2012 (7) TMI 618 - AT - Income Tax

ITAT Upholds CIT(A) Decisions on Commission & Reopening; Sections 36(1)(ii) & 147 Applied

Deputy Commissioner of Income Tax, Versus M/s Convertech Equipment Pvt. Ltd.,

The Income Tax Appellate Tribunal (ITAT) upheld the Commissioner of Income Tax (Appeals) (CIT(A)) decisions in two issues. Firstly, the disallowance of ... Addition on account of commission paid to Directors of the company – Held that:- Commission paid to both the directors was wholly and exclusively based on performance of assessee’s business and commercial expediency. There is no violation to sec. 36(1)(ii) of the Act - directors are assessed to tax at maximum rate and commission received has been shown in their returns as taxable income - no reduction of tax liability either by the assessee or by the directors – In favor of assessee Reopening of assessment u/s 147 - Since the commission paid to directors was not allowable under the provisions of Section 36(1)(ii), the assessment was reopened by invoking the powers under Section 147 – Held that:- Reopening was made after four years from the end of the relevant assessment year - notice under section 148 based on the recorded reasons supplied to the petitioner as well as the consequent order were without jurisdiction as no action under section 147 could be taken beyond the four year period – In favor of assessee Issues:1. Disallowance of commission paid to directors under Section 36(1)(ii) of the Income Tax Act, 1961.2. Validity of reopening assessment under Section 147 and subsequent annulment of order under Section 143(3)/147.Analysis:Issue 1: Disallowance of Commission Paid to DirectorsIn the first issue, the Revenue appealed against the deletion of the addition of commission paid to directors by the CIT(A), arguing that it was not an allowable expenditure under Section 36(1)(ii) of the Income Tax Act. The ITAT upheld the CIT(A)'s decision based on similar cases from AY 2004-05 and 2005-06. The ITAT noted that the commission paid to the directors was based on performance and commercial expediency, leading to business growth and increased profits. The ITAT found no reason to interfere with the CIT(A)'s decision, emphasizing that the commission was wholly and exclusively related to the business's performance.Issue 2: Validity of Reopening Assessment under Section 147The second issue involved the validity of reopening the assessment under Section 147 by the Revenue. The Revenue contended that the assessment was reopened due to the non-allowability of commission paid to directors under Section 36(1)(ii). However, the ITAT disagreed with the Revenue's argument, citing the proviso to Section 147, which restricts reopening assessments after four years from the end of the relevant assessment year unless there is a failure to disclose material facts by the assessee. The ITAT found that in this case, there was no failure on the part of the assessee to disclose material facts. Referring to a relevant High Court decision, the ITAT concluded that the reopening of the assessment was not valid and upheld the CIT(A)'s decision to cancel the reopening.In summary, the ITAT upheld the CIT(A)'s decisions in both issues, dismissing the Revenue's appeals and the assessee's cross-objection as infructuous. The judgments were pronounced on 25th May 2012.