The Tribunal observed that the commission paid was disallowed by invoking provisions under Section 36(1)(ii) and not by invoking Section 40A(2)(b)(ii) of the Act. This implies that the AO had not disputed the services rendered by Renu Munjal but he was of the opinion that dividend had been paid in the garb of commission because it actually reduced the corpus available for distribution as dividend. Section 36(1 )(ii) of the Act had been incorporated to check, inter-alia, private companies from avoiding tax by distributing their profits to their members (showing them to be their employees) by way of commission and not by way of dividend. The AO was not correct in holding that the corpus for paying the dividend had reduced as it does not reflect the correct legal position with reference to section 36(1 )(ii) of the Act.
Whenever any commission is paid to an employee it is bound to reduce the corpus available for distribution as dividend. But that ipso-facto cannot be the basis for holding that commission is in lieu of dividend. The taxpayer had declared profits of INR 420 million and dividend had also been paid to all the shareholders including Renu Munjal. The taxpayer as well as Renu Munjal was bracketed in the highest income tax slab and the only effect was on account of saving dividend distribution tax to the taxpayer which was very minimum keeping in view the overall profits of the company. Therefore, this cannot be held to be device for reducing the overall tax effect in the case of taxpayer.
Since the shareholding of Renu Munjal was 1 percent only, the dividend would have been much less than the commission actually paid to Renu Munjal. Therefore, sum of Rs. 39 Lakh, in any case, would not have been paid to Renu Munjal as profits or dividend if it had not been paid as commission. The decision in the case of Dalal Broacha Stock Broking P. Ltd was not applicable as in that case, taxpayer Company, had paid commission of Rs. 40 Lakh each to the three working directors who owned the entire capital of the company. However, in the taxpayer’s case Renu Munjal held only 1 percent of the share capital and, therefore, Rs. 39 Lakh could not be payable as dividend. Accordingly, the Tribunal held that the commission paid to the director was allowed under Section 36(1 )(ii) of the Act.
INCOME TAX APPELLATE TRIBUNAL ,DELHI
ITA No. 4329/Del/2010 – Assessment Year: 2005-06
Hero Honda Finlease Ltd. Vs. Addl. CIT
O R D E R
PER S.V. MEHROTRA, A.M.
This appeal is filed by the assessee and directed against the order of ld. CIT(A) dated 31 .08.201 0 for the A.Y. 2005-06.
2. Brief facts of the case are that in the relevant assessment year the assessee company was engaged in the business of hire purchase, leasing and financing, mainly of motorcycles sold by M/s Hero Honda Motors Ltd. It had filed its return of income declaring total income of Rs. 42,62,50,140/-. The assessment was completed at a total income of Rs. 43,03,88,060/- after making following disallowances: –
Add: Disallowance u/s 14A – as discussed above Rs. 2,37,918 ii) Disallowance u/s 36(1)(ii) as discussed above Rs. 39,00,000
3. The assessee preferred an appeal before the ld. CIT(A) who while partly allowing the assessee’s appeal confirmed the disallowance made u/s 36(1)(ii) and restricted the disallowance u/s 14A to Rs. 50,000/-.
4. Being aggrieved with the order of ld. CIT(A), the assessee is in appeal before us and has taken following grounds of appeal: –
1. “That the Commissioner of Income tax (Appeals) erred on facts and in law in upholding disallowance of expenses to the extent of Rs. 50,000/- made by the AO under section 14A of the I. T. Act, 1961 on the ground that certain overhead expenses must have been incurred in relation to earning of exempt dividend income.
1.1 That the Commissioner of Income tax (Appeals) erred on facts and in law in not appreciating that only expenditure incurred having direct relation with earning of exempt income could have been disallowed u/s 14A of the Act.
2. The Commissioner of Income tax (Appeals) erred on facts and in law in upholding the action of the AO in disallowing commission paid to director, amounting to Rs. 39 lacs u/s 36(1)(ii) of the Act on the alleged ground that the same was paid in lieu of distribution of profits as dividend, resulting in avoidance of dividend distribution tax.”
5. Brief facts apropos ground no. 1 and 2 are that the assessee had earned dividend income of Rs. 6,79,767/-, which had been claimed as tax free. The AO required the assessee to submit details of expenses incurred with regard to earning of the aforesaid dividend of Rs. 6,79,767/-. The assessee submitted that the investment in the shares was made out of surplus funds of the business and neither any cost was incurred in making the said investment, nor cost was incurred in earning the said dividend. The AO pointed out that this issue had been decided in A.Y. 2002-03 and 2003-04 and the findings of A.Y. 2002-03 were followed in 2004-05 also. Following the findings for aforesaid assessment years, the AO disallowed an amount of Rs. 2,37,918/- being the expenditure incurred for earning the dividend income of Rs. 6,79,767/- by apportioning the total expenditure incurred in the ratio of the dividend receipt to the total receipts of the assessee.
6. Ld. CIT(A) after considering the assessee’s submissions restricted the disallowance to Rs. 50,000/-, inter-alia, observing that it could not be denied that some expenditure had necessarily to be attributed to earning such dividend income on account of establishment charges, administration expenses and other expenses etc. Ld. Counsel for the assessee submitted that disallowance has been confirmed to the extent of Rs. 50,000/- purely on adhoc basis without establishing any nexus between earning of dividend and incurring of expenditure under the aforementioned heads.
7. Ld. DR submitted that under such circumstances Tribunal is consistently restoring the matter to the file of AO in view of the decision of Hon’ble jurisdictional High Court in the case of Maxopp Investment Limited & others vs. CIT, 203 Taxmann 364.
8. Ld. Counsel in the rejoinder submitted that even if the matter is to be restored, the disallowance should not exceed Rs. 50,000/- as the assessee cannot be worse off. Ld. DR, however, submitted that since matter is to be restored to the AO in view of the jurisdictional High Court, no rider can be put on AO while deciding the issue having regard to the decision of jurisdictional High Court.
9. We have considered the submissions of both the parties and have perused the record of the case. Admittedly, for the year under consideration, Rule 8D was not applicable. We find that under such circumstances, Tribunal, following the decision in the case of Maxopp Investment Ltd. (supra), is consistently restoring the matter to the file of AO for quantifying the expenditure on some reasonable basis.
10. We are in agreement with ld. DR that no rider can be put on the AO while deciding the issue as he has to follow the decision of Hon’ble jurisdictional High Court. Moreover, once the order of ld. CIT(A) is set aside, his findings cannot be given any credence.
11. In view of above discussion, we restore this matter to the file of AO to quantify the expenditure incurred for earning dividend on some reasonable basis.
12. In the result, this ground is allowed for statistical purposes.
13. Brief facts apropos ground no. 3 are that assessee had claimed expenses on account of commission to director amounting to Rs. 39 lacs. Since in the opinion of AO this claim was prima-facie not allowable as per the provisions of 36(1)(ii), he required the assessee to furnish details of commission to director with the basis thereof and to also justify its allowability u/s 36(1)(ii). The assessee vide his letter dated 26.12.2007 submitted that commission amounting to Rs. 39 lacs had been paid @ 1% of net profit (wrongly mentioned as total turnover in asstt. order). It was further pointed out that the commission was paid as remuneration for the services rendered by Ms. Renu Munjal for running the business and this sum was not otherwise payable as profit or dividend. The AO did not accept the assessee’s contention for the following reasons: –
i) Commission had been paid to Ms. Renu Munjal, employee-director in the company who was also a shareholder.
ii) The profit which would have been otherwise paid to Ms. Renu Munjal as dividend had been diverted in the form of commission.
iii) By diverting sum of Rs. 39 lacs as commission to director, the assessee had only reduced the corpus available for distribution as dividend.
iv) The commission had been worked out as certain percentage of the net profit and, therefore, could not be said to be a part of salary.
In view of above factual findings, the AO held that the commission of Rs. 39 lacs was not allowable as per the provisions of sec. 36(1 )(ii). 14. Before ld. CIT(A) the assessee, inter-alia, advanced following submissions: –
i) the amount of commission was paid in accordance with the terms of employment of Ms. Renu Munjal as a whole time director, which was duly approved by the Board of Directors and subsequently ratified by the shareholders.
ii) the amount of commission was computed on the basis of 1% of net profit to be arrived at in accordance with the provisions of sec. 198 read with section 349 of the Company’s Act, 1956.
iii) Ms. Renu Munjal held .1% of shares in assessee company.
iv) the commission was paid in lieu of services rendered and not in lieu of distribution of dividend to shareholders.
v) during the relevant previous year, the assessee company proposed final dividend @ Rs. 15 per share which was distributed amongst all the shareholders, including Ms. Renu Munjal/ whole time director. Thus, the dividend was additionally distributed in proportion to shareholding of Ms. Renu Munjal in the company, in line with distribution made to other shareholders.
vi) there was no whisper or any evidence being brought on record by the AO in the assessment order which could suggest that profits were distributable to whole time director/Mrs. Renu Munjal as a shareholder of .1% shares in the assessee company in lieu of which commission had been paid.
vii) simply because the whole time director/Ms. Renu Munjal was also the shareholder of the assessee company, the same did not ipso facto lead to the conclusion that payment made was in lieu of right vested in Ms. Renu Munjal as a shareholder.
viii) it is not the case of the AO that aggregate remuneration (including commission) paid to the whole time director was excessive having regard to the nature of services rendered. The assessee placed reliance on the decision of Hon’ble Supreme Court in the case of Shahzada Nand & Sons vs. CIT 108 ITR 358, wherein it was, inter-alia, held that for allowability of commission it is not necessary u/s 36(1)(ii) that some extra services should have been rendered.
ix) the commission was paid in earlier years also in accordance with the terms of employment, with reference to percentage of profit and was allowed. Therefore, in view of the decision of Hon’ble Supreme Court in the case of Radha Swami Satsang vs. CIT 193 ITR 321 the assessee’s claim should have been allowed.
Ld. CIT(A) dismissed the assessee’s ground of appeal observing in para 3.3 as under: –
“Keeping in view the facts and circumstances of the case, it is held that the AO was right in disallowing the commission payment u/s 36(1)(ii) which as per the AO ensures that company did not resort to avoiding payment of tax by distributing the profit to their specific members/directors/shareholders as bonus or commission instead of dividend. The AO is not wrong in observing that by diverting the sum of Rs. 39 lacs as commission to director the assessee has resorted to reducing the corpus available for distribution as dividend. Accordingly, keeping in view the entire facts and circumstances of the case, the action of the AO is upheld.”
15. Ld. Counsel for the assessee reiterated the submissions advanced before the ld. CIT(A) and referred to pages 69 to 72 of the paper book, wherein the resolution containing appointment of Ms. Renu Munjal is contained. He pointed out that Ms. Renu Munjal was re-appointed in the meeting held on 5th August, 2000 w.e.f. 1st September, 2000 for a period of 5 years and her terms of appointment included payment of commission which read as under: –
“Commission: The appointee shall be allowed remuneration by way of commission in addition to Basic Salary, Perquisites and Allowances, Benefits or amenity subject to the condition that the amount of commission shall not exceed 1% of the net profits of the company in a particular financial year as computed in the manner referred to in Section 198 of the Companies Act, 1956.”
16. He pointed out that the terms of appointment as set out in the meeting held on 5th August, 2000 were partially modified in the 12th Annual General Meeting of the members held on 1 4th July, 2003 as under:
“RESOLVED THAT in partial modification of the earlier resolution passed with respect to the re-appointment of Renu Munjal (Ms.), Whole-time Director of the Company in the 10th Annual General Meeting of the Company held on August 18, 2001, the consent of the company be and is hereby accorded under sections 309, 310 read with Schedule XIII and other applicable provisions, if any, of the Companies Act, 1956 to increase here Basic Salary as set out in the Explanatory Statement annexed hereto for the remaining period of her tenure.”
17. He, therefore, submitted that the complete package of remuneration payable to Ms. Renu Munjal included commission also. Ld. Counsel further referred to page 6 of the paper book which is part of 14th annual report and pointed out that explanatory statement pursuant to sec. 173(2) of the Company’s Act, 1956 read as under: –
“Item No. 7
The tenure of Mrs. Renu Munjal, Whole-time Director of the Company is coming to an end on August 31, 2005. She was re-appointed as Whole-time Director in the 10th Annual General Meeting held on August 18, 2001. Her Basic Salary was revised to Rs. 1,35,000 with an increase of 10% in each of the financial year during the remaining period of her tenure in the 12th Annual General Meeting held on July 14, 2003. Thereafter, the Remuneration Committee in their meeting held on April 18, 2005 after having due consideration of the Remuneration Policy of the Company and of her increased job responsibilities in the present business scenario of the company have recommended her appointment as the Managing Director of the Company. Thereafter the Board of Directors have approved her appointment for a period of 5 (five) years from September 1, 2005 subject to your approval on the following remuneration (including minimum remuneration) and other terms and conditions as stated below:
I. Basic Salary : Rs. 2,00,000/- (Rupees two lacs only) per month, subject to an increase of 10% per annum effective April 1, 2006 and thereafter on the first day of each financial year.
II. Commission : The appointee shall be allowed remuneration by way of Commission in addition to Basic Salary, Perquisites and any other Allowances, benefits or amenities subject to the condition that the amount of Commission shall not exceed 1 % of the net profit of the Company in a particular financial year as computed in the manner referred to in sec. 198 of the Companies Act, 1956;
Provided that the aggregate amount of remuneration payable to the Appointee in a particular financial year shall be subject to the overall ceiling limit laid down in section 198 and 309 of the Companies Act, 1956.”
18. Ld. Counsel further referred to page 5 of the paper book and pointed out that company had declared dividend of Rs. 15 per Equity Shares on 90,50,000 Equity Shares of Rs. 10 each for the F.Y. 2004-05. Ld. Counsel further referred to page 38 of the paper book, wherein the computation of net profit in accordance with sec. 198 read with section 349 of the Company’s Act is contained which is reproduced hereunder: –
14) Computation of net profit in accordance with sec. 198 read with sec. 349 of the Companies Act, 1956
