2019 (6) TMI 138 - AT - Income Tax

Revenue's Appeal Dismissed, AO Directed to Limit Disallowance to Exempt Income

The Dy. Commissioner of Income, Circle-12 (1) (1), Mumbai Versus Ami Polymer Pvt. Ltd.

The Tribunal dismissed the Revenue's appeal on all issues except for directing the AO to restrict the disallowance under section 14A to the extent of the ... Addition of commission paid to director u/s 36(1)(ii) - the payments was more than other directors - CIT-A deleted the addition - HELD THAT:- We noted that the Alpesh Gandhi, is an executive director of the assessee company and is paid annual salary of 36 lacs along with variable component of commission computed at the rate of 15% of the net profit earned by the assessee company, which is paid in lieu of functions performed / services rendered. In this year the commission computed on profit was to the tune of ₹ 42,11,363/-. We noted that the variable component of commission was a part of remuneration package of the executive director as part of all shareholders. This variable commission is based on his performance evaluation and also considering his contribution in meeting the financial performance of the company. Alpesh Gandhi is a highly qualified person and detail of his qualification, functions performed and services rendered were filed before AO as well as before CIT(A). The sales of assessee company have increased by ₹ 2,15,92,232/- as compared to total sales of FY 2010-11 i.e. by 25.58%. The assessee company filed details that there is an increase in customer basis by 76 customers, where sales are more than of ₹ 50,000/- - out of increase in total sales of ₹ 2,15,02,232/- as narrated above the sales of ₹ 1,07,25,036/- i.e. almost 50% is from this new customers. It was contended that even the export sales have grown by 45.52%.There is substantial increase in profit before tax as compared to earlier and i.e. by 48.23%. In view of this facts, were are of the view that the CIT(A) has rightly deleted the addition and we confirm the same. This issue of Revenue’s appeal is dismissed. Disallowances of interest u/s 36(1)(iii) - utilization of interest free funds in capital work in progress - HELD THAT:- noted that the assessee’s own capital i.e. interest free funds available as on 31.03.2012 is ₹ 5,30,46,131/- as against the investment made in capital work in progress at ₹ 2,32,02,581/-. Even non business investment is ₹ 36,49,657/-. It means that the assessee’s own interest free funds are more than the investment made in non-business investments. The CIT(A) has rightly deleted the addition. - Decided in favour of assessee Disallowance u/s 14A r.w Rule 8D - expenses relatable to exempt income - adjustment in book profit u/s 115JB - HELD THAT: -The assessee has earned the dividend income of ₹ 19,500/- and disallowance should be restricted to the extent of exempt income earned by assessee and this issue is squarely covered by the decision of Pr. CIT vs. Ballarpur Industries Limited [2016 (10) TMI 1039 - BOMBAY HIGH COURT] , wherein this issue has been considered and finally following the judgment of Hon’ble Delhi High Court in the case of Cheminvest Limited vs. CIT 2015 (9) TMI 238 - DELHI HIGH COURT] Wherein held that the provisions of Section 14A would not apply to the facts of this case as no exempt income was received or receivable during the relevant previous year. It is not the case of the AO that any actual income was received by the assessee and the same was includible in the total income. In the facts of the case, the Authorities held that since the investments made by the assessee in the sister concerns were not the actual income received by the assessee, they could not have been included in the total income.” The provisions of section 14A r.w Rule 8D will not apply, where income is computed on the basis of book profit u/s 115JB as held by special bench of this Tribunal in the case ACIT vs. Vireet Investments (P.) [2017 (6) TMI 1124 - ITAT DELHI] Disallowance of PF and ESIC - beyond the respective due date u/s 36(i) (va) r.w.s. 2(24(x) - CIT(A) deleted the disallowance by noting the actual date of payment - HELD THAT:- We noted that the payments made by assessee on account of PF and ESIC is within the due date of filing of return of income u/s 139(1) , as is evident from the above chart. Hence, we are of the view that the issue is squarely covered by the decision of Hon’ble Bombay High Court in the case of CIT vs. Hindustan Organics Chemicals Ltd [2014 (7) TMI 477 - BOMBAY HIGH COURT]. As the issue is squarely covered as the payments made within the due date of filing of return of income we confirm the order of CIT(A). This issue of Revenue’s appeal is dismissed. Issues Involved:1. Deletion of addition made on account of commission paid to a director under section 36(1)(ii) of the Income Tax Act.2. Deletion of disallowance of interest expenses under section 36(1)(iii) of the Income Tax Act.3. Deletion of disallowance of expenses relatable to exempt income under section 14A read with Rule 8D of the Income Tax Rules, 1962.4. Deletion of disallowance of the claim of contribution towards provident fund and ESIC made beyond the respective due date under section 36(1)(va) read with section 2(24)(x) of the Income Tax Act.Detailed Analysis:1. Deletion of Addition Made on Account of Commission Paid to a Director:The Revenue challenged the deletion of an addition of Rs. 42,11,363/- made by the Assessing Officer (AO) under section 36(1)(ii) of the Income Tax Act. The AO disallowed the commission paid to the executive director, Mr. Alpesh Gandhi, arguing that it was in lieu of dividend and was more than what other directors received without justification. The CIT(A) deleted the addition, noting that the commission was part of the director's remuneration package and based on his performance and contribution to the company's financial performance. The Tribunal confirmed the CIT(A)'s decision, emphasizing the director's qualifications and the significant increase in the company's sales and profits attributable to his efforts.2. Deletion of Disallowance of Interest Expenses:The AO disallowed interest expenses of Rs. 24,61,097/- under section 36(1)(iii) of the Income Tax Act, arguing that the assessee could not prove that interest-free funds were utilized in capital work in progress. The CIT(A) noted that the assessee had sufficient interest-free funds exceeding the investment in capital work in progress and non-business investments. Citing the Bombay High Court's decision in Reliance Utilities & Power Ltd., the CIT(A) deleted the disallowance. The Tribunal upheld the CIT(A)'s decision, confirming that the interest-free funds available were more than the investments made.3. Deletion of Disallowance of Expenses Relatable to Exempt Income:The AO made a disallowance of Rs. 1,16,788/- under section 14A read with Rule 8D, which included Rs. 1,01,682/- for interest and Rs. 15,106/- for administrative expenses. The CIT(A) deleted the interest disallowance but sustained the administrative expenses. The Tribunal directed the AO to restrict the disallowance to the extent of the exempt income earned (Rs. 19,500/-), following the Bombay High Court's decision in Ballarpur Industries Limited and the Delhi High Court's decision in Cheminvest Limited. Additionally, the Tribunal noted that section 14A read with Rule 8D does not apply when computing book profit under section 115JB, as held by the special bench in ACIT vs. Vireet Investments (P.) Ltd.4. Deletion of Disallowance of Contribution Towards Provident Fund and ESIC:The AO disallowed Rs. 69,546/- for contributions to PF and ESIC made beyond the due dates. The CIT(A) deleted the disallowance, noting that the payments were made within the due date for filing the return of income under section 139(1). The Tribunal confirmed the CIT(A)'s decision, citing the Bombay High Court's ruling in CIT vs. Hindustan Organics Chemicals Ltd., which held that such payments made within the due date for filing the return are allowable.Conclusion:The Tribunal dismissed the Revenue's appeal on all issues except for directing the AO to restrict the disallowance under section 14A to the extent of the exempt income earned. The appeal was partly allowed in these terms.