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Income Tax Appellate Tribunal, “ D ” BENCH, AHMEDABAD
Before: MS. SUCHITRA KAMBLE & SHRI MAKARAND V. MAHADEOKAR, ACCOUNTNAT MEMBER
PER SHRI MAKARAND V. MAHADEOKAR, AM: This appeal is filed by the Assessee as against the order dated 12/06/2023 passed by the Ld.Commissioner of Income-tax(Appeals) - National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “the Ld.CIT(A)” in short], arising out of the assessment order dated 21/12/2018 passed by the Assessing Officer (AO) under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") relevant to the Assessment Year (AY) 2016-17. Ami Life Sciences Pvt.Ltd. vs. ACIT Asst. Year : 2016-17 2 Facts of the case:
The assessee is a company, involved into manufacturing of pharma intermediates. The assessee had filed return of income on 01-10-2016 declaring total income of Rs.3,13,99,380/- and book profit of Rs.6,68,25,463/-. The case was selected for scrutiny and notices u/s.143(2) and 142(1) of the Act were issued to the assessee. In response to the same, the assessee submitted the details called for. During the course of assessment proceedings, the AO observed that the assessee had paid a commission of Rs.52,34,373/- to Shri Girish Chovatia, Director of the company.
The AO called for details of commission paid to Shri Girish Chovatia. It was also observed by the AO that Shri Girish Chovatia is holding 32.78 percentage shares of the company. In response to notice, the assessee submitted documentary evidences of contribution of Shri Girish Chovatia with supporting case laws in the matter, where it was held that in case payment is made against services provided by the directors, the disallowance cannot be made under section 36(1)(ii) of the Act.
During the course of assessment proceedings assessee submitted that –
Shri Girish Chovatia is a qualified MBA (Marketing) and responsible for the product development and sales into domestic as well as export market.
The pharma industry itself is highly competitive in nature. The monopoly phase of a new product gets rapidly eroded. Therefore, Asst. Year : 2016-17 3 besides the regenerative demand there is a requirement of continuous penetration into market.
Shri Girish Chovatia is responsible for development of the new product in line with the requirement of the customer and increase export sales for which he is constantly travelling to many countries, meeting the customer, understand need of the customers and develop, mould and modify the products accordingly to market requirements.
The strategy has benefited the company in terms of growth in sales as well as increasing in net earnings. To support the growth story figures of year wise sales from the FY 2010-11 to FY 2017-18 was provided to the AO with breakup of domestic sales and export sales.
Continuous efforts of Shri Girish Chovatia has always help into growth of the company. Because of which the rest of the shareholders have decided to pay him commission based on growth in export sales of the company and on new products developed and marketed into market by him.
During the period the company had achieved export sales of Rs.6277.70 Lakhs and as per commitment, he was paid commission of Rs.52.34 Lakhs.
The amount of commission is very nominal to the turnover and profit earned by the company.
The company has not paid the commission to avoid any tax.
The company has done good amount of capital investment every year because of which no dividend is declared in these years.
The company has made investment of Rs.655.74 Lakhs in the year under consideration and Rs.556.03 crores in next year. Total addition of Rs.6055.30 lakhs since the FY 2011-12 to FY 2017-18. 2. 3. However, the AO rejected the submission of the assessee on the ground that it is only an arrangement to avoid dividend distribution tax and Ami Life Sciences Pvt.Ltd. vs. ACIT Asst. Year : 2016-17 4
deduction cannot be allowed under section 36 (1)(ii) of the Act. He also concluded that the board resolution cannot be considered as evidence of extra service provided by the director as the board is constituted by the director employee to whom payment is made. The AO mainly relied on case law of Dalal and Broacha Stock Broking Pvt. Ltd of Mumbai Special Bench (ITA No. 5792/Mum/2009 dated 6-12-2010).
The assessee also had claimed weighted deduction of Rs.3,63,58,968/- u/s.35(2AB). The AO considered report in form 3CL issued by Department of Scientific and Industrial Research (DSIR) in which total claim of Rs.155.465 Lakh was considered as eligible for deduction u/s.35(2AB) of the Act against total claim of Rs.181.79 Lakhs claimed by the assessee. Based on report of DSIR, the AO restricted claim of the assessee to Rs.310.92 Lakhs disallowing Rs.26.33 Lacs. The AO allowed revenue expenditure of Rs. 26.33 Lakhs and disallowed weighted deduction amount of Rs. 26.33 Lakhs.
Aggrieved by the order of AO, the assessee filed an appeal before the Ld.CIT(A).
During the course of appellate proceedings, the assessee submitted that the facts of the case relied upon by the AO and assessee’s facts are completely different. In the case referred by the AO, the Special Bench had observed that no evidence on record was available to support the fact that the Director had rendered extra services for the payment of commission or remuneration. Asst. Year : 2016-17 5
The assessee submitted that there are subsequent judgment of Mumbai Tribunal allowing payment of commission to Directors for extra services. These relied on the judgements are M/s.Nat Steel Equipment Pvt. Ltd. Versus DCIT-7 (171 ITD 482) (Mumbai) (2018). This judgment was passed by Mumbai tribunal on 13.05.2018, after considering the judgment of Special Bench in case of Dalai Broacha Stock Broking Pvt. Ltd., wherein the Tribunal observed that "Where the directors of the assessee company had provided services and in recognition thereof were in receipt of commission income, the same merely on the basis of speculation by the revenue authorities that the same was to avoid payment of dividend tax, could not be disallowed by taking recourse to Sec. 36(1)(ii) of the Act".
The Assessee also placed reliance on the decision of M/s.Marks Shipping Pvt. Ltd. Vs. ACIT - 4 (2), Mumbai, 51791 (ITAT-MUMBAI) (2016), wherein the Ttribunal observed that (as submitted by the assessee) – “In case of Dalal tribunal came to conclusion that no evidence on record was available to support the fact that the Directors had rendered any extra services for the payment of huge commission or remuneration” (Para 4.1 of the judgement). "In case of assessee, services rendered by Director Shri Mahesh A Dharira, it is pertinent to mention here that payment has not been paid to other Directors. Thus, payment in question was with respect to services rendered by the said Director, was not avoidance of payment of tax. We find no avoidance of tax done. So, we direct the Assessing Officer to allow the same because same was paid to Director in proportion to the service rendered by him” (para 4.2 of the judgement). Asst. Year : 2016-17 6
The assessee further submitted to the Ld.CIT(A) that Shri Girish Chovatia has rendered services to the company and it is also accepted by the AO that the Company has grown in terms of revenue as well as capex. However, the AO concluded that the reasonableness of payment or adequacy of services rendered by the employees are not relevant factors in deciding the allowability of deduction.
The assessee stated before the Ld.CIT(A) that the AO completely misconstrued the provision of section 36(1)(i) of the Act relating to "Commission or Bonus in lieu of payment of dividend”. He further stated that the provision is introduced only to disallow the payment of commission or bonus if it is made to avoid the payment of tax on dividend, i.e. Dividend Distribution Tax. In assessee’s case the commission or bonus is paid to director for his services to the Company and company is able to justify that the payment is not with the intention to avoid DDT and therefore the expenses should not be disallowed under section 36(1)(ii) of the Act.
But the Ld.CIT(A) dismissed the appeal. The relevant paras of the order are reproduced for the sake of clarity:
“5. Decision: In this case, the appellant has raised two grounds of appeal. They are adjudicated as under:
1 Ground No.1: The Assessing Officer made the addition of Rs.52,34,373/- on the ground that the appellant has made commission payment amounting to Rs. 52,34,373/- to the Director of the company Shri Girish Chovatia. During the course of assessment, the assessee submitted the details like board resolution authorizing such payment, proof of various meeting held by Shri Girish Chovatia at various exhibition/fairs/conference in last six years, Asst. Year : 2016-17 7 country wise export sales arid various countries visited by Sri Chovatia in last 6 years. The Assessing Officer made the addition u/s.36(1)(ii) of the Income tax Act, relying upon the judgement of Hon'ble Mumbai ITAT Special Judge judgement in the case of M/s Dalal Broacha Stock Broking Pvt Ltd vs Addl. Commissioner of Income tax. The Assessing Officer came to the conclusion that the appellant has adopted device to avoid payment of full taxes. Hence, made the addition u/s 36(i)(ii) of the I.T. Act.
Now before me in the appellate proceedings, written submission has been filed and video conference was also given to the appellant. The appellant has filed various details regarding efforts taken by Shri Girish Chovatia for the rise of turnover of the company. The appellant has also relied upon plethora of judgements and tried to distinguish the judgement of Special Bench Mumbai ITAT in the case of M/s Dalal Broacha Stock Broking Pvt Ltd vs Addl. Commissioner of Income tax. I have gone through the judgements relied upon by the appellant. They are clearly distinguishable from the facts of this case. The judgement of Hon'ble Special Bench of Mumbai ITAT as mentioned above is clearly applicable to the facts of the case. It is to be noted here that there are many Directors, but the commission has been paid to Shri Girish Chovatia only. The appellant has not supplied any reason in the written submission as well as in the video conference that why other Directors were not involved. The Hon'ble Delhi High Court in the decision of Schneider Electric vs. CIT dated 31.01.2006 held that the Assessing Officer is justified in making addition on account of commission if it is not proved before the Assessing Officer how the business has been grown due to the person whom the commission has been paid. The Hon'ble Delhi High Court has relied upon the judgement of Hon'ble Supreme Court in the case of Lachminarayan Madanlal vs CIT [1972] 86 ITR 439. Hence, relying upon the judgement of Hon'ble Mumbai ITAT Special Bench and Hon'ble Delhi High Court, the appeal of the appellant is dismissed on this ground
2 The second ground raised by the appellant is disallowance made by the Assessing Officer worth Rs.26,33,000/- u/s 35(2AB) of the Income tax Act. The appellant has claimed deduction u/s 35(2AB) worth Rs.211.53 lacs. The Assessing Officer found that the appellant has claimed deduction on certain expenditure like marketing expenses, commission payment etc which were nowhere related to scientific research. Relying upon the judgment of Hon'ble 28 Taxmann.com 28 made the disallowance worth Rs. 26,33,000/-. Asst. Year : 2016-17 8
Now before me in the appellate proceedings and the video conference, no effort has been made by the appellant to prove how on such expenses, which are not related to scientific research, deduction has been claimed u/s 35(2AB) of the I.T. Act. The Assessing Officer has relied upon Form 3CL issued by DSIR. It quantifies the allowable expenditure on scientific research (not being expenditure in the nature of cost of any land on building). The Assessing Officer has further mentioned that once DSIR in its Form 3CL has quantified the eligible expenditure, any expenditure so claimed by assessee would not fall under expenditure on scientific research. Hence, the Assessing Officer has clearly made out the case of excess deduction claimed by the appellant u/s 35(2AB) of the I.T. Act. I agree with the contention of the Assessing Officer. The appeal of the appellant is dismissed on this ground.
In the result, the appeal of the appellant is dismissed.”
Not satisfied with the order of the Ld.CIT(A), the assessee is in appeal before us with following grounds:
“1. Ld. CIT (A) (NFAC) erred in law and on facts in confirming disallowance made by AO of Rs. 52, 34, 373/- commission paid to Managing Director of the assessee company under the provisions of Sec. 36(1)(ii) of the Act.
Ld. CIT (A) (NFAC) erred in law and on facts in confirming action of AO without appreciating that commission was paid to the Director for rendering specified services that lead to the growth resulting in increased earnings and not in lieu of dividend.
Ld. CIT (A) (NFAC) erred in law and facts in confirming disallowance not appreciating the fact that commission was regularly paid to Mr Chovatia on export sales for specific services rendered in earlier & succeeding years as authorized by Board resolution and not to all other directors /shareholders.
Ld. CIT (A) (NFAC) erred in law holding that Special Bench Mumbai decision in case of M/s Dalal Broacha Stock broking Pvt. Ltd. relied upon by AO was clearly applicable to apply provisions of Sec. 36(1)ii) to the facts ignoring judicial decisions submitted distinguishing Special Bench decision. Asst. Year : 2016-17 9
Ld. CIT (A) (NFAC) erred in law and on facts in not appreciating the fact that commission payment to the director Mr Chovatia in preceding and succeeding years was accepted by Department in scrutiny proceedings.
Ld. CIT (A) (NBAC) erred in law and on facts confirming action of AO in restricting claim made u/s 35(2AB) of the Act by Rs. 26, 33, 000/- simply by relying upon Form 3CL issued by DSIR not considering submissions made by the assessee before him.
Levy of interest u/s 234B, 234C & 234D of the Act is unjustified
Initiation of penalty proceedings u/s 271(1)(c) of the Act is unjustified.”
On Ground Nos. 1 to 5
During the course of hearing before us, the counsel for the assessee, after explaining the facts already explained to AO and CIT(A), relied on the following judicial pronouncements:
- Loyal Motor Services Co. Ltd. [1946] (14 ITR 647) (Bombay). - AMD Metaplat (P) Ltd. [2012] 20 taxmann.com 647 (Delhi). - Controls & Switchgear Contractors Ltd. [2014] 47 taxmann.com 141 (Delhi).
We noted that the AO in his entire assessment order was failed to provide any evidence that the company has made the payment of commission only to avoid DDT. On the contrary, the assessee could provide substantial evidence to prove service of the director with the facts that he is one of the 30 shareholders holding only 32.78% shares, he is one of the six directors, and all have not been paid any commission. Further, book profit of the company during the period was of Rs.6,68,25,463/- whereas Asst. Year : 2016-17 10
Company had given commission of Rs14,98,923/- which is 7.83% of the book profit of the Company. Further, it is noted that Shri Girish Chovatia has declared his total income (including commission) of Rs.2,74,82,370/- and paid tax of Rs.94,13,654/-. This shows that the payment of commission cannot be said to avoid the tax.
We have carefully examined the submissions and evidence provided by the assessee, as well as the relevant judicial precedents. It is observed that the AO primarily relied on the case of Dalal and Broacha Stock Broking Pvt. Ltd., which is factually distinguishable. In the present case, the assessee has provided substantial evidence demonstrating the services rendered by Shri Girish Chovatia and the resultant benefits to the company.
The case laws cited by the assessee before the Ld.CIT(A), particularly M/s Nat Steel Equipment Pvt. Ltd. and M/s.Marks Shipping Pvt. Ltd., support the view that commission paid for actual services rendered cannot be disallowed merely on the presumption of tax avoidance. The AO did not provide concrete evidence to show that the payment was made to avoid Asst. Year : 2016-17 11 On Ground No.6
Before the Ld.CIT(A) it was submitted that the assessee at the time of filing of tax returns, calculated the deduction under section 35(2AB) and made a claim of total of Rs.181.79 lakhs. The DSIR in their visit found certain revenue expenses as not linked with the R&D activity and vide certificate dated 22.06.2017 restricted the claim for revenue expenses by Rs.26.33 lakhs. It means they approved total amount of Rs.155.46 lakhs. However, they have not given any breakup or details of the expenses which are treated as not incurred for the purpose of R&D. The assessee further submitted before the Ld.CIT(A) that the assessee-company has maintained separate books of accounts which are verified and certified by a Chartered Asst. Year : 2016-17 12
The Assessee stated that section 35 is to promote R&D activities into country and therefore the department should have taken lenient view. It is not in dispute before the authority and the AO that the company had undertaken the research work and had spent certain amount during the relevant assessment years on scientific research, not being the capital expenditure in the nature of land and building.
The assessee also placed reliance on judgement in case of Bosch Ltd. Vs. Secretary, Dept. of Scientific & Industrial Research Ministry of Science & Technology, Government of India [69 taxmann.com 339 (Karnataka)] in which the Hon'ble High Court held that - "The impugned order is thus clearly hit by the vice of non-compliance of the principles of natural justice or audi alterm partem, the applicability of which even to the taxing statute cannot be ruled out. The competent authority passed this order under these provisions certainly exercising a quast-judicial function when he passed this order approving the expenditure incurred by the assessee on scientific research. No such unilateral action or determination could have been taken by the respondent secretary particularly when he chose to reduce the amount of expenditure incurred on scientific research as against the amount claimed by the assessee, to the detriment of the assessee company resulting in an adverse double tax effect as per the provisions of the Act."
We find merit in the assessee's contention. The AO's reliance solely on the DSIR report, without considering the detailed books of accounts and certification by a Chartered Accountant, is not justified. The principles of natural justice require that any reduction in the claim should be substantiated with clear reasons and the assessee should be given an opportunity to respond. Asst. Year : 2016-17 13
Following the judgment in Bosch Ltd. vs. Secretary, DSIR (supra), we hold that the restriction of the weighted deduction under section 35(2AB) of the Act by the AO is not sustainable. Accordingly, the disallowance made by the AO and confirmed by the Ld.CIT(A) is deleted, and the assessee's claim is allowed in full.
Ground Nos. 7 and 8 are consequential and, hence, are dismissed being infructuous.
In view of the above findings, the appeal filed by the Assessee is allowed. Order pronounced in the Open Court on 15th July, 2024 at Ahmedabad. (SUCHITRA KAMBLE) ACCOUNTANT MEMBER
अहमदाबाद/Ahmedabad, "दनांक/Dated 15/07/2024 ट".सी.नायर, व."न.स./T.C. NAIR, Sr. PS आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant
""यथ" / The Respondent. 3. संबं"धत आयकर आयु"त / Concerned CIT 4. आयकर आयु"त ( अपील ) / The CIT(A)-(NFAC), Delhi
"वभागीय ""त"न"ध , अ"धकरण आयकर अपील"य , राजोकट/DR,ITAT, Ahmedabad, 6. गाड" फाईल /Guard file.
आदेशानुसार/ BY ORDER, स"या"पत ""त //// सहायक पंजीकार (Asstt.