Commission to working director-shareholder cannot be disallowed merely because assessee-company did not declare dividend

ITAT DELHI

Coil Company (P.) Ltd. v/s. ACIT

IT Appeal Nos. 1389 (Delhi) of 2009

2648 (Delhi) of 2010 and 425 (Delhi) of 2011

[Assessment Years 2005-06 to 2007-08]

MAY 25, 2012

 ORDER

Rajpal Yadav, Judicial Member-In this bunch of three appeals, ITA No. 452/Del/2011 in assessment year 2006-07 is directed at the instance of revenue against the order of Learned CIT(Appeals) dated 18.11.2010. Whereas, in assessment years 2005-06 and 2007-08, assessee is in appeal against the orders of Learned CIT(Appeals) dated 13.2.2009 and 31.3.2010 respectively. The major common issue involved in all these appeals relates to allowability of the commission paid to Shri Sucha Singh, Managing Director of the company under section 36(1)(ii) of the Income-tax Act, 1961. In the appeals of assessee, this is the only issue involved, whereas in the appeal of revenue apart from this issue, two more grounds of appeal have been taken, which relates to allowance of depreciation on computer peripheral @ 60% and, deletion of Rs.20,06,234, which was added by the Assessing Officer by making a disallowance out of miscellaneous expenses.

2. First, we take the common issue involved in all the three appeals relating to allowability of commission paid to Sardar Sucha Singh, MD of the assessee company under sec. 36(1)(ii) of the Income-tax Act, 1961.

3. The brief facts of the case are that assessee is a private limited company engaged in business of manufacturing and sale of fan, coil units, child water coils, fluid cooler, air cooling unit and other items. In the year 1995, the company has 20 share, having capital of Rs.100 each. These shares were held by two individuals, namely, Jagjit Singh & Sucha Singh in equal shares. On march 31, 2003, the total share capital of the assessee was 4002000. The total number of shares are 40020. These shares were retained by four individuals and one company, namely, Sucha Singh Rs.25,000, Harjinder Kaur Rs.10,500, Amardeep Singh 20, Pramjeet Singh 500, Coil Company INC 4000. On 10.3.2003, the Board of Directors had passed a resolution that looking to the advantage of good business relationship of Sardar Sucha Singh, MD, sales promotion commission @ 1% on the total turnover of the company, be paid to him w.e.f. Ist of April 2003. Under this resolution, commissions have been paid to Sardar Sucha Singh. The following table would depict the assessment year, amount of commission paid and the status of the dispute in respect of that amount:

4. At the end 31.3.2004, the total share capital of the assessee was Rs.1,00,02,000. The total number of shares were 1000200. These shares were possessed by four individuals and one company, namely, Sucha Singh 40,000, Harjinder Kaur 16,000, Amardeep Singh 15,020, Paramjeet Singh 25,000, Coil Company INC 4000. Up to the end of March 31,2009, this status remained as it is. The one more important fact required to be noted here is that turnover of the company in assessment year 2000-01 was Rs.837,17,395 and it increased to Rs.3112,09,597 in assessment year 2007-08. According to the Assessing Officer, assessee has not distributed the dividend from the very inception and the amount of commission paid to Sardar Sucha Singh could be paid as a profit or dividend income as per section 36(1)(ii) of the Act. Hence, the amount cannot be allowed to the assessee as a deduction. Dissatisfied with the disallowance, assessee carried the matter in appeal before the learned first appellate authority. In assessment years 2005-06 and 2007-08, learned Commissioner has upheld the disallowance. However, in assessment year 2006-07, Learned Commissioner has deleted the disallowance. The order of the Learned CIT(Appeals) in assessment year 2006-07 is subsequent to the orders passed in assessment years 2005-06 and 2007-08. Learned Commissioner has observed that commission paid to Sardar Sucha Singh was based on the Board’s resolution passed in March 2003. There is a phenomenal increase in the turnover of the company and hence it was paid because of his contribution towards the better performance of the company.

5. The learned counsel for the assessee while impugning the order of the Learned CIT(Appeals) in assessment years 2005-06 and 2007-08 submitted that the learned first appellate authority has failed to construe the provisions of section 36(1)(ii) of the Act in right perspective. According to the Learned Commissioner, the deduction of commission paid is to be allowed to the assessee only if it would not have been payable as profits or dividend. In her understanding, this amount could be paid as a profit in the shape of dividend. He pointed out that the issue in dispute is squarely covered in favour of the assessee by the decision of Hon’ble Delhi High Court rendered in the case of CIT v. Bony Polymers Pvt. Ltd. passed in ITA No. 69/2011 and other appeals. He placed on record copy of the Hon’ble High Court’s decision. He further relied upon the order of the ITAT passed in the case of M/s. Creative Travels Pvt. Ltd. v. ACIT in ITA No. 394/Del/09 for assessment years 2005-06 and 2006-07 and pointed out that both these orders have been upheld by the Hon’ble High Court. He placed on record copy of the Hon’ble High Court’s decision in the case of CIT v. Creative Travels passed in ITA No. 1283/2011. The learned counsel for the assessee further relied upon the decision of Hon’ble Delhi High Court in the case of AMD Met Plast Pvt. Ltd. v. DCIT rendered in ITA No. 650/Del/2011. He placed on record copy of this decision.

6. On the other hand, Learned DR relied upon the order of the learned Assessing Officer.

7. We have considered the rival contentions and gone through the record carefully. Sec.36(1)(ii) of the Act has a direct bearing on the controversy. Therefore, it is salutary upon us to take note of this clause. It reads as under:

“The deductions provided for in the following clauses shall be allowed in respect of the matter dealt with therein in computing the income referred to in sec. 28 of the Act.

Section 36(1)

Any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission”.

8. The plain reading of sec. 36(1)(ii) contemplates two situations. According to the first situation, any sum paid to an employee as a bonus or commission for services rendered would be allowed to the assessee. The second part exhibits the other condition that the deduction mentioned in the first situation could be allowed, if such sum would have not been payable to an employee as a profit or dividend meaning thereby if the amount of commission or bonus is receivable by an employee in the shape of profit/dividend then such commission paid to such employee would not be allowed as a deduction.

9. We have already noticed the shareholding pattern of the assessee. It is pertinent to observe that in the relevant year Sardar Sucha Singh was holding just 39.9% of the total shareholding and rest of the shares are being held by other individuals or by the company. Being a private limited company, controlled by the family members, a resolution approving the payment of commission to the working directors may not be very difficult task but whether this arrangement indicates that if this commission was not paid to the working director then it would be received in the shape of profit/dividend. If we look towards the shareholding pattern then only 39.9% of this commission paid would be paid to Shri Sucha Singh on the basis of the shares held by him. The other shareholders, namely, Harjinder Kaur, Paramjeet Singh who are holding 25% and 16% of the shares would get commission though the Board has not resolved for payment of any extra remuneration to these persons. It only suggests that commission was not paid to Shri Sucha Singh on the basis of the shares held by him, rather it is paid by keeping in view his services towards the company. Distribution of dividends is one component. It does not give the meaning that if an assessee failed to distribute the dividend, then payment of any commission would take the colour of dividend. The commission paid to Shri Sucha Singh is linked with the sales turnover of the assessee and to the performance of the directors. It has nothing to do with the shareholding pattern. Considering the authoritative pronouncement of the Hon’ble Delhi High Court in the cases referred by the learned counsel for the assessee, we allow the grounds of appeal raised by the assessee in assessment years 2005-06 and 2007-08. Consequently, we reject the ground No.1 raised by the revenue in assessment year 2006-07. The disallowance made by the Assessing Officer in respect of commission paid to Shri Sucha Singh in all the three years is held not to be justified. Such disallowance is deleted.

10. In the result, appeals of the assessee for assessment years 2005-06 and 2007-08 are allowed.

11. Ground No.2 in the revenue’s appeal relates to grant of depreciation @ 60% on computer peripheral. The learned counsel for the assessee at the outset pointed out that this issue is covered in favour of the assessee by the decision of Hon’ble Delhi High Court rendered in the case of BSES.

12. With the assistance of learned representative, we have gone through the record carefully. Learned CIT(Appeals) has allowed the depreciation on the computer peripheral @ 60% by putting reliance upon the order of the Hon’ble Delhi High Court rendered in the case of CIT v. BSES Rajdhani Powers Ltd. in ITA No. 1266/2010. Learned CIT(Appeals) also made reference to the order of the ITAT passed in the case of ITO v. Simron Majumdar reported in 98 ITD 119. Considering the order of Learned CIT(Appeals), we are of the view that the learned first appellate authority has rightly placed its reliance on the judgment of the Hon’ble Delhi High Court as well as of ITAT. We do not find any merit in this ground of appeal. It is rejected.

13. In ground No.3, grievance of the revenue is that Learned CIT(Appeals) has erred in deleting the addition of Rs. 20,06,234. The brief facts of the case are that assessee has debited a sum of Rs. 87,79,514 under the head “miscellaneous expenses”. Assessing Officer has observed that in the immediately preceding year, assessee has claimed expenses of Rs. 47,66,865 under this head. There is an increase of 100% in the expenses. He directed the assessee to submit the details of all these expenses along with narrations exhibiting the nature of expenses, as well as supporting documents. Assessing Officer also directed the assessee to submit justification for incurring these expenses. Learned Assessing Officer has reproduced the details of expenses and observed that major expenses appear to be capital in nature. He disallowed a sum of Rs. 20,06,324 out of the total expenses.

14. On appeal, assessee moved an application for permission to lead additional evidence and placed on record details of expenditure along with evidence. Learned CIT(Appeals) issued notice to the Assessing Officer inviting his comments as to why additional evidence be not taken on record. Assessing Officer opposed the prayer of the assessee. However, learned first appellate authority has admitted the additional evidence u/s. sub-rule (2) of Rule 46A. According to the Learned CIT(Appeals), Assessing Officer has just granted seven days time for submitting its explanation on this issue and the time was not sufficient. Learned first appellate authority has reproduced the order sheet entries of the Assessing Officer in paragraph No. 17, before arriving at a conclusion that assessee was not provided sufficient opportunity of hearing. Learned CIT(Appeals) thereafter gone through the evidence and deleted the addition.

15. With the assistance of learned representatives, we have gone through the record carefully. As far as entertainment of additional evidence is concerned, we do not find any error in the order of the Learned CIT(Appeals). But sub-rule (3) of Rule 46A suggests that learned first appellate authority shall not take into consideration any evidence produced under sub-rule (1) of Rule 46, unless the Assessing Officer has been given an opportunity to rebut the evidence taken on record. In the present case, Learned CIT(Appeals) has granted the opportunity to the Assessing Officer before admission of additional evidence, which was for the purpose to seek the comments of the Assessing Officer, as to why additional evidence be not admitted under sub-rule(2) of Rule 46A. After this exercise, Learned CIT(Appeals) ought to have given one more opportunity to the Assessing Officer for giving his comments on the merit of evidence i.e. whether Assessing Officer wants to examine any witness or evidence produced by the assessee. This opportunity was not given to the Assessing Officer by the Learned CIT(Appeals). Therefore, we set aside the order of Learned CIT(Appeals) on this issue and restore this issue to the file of the Assessing Officer for readjudication. The assessee will be at liberty to produce any evidence in support of its explanation. The Assessing Officer shall readjudicate the issue after providing due opportunity of hearing to the assessee.

16. In the result, both the appeals of the assessee are allowed whereas the appeal of the revenue is partly allowed for statistical purposes.