KSHITIJ INTERIORS P.LTD,MUMBAI vs. DCIT 8(2), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार PER RAJENDRA, AM- लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order 01.08.2013 of CIT(A)-17,Mumbai the assessee has filed the present appeal. Assessee-company,engaged in the business of interior decorators etc.,filed its return of income on 11.10.2010,declaring income of Rs.53,88,125/-.The Assessing Officer(AO)completed the assessment on 31.12.2012,u/s.143(3) of the Act,determining the income of the assessee at Rs.64,78,720/-. 2.Effective ground of appeal is about confirming of an addition of Rs.10 lakhs.During the assessment proceedings,the AO found that the assessee had paid commission of Rs.10 lakhs to one of its Directors,namely Bhawarlal K Sharma(BKS).He directed the assessee to justify the commission paid to its whole time director.After considering the reply dated 29.12.2012 of the assessee,the AO held that BKS was working as employee of the assessee,that the payment made to him was covered u/s.36(1)(ii) of the Act,that profit for the year available for appropriation before tax was Rs.35,09,200/- after paying commission to BKS,that the said amount was carried to the balance sheet along with balance brought forward,that it was credited under the head reserve and surplus,that the assessee did not declare any dividend during the year under appeal,that it had profit amounting to Rs.45.98 lakhs,that same could have been distributed among the share holders in the form of dividend,that instead of paying dividend the assessee opted to distribute the profit to one of its directors in form of commission.The AO referred to the case of Loyal Motor Service Co.Ltd.(14 ITR 647) and held that by paying commission it had avoided full payment of tax,that intention of the provisions of section 36(1)(ii) was to prevent escapement of taxation in form of commission/bonus payment.He held that the commission paid to BKS in lieu of dividend was not eligible for deduction u/s.36(1)(ii)of the Act. 3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authoirty(FAA).Before him,it was argued that BKS had been looking after the business of the 7367-Kshitij -10-11 assessee, that due to his efforts and dedication the assessee had recorded growth in the business,that because of the creative skill of the director it could expand business in the field of interior decoration, that the payment of commission was as per the resolution passed by the board of the directors,that BKS was rewarded for additional overriding commercial efforts and untiring services of BKS, that the payment was covered by the principles of commercial expediency,that BKS had paid tax on the commission received from the assessee in his personal return of income,that he was holding only 25% shares of the company.It relied upon the cases of Hero Honda Finelease Ltd.(ITA/4329/Del/ 2010),Marrison Travels Pvt.Ltd.(ITA/ 1296/ Del/ 2012). After considering the submissions of the assessee and the assessment order,the FAA held that the assessee had paid the commission to only one of the directors,that BKS was paid commission of Rs.10.00 lakhs on the sales,that BKS had no specialised knowledge,that no evidence was produced by the assessee to prove that BKS had performed specific services,that the assessee was a closely held company,that BKS was not managing director of the company,that it had failed to draw the issue to home that the commission paid to BKS was part and parcel of his salary.Finally,he confirmed the addition of Rs.10.53 lakhs. 4.Before us,the Authorised Representative(AR) stated that section 36(1)(ii) was invalid after repeal of section 40(c) of the Act,that reasonableness of payment was not a deciding factor, that payment of dividend was not compulsory for making commission payment, that the director had paid tax on that, that revenue had suffered no loss because of payment of commission to BKS.He referred to the case of Dalal Bharucha Brokerage (131 ITD36).Departmental Representative (DR) relied upon the order of the FAA. 5.We have heard the rival submissions and perused the material before us.We find that there were only four shareholders of the assessee-company ,that out of which two were directors namely BKS and his wife Manju Sharma,that it had paid commission on sales,amounting to Rs.10.00 lakhs to BKS,that BKS was holding 25% of the shares of the company.Provisions of section 36(1)(ii) stipulate that in certain circumstances commission/bonus paid by an asssessee can be disallowed.We find that in the case before us,the finding of fact has been given that assessee had not declared dividend for the year under appeal.The AR had not challenged the finding.The AO and the FAA have held that by not declaring dividend and by not paying dividend distribution tax,in lieu of the commission paid to BKS,the assessee had evaded payment of full taxes.One of the reasons to introduce the section in the Act was to prevent escapement of taxes where the assessees would make bonus/commission without paying dividend.We find that the sales as on (31.03.2009) had reduced from Rs.16.36 crores to Rs.9.84 crores as on(31.3.2010), that profit before depreciation tax for the year under consideration was Rs.60.45 lakhs whereas for the earlier year it was Rs.92.44 lakhs, that profit after tax has also reduced by Rs.20.00 lakhs (approx.).In these circumstances, we are unable to appreciate the claim made by the assessee that because of the‘overriding commercial efforts and untiring services to the business of the company’ BKS was paid commission.The CIT(A) has specifically mentioned that neither before him nor before the AO the assessee had adduced any evidence to prove that BKS has done any specialised function.It is also a fact that commission paid to BKS was not part and parcel of his salary. Considering all these factors cumulatively, we are of the opinion that order