DCIT 3(2), MUMBAI vs. NAGPUR POWER & INDUSTRIES LTD, MUMBAI

The aforesaid appeal of the Department is directed against the order dated 16th August 2013, passed by the learned Commissioner (Appeals)–4, Mumbai, for the assessment year 2010–11. The Department has raised following effective grounds:–

As could be seen, grounds no.1 and 2, are on the common issue of addition of ` 11,19,877, made by the Assessing Officer and deleted by the first appellate authority.

Briefly the facts are, the assessee is a company engaged in the business of ferro manganese, silico manganese and value added ferro alloys, ferro manganese slag and similar other products. For the assessment year under consideration, the assessee filed its return of income on 18th September 2010, declaring total income of ` 13,61,10,940. During the assessment proceedings, the Assessing Officer, on going through the financial statements, noticed that during the relevant previous year, the assessee apart from paying salary to M/s. Nagpur Power & Industries Ltd. 3 the executive, chairman and director of the company Shri Gautam Khandelwal, has also paid commission to him for an amount of ` 11,19,877, which has been claimed as deduction. The Assessing Officer being of the view that commission paid is not an allowable expense under section 36(1)(ii) of the Act, proposed to disallow the same. Objecting to the proposed disallowance of the commission payment, the assessee submitted an explanation stating therein that the commission paid to Shri Gautam Khandelwal, is actually part of salary paid to him which amounts to 5% of the net profit of the company and the said payment is also in terms with the provisions of Companies Act, 1956 It was also submitted that the commission payment was authorised by board resolution dated 30th June 2009. The Assessing Officer, however, was not satisfied with the explanation of the assessee. He was of the view that the assessee in the garb of commission has distributed its profit to the shareholders without treating it as dividend and paying dividend distribution tax thereon. Following a decision of the Tribunal, Mumbai Bench, in Dalal Brocha Stock Broking Pvt. Ltd., [TS–287–ITAT–2011 (MUM.)], he ultimately disallowed the commission paid and added it back to the income of the assessee. Being aggrieved of such addition, the assessee challenged the same in an appeal preferred before the first appellate authority.

Before the learned Commissioner (Appeals), the assessee reiterated the stand taken before the Assessing Officer. The learned

On the other hand, the learned CIT(A), relied upon the decision of the Hon'ble Delhi High Court in Hive Communication Pvt. Ltd. v/s CIT, of 11, order dated 8th July 2011, and in the case of CIT v/s Convertech Equipments Pvt. Ltd., ITA no.669/2012, dated 3rd December 2012, wherein it was held that if commission is paid towards services rendered by the director as per terms of M/s. Nagpur Power & Industries Ltd. 5 appointment, then no disallowance could be made by treating it as dividend. Accordingly, he deleted the addition.

While the learned Departmental Representative relied upon the reasoning of the Assessing Officer, the learned Counsel for the assessee strongly supported the findings of the first appellate authority.

We have considered the submissions of the parties and perused the material available on record. As can be seen, the Assessing Officer has disallowed the commission paid to Shri Gautam Khandelwal, shareholder and director of the company on the ground that it is actually dividend. However, as recorded by the learned Commissioner (Appeals), Shri Gautam Khandelwal, is only 4.28% of the shareholder of the company and distribution of dividend, if at all, it is declared by the company would be very negligible, hence, it is hard to believe that for avoiding payment of distribution tax on such negligible amount of dividend, the assessee would have paid dividend to Shri Gautam Khandelwal in the garb of commission. Moreover, the assessee has produced material on record to show that commission payment is in terms with the terms of appointment and towards services rendered by the director. Nothing has been brought on record by the Assessing Officer to controvert the aforesaid claim of the assessee. That being the case, the disallowance of commission paid, in our view, is without

The next issue, as raised in ground no.3, relates to disallowance of ` 12,21,098, by the Assessing Officer but deleted by the learned Commissioner (Appeals).

Briefly the facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee has debited an amount of ` 22,88,993, towards miscellaneous expenses which included plantation expenses of ` 12,21,098. The Assessing Officer disallowed the plantation expenses of ` 12,21,098, opining that the expenditure is going to get enduring benefit to the assessee. He further observed, as the assessee is not into plantation business the expenditure cannot be considered as revenue in nature. The assessee challenged the disallowance before the first appellate authority.

The learned Commissioner (Appeals) having considered the submissions of the assessee in the light of the facts on record, found that the expenditure incurred was primarily for the purpose of environmental safety and pollution control. He found that the assessee had to incur such expenditure for planting citrus tree to reduce pollution caused by the factory to the environment. He also noticed that such expenditure has to be incurred by the assessee in terms with M/s. Nagpur Power & Industries Ltd. 7 Prevention of Pollution Act. He also observed that in the earlier assessment years, the Assessing Officer has allowed such expenditure fully. Relying upon some High Court judgments, the learned Commissioner (Appeals) finally deleted the addition made by the Assessing Officer.

We have considered the submissions of the parties and perused the material available on record. As could be seen the only reason on which the Assessing Officer disallowed the expenditure is it is of enduring benefit, hence, is a capital expenditure. Having held so, strangely enough, the Assessing Officer did not allow any depreciation. However, as could be seen from the submissions made by the assessee right from the assessment stage, the expenditure incurred was not merely for beautification of the factory premises but for Prevention of Pollution Control and Environment Safety. It is also evident, the assessee has to incur such expenditure as mandated by pollution control and environmental safety laws. It is also evident that the allegation of the Assessing Officer that such expenditure is not recurring in nature is without any basis as the learned Commissioner (Appeals) has recorded a finding of fact that the assessee had been incurring such expenditure from earlier assessment years and the Assessing Officer has allowed such expenditure fully. Considering the aforesaid facts and circumstances, we do not find any reason for disallowance of the plantation expenditure claimed by the assessee.

In the result, Revenue’s appeal stands dismissed. Order pronounced in the open Court on 09.10.2015