2012 (12) TMI 116 - AT - Income Tax

Tribunal rules for assessee on foreign exchange, gifts, directors' commission. Donation expenses claim dismissed.

The Tribunal partially allowed ITA No. 3878/Del/2010 and fully allowed ITA No. 796/Del/2011, ruling in favor of the assessee on the issues of foreign ... Foreign exchange fluctuation loss - restatement of debtors and a further loss on account of revaluation of foreign currency – Held that:- Assessee company by revaluing the foreign currency assets at the closing rate and by recognizing the exchange difference arising as expenses ensured adherence to the mandatory requirement laid under accounting standard AS11 of the ICAI. It has further been claimed that the assessee maintained its accounts as per the accrual system of accounting and has been following this accounting and the same is also in line with the Standard Accounting policies and practices being followed by the industry at large - loss suffered by the assessee on account of foreign exchange difference as on the date of balance sheet is an item of expenditure u/s. 37(1) - in favour of the assessee Addition - expenses incurred on birthday and anniversary gifts given to Directors and other managerial persons – alleged that these expenses were of personal nature – Held that:- Expenses were incurred by the assessee on birthday and anniversary gift given to the Director and other managerial persons. These expenditure can certainly be categorized as expenditure for the purpose of business as the same amount was to boost the moral of the employees - expenditure in this regard is duly allowable - in favour of the assessee. Addition on account of commission paid to Directors – alleged that in this regard the two employee director also happen to be share holder of the company holding 19.80% and 12.40% of shares of the company – Held that:- Compensation for both the directors were structured in such a way that apart from getting a fixed remuneration for their services rendered, they would also be entitled to receive commission based on the profitability of the company - assessee has paid taxes at maximum marginal rate. Both the Directors have admitted the payment of commission received and offered the same in their income tax returns and had paid at a maximum marginal rate. This clearly establishes the fact that there has been no tax avoidance motive behind the payment of commission to the directors by the assessee company - payment of commission was justified and not disallowable u/s 36(1)(ii) of the IT Act - in favour of assessee. Issues Involved:1. Addition on account of foreign exchange fluctuation.2. Addition on account of expenses on birthday and anniversary gifts.3. Addition on account of expenses paid on donation.4. Addition on account of commission paid to directors.Issue-wise Detailed Analysis:1. Addition on Account of Foreign Exchange Fluctuation:The Assessing Officer (AO) disallowed a sum of Rs. 11,67,317/- claimed by the assessee as foreign exchange fluctuation loss, arguing that the loss must actually be suffered in the relevant previous year, and actual suffering would arise only at the time of remittances. The Ld. Commissioner of Income Tax (Appeals) upheld this disallowance, stating that the claim did not fulfill the criteria for deductibility under section 37 of the Act, as there was no actual expenditure.The assessee appealed, citing the case laws of ONGC Ltd. and Woodward Governor India P Ltd., and argued that according to AS 11 issued by the ICAI, revaluation of foreign currency assets and recognition of exchange differences as expenses were mandatory. The Tribunal found the submissions cogent and, referencing the Supreme Court's decision in Woodward Governor India P Ltd., held that the loss on account of foreign exchange difference as on the date of the balance sheet is an item of expenditure under section 37(1). The Tribunal set aside the orders of the authorities below and decided the issue in favor of the assessee.2. Addition on Account of Expenses on Birthday and Anniversary Gifts:The AO disallowed Rs. 76,650/- debited by the assessee for birthday and anniversary gifts given to directors and managerial personnel, considering them personal expenses. The Ld. Commissioner of Income Tax (Appeals) upheld this disallowance, stating that the assessee failed to establish that the expenses were incurred wholly and exclusively for business purposes.The assessee appealed, arguing that the expenses were for boosting employee morale and were added to the employees' taxable income. The Tribunal found that such expenses could be categorized as business expenditures, as they were meant to boost employee morale. The Tribunal set aside the orders of the authorities below and decided the issue in favor of the assessee.3. Addition on Account of Expenses Paid on Donation:The assessee did not press this ground, and hence, it was dismissed as not pressed.4. Addition on Account of Commission Paid to Directors:The AO disallowed Rs. 44,66,604/- out of the total commission of Rs. 1,38,71,441/- paid to two director-employees, arguing that the commission would have been received as dividends if not paid as commission, thus not satisfying the negative condition under section 36(1)(ii). The Ld. Commissioner of Income Tax (Appeals) confirmed the AO's action, noting that the payment to directors showed a sharp increase compared to the previous year and was not justified with reference to the services rendered. The Ld. Commissioner also mentioned that the payment was excessive and unreasonable under section 40A(2)(a).The assessee appealed, arguing that the commission was part of the directors' remuneration, structured as a fixed percentage of net profits, approved by the Board of Directors, and consistent with industry practices. The assessee also noted that the commission was allowed in previous years, and there was no tax avoidance motive.The Tribunal found that the commission payment was justified, as it was part of the directors' remuneration structure, approved by the Board, and consistent with previous years. The Tribunal also noted that both directors paid taxes at the maximum marginal rate, indicating no tax avoidance motive. The Tribunal found the Ld. Commissioner of Income Tax (Appeals)'s contention under section 40A(2)(a) unsupported by any comparable instance. The Tribunal set aside the orders of the authorities below and decided the issue in favor of the assessee.Conclusion:The Tribunal allowed ITA No. 3878/Del/2010 partly and ITA No. 796/Del/2011 entirely, deciding the issues of foreign exchange fluctuation, birthday and anniversary gifts, and commission paid to directors in favor of the assessee. The issue of expenses paid on donation was dismissed as not pressed.