy of services is not a ground of disallowance of ITA 3115/Mum/2014 4 commission to employees. It was submitted that the AO has not given proper and adequate opportunity of being heard to the assessee company before making additions to the income of assessee on account of disallowance of commission expenditure vide assessment orders dated 16.01.2013 passed u/s 143(3) of the Act. Thus, it was submitted that the payment of Rs.3,00,000/- being commission to employees is a deductible expenditure as per provisions of Section 36(1)(ii) of the Act.

The CIT(A) held that none of employees were shareholder or director of the assessee company and thus, the said payment of commission of Rs.3,00,000/- by the assessee company to these two employees is not hit by provisions of Section 36(1)(ii) of the Act.

Aggrieved by the orders dated 06-03-2014 passed by the CIT(A), the assessee preferred second appeal with the Tribunal.

The ld counsel for the assessee contended that the assessee is engaged in dealing in surgical infertility management equipment. The ld. Counsel submitted that Rs.3 lacs commission was paid to two employees for services rendered by them. The revenue has disallowed the said commission by invoking provisions of Section 36(1)(ii) of the Act. The ld. Counsel submitted ITA 3115/Mum/2014 6 that the Revenue has relied upon the decision of Special Bench in the case of Dalal Broacha Stock Broking Private Limited (supra). It was submitted that the said decision has no applicability to the present case as the said two employees are not shareholder-directors of the assessee company. It was submitted that they are not even relatives of shareholders directors of the company and Section 36(1)(ii) of the Act has no applicability to the payment of the commission to these two employees. The ld. Counsel for the assessee company brought to our notice the appointment letters of the said employees which are placed in paper book filed with the Tribunal to contend that the said commission is in-fact part of salary paid to these employees and is not paid in lieu of profit or dividends. The confirmation from the employees with respect to receiving of commission are placed on paper book filed with the Tribunal.The ld counsel submitted that tax was deducted at source on payment of commission to these employees and our attention was drawn to Form No 16 for next assessment year 2011-12 whereby these commissions are stated to be included and tax deducted at source by the assessee company on these commission payment. It was submitted that assessee company is regularly rewarding its employees with commission based on their performance which is part of salary payable to these employees. The ld counsel submitted that various invoices raised by the assessee company are placed in the paper book. The ld. Counsel submitted that Mr Uday Kolhe was transferred from proprietary concern of the directors to the assessee company on 01-02-2010 vide letter of transfer to assessee company is placed in paper book and he was employee of the company during the period of February/March 2010. It was submitted that both the employees were acting as engineers for sale /service.The Ld Counsel submitted that emails are placed on record in paper book to show that these employees were working for the assessee company.

The ld DR on the other hand submitted that commission is not allowable as an expense as the employees were entitled for commission on sales while no such working of commission based on sales have been submitted . The Ld DR submitted that the CIT(A) had held that no evidence is filed before the CIT(A) to show that these two employees were instrumental in getting the purchase orders and thus the CIT(A) had concluded that no service has been rendered by these two employees for which commissions were paid and hence it was held by the CIT(A) that the claim of the assessee company is not genuine and the same was disallowed by the CIT(A).No documents have been filed relating to the contribution of these two employees in getting the sale orders for the assessee company and in any case, the evidence so placed by the assessee company are additional evidences and need verification by the Revenue .It was also submitted that the CIT(A) has not forwarded the evidences so filed for the first time before him to the AO for remand report and all these evidences so filed before the CIT(A) and the Tribunal need examination and verification by the AO.

We have considered the rival contentions and perused the material on record. We have observed that the assessee company has paid commission to two employees aggregating to Rs.3 lacs during the previous year relevant to assessment year.The terms of appointment stipulate that the commission is to be paid based on sales. The assessee company did not file evidences before the CIT(A) with respect to services rendered for generating sales orders for which commissions were paid as set out in the orders of the CIT(A). The CIT(A) did not forward the evidences which were filed for the first time before him by the assessee company to the AO for examination/verifications. The assessee company has also placed evidences before us to contend that the commissions paid to these employees were for services rendered and are part of the salary. It is submitted before us that due TDS has been deducted and these employees have confirmed to have received commission and declared ITA 3115/Mum/2014 8 the same in the return of income filed with the revenue. It was also contended that no attempt is made to evade taxes by booking the commission expenditure. In our considered view, all these additional evidences requires examination and verification by the AO to come to conclusion whether the commission is an allowable expenditure and in our considered view , these additional evidences are to be admitted in the interest of justice and the matter be restored to the file of AO for de-novo examination of the issue afresh after considering the explanation/evidences to be submitted by the assessee is his defense. Needless to say proper and adequate opportunity of hearing shall be given by the AO to the assessee company in accordance with principles of natural justice and in accordance with law. However, we would like to state at this stage we are fully agreeable with the finding of the CIT(A) that the commissions to these two employees is not hit by provisions of Section 36(1)(ii) of the Act as these two employees are not shareholders or directors of the assessee company nor are they relatives of the shareholders and directors of the assessee company. We note that the revenue is not in appeal against this finding of the CIT(A) that the commission to these two employees is not hit by the provisions of Section 36(1)(ii) of the Act. We order accordingly.

In the result, the appeal filed by the assessee company in ITA N0. 3115/Mum/2014 for the assessment year 2010-11 is allowed for statistical purposes .