Revenue's Appeal Dismissed: Deduction Allowed under Section 80IA for Commission/Bonus

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that allowed the deduction under section 80IA and the commission/bonus paid to the directors. The Tribunal found no merit in the Revenue's arguments and referred to previous decisions supporting the CIT(A)'s conclusions. The judgment was delivered on 20.09.2017.

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Issues Involved:

1. Disallowance of deduction under section 80IA (erstwhile 80IB) amounting to Rs. 1,23,60,580.
2. Disallowance of commission/bonus paid to directors amounting to Rs. 12,00,000.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction under Section 80IA:

The Revenue challenged the deletion of the addition made by the Assessing Officer (AO) on account of disallowance of deduction under section 80IA amounting to Rs. 1,23,60,580. The brief facts relevant to this issue are that the assessee claimed deduction under section 80IB (erstwhile 80IA) on the consolidated profits of all its units. The AO observed that the assessee started its production in 1990 and was eligible for deduction under section 80I(IA) for ten years. The assessee then opened a new unit (Unit-II) in September 1997, which started the same production. The AO noted that the assessee surrendered its manufacturing license for Unit-I in FY 1999-2000 and started job work for Unit-II, using the facilities and workers of Unit-I. The AO concluded that this amounted to the reconstruction of the business to increase the profit of Unit-II, making it eligible for deduction under section 80IA for another ten years. Consequently, the AO disallowed the deduction claimed under section 80IB.

The CIT(A) deleted the disallowance, noting that the issue was covered in favor of the assessee by the orders of the CIT(A) and ITAT for the assessment years 2000-01, 2001-02, 2002-03, 2003-04, and 2005-06. The ITAT had previously ruled that Unit-II was independently set up with new machinery and was not a reconstruction of the existing business. The ITAT emphasized that the business of manufacturing encompasses various activities, and merely getting job work done by Unit-I does not transform Unit-II into a reconstructed business. The ITAT upheld the CIT(A)'s order, allowing the deduction under section 80IA.

Upon considering the submissions of both parties and the ITAT's previous decision, the Tribunal found no justification to discard the CIT(A)'s findings. The Tribunal noted that the Revenue failed to provide any material evidence to take a different view from the ITAT's earlier decision. Therefore, the Tribunal dismissed Ground No. 1 raised by the Revenue.

2. Disallowance of Commission/Bonus Paid to Directors:

The second issue involved the disallowance of commission/bonus amounting to Rs. 12,00,000 paid to the directors, who were also shareholders of the assessee company. The AO observed that the assessee declared a profit of Rs. 4,65,88,411 but distributed only Rs. 50 lacs as dividends. The AO concluded that the bonus/commission paid to the directors could have been distributed as dividends, thereby disallowing the payment under section 36(1)(ii) of the Act, relying on the Bombay High Court's decision in Loyal Motor Service Co. Ltd. vs. CIT.

The CIT(A) deleted the addition, reasoning that the commission paid to the directors was taxable in their hands at the normal rate, whereas dividends would have been tax-free. The CIT(A) noted that the payment of commission was supported by board resolutions and was not related to the directors' shareholding. The CIT(A) also referred to the Delhi High Court's decision in CIT vs. Career Launcher India Ltd., which held that payment of bonus/commission to directors for services rendered and as part of their terms of employment is allowable under section 36(1)(ii).

The Tribunal, after considering the rival submissions and relevant records, found no justification to discard the CIT(A)'s findings. The Tribunal noted that the Revenue failed to rebut the CIT(A)'s findings, which indicated no ulterior motive behind the payment of bonus/commission to the directors. The Tribunal also referred to the Delhi High Court's decision in CIT vs. Career Launcher India Ltd., which supported the CIT(A)'s conclusion. Therefore, the Tribunal upheld the CIT(A)'s order and dismissed the Revenue's appeal on this ground.

Conclusion:

The Tribunal dismissed the Revenue's appeal, finding no merit in the grounds raised. The Tribunal upheld the CIT(A)'s order, allowing the deduction under section 80IA and the commission/bonus paid to the directors. The judgment was pronounced in the open court on 20.09.2017.

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