2010 (1) TMI 68 - HC - Income Tax

Appeal dismissed, commission payment and interest deduction allowed as legitimate business expenses

The appeal filed by the revenue was dismissed as both substantial questions of law were answered in favor of the assessee. The Tribunal found that the ... Deduction - Commissioner paid to direction – interest payable in respect of investment – application of section 40A(2)(a), payment to relatives – held that – the appellant was justified in paying commission to its directors against value of the order secured from M/s Shree Balaji Poly Packs and the personal guarantee offered by the Directors for the performance and value of goods delivered for conversion. – deduction of commission pad to directors allowed - In this case, the assessee has an object for investment and has also got orders from the said M/s Virgo Polymers India Limited to the extent of 80 to 90 percent and hence, there is a commercial expediency. Further there is no proof that the borrowed amount has actually been diverted to investment. Therefore, after taking into consideration the object of the assessee as well as the investment was made due to commercial expediency and also there is no nexus between the borrowed amount, the Tribunal is correct in holding that the investment in shares was made keeping in view the commercial interest of the assessee. Issues Involved:1. Justification of commission paid to the Directors.2. Deduction of interest payable in respect of investments made in M/s Virgo Polymers India Limited.Issue-wise Detailed Analysis:1. Justification of Commission Paid to the Directors:The primary issue revolves around whether the commission paid to the Directors amounting to Rs. 4,20,000/- qualifies as a business expenditure. The assessee, a private limited company, paid this commission to three Directors for securing orders from M/s Shree Balaji Poly Packs and providing personal guarantees. The Tribunal found that the commission was 5% of the total order value secured by the Directors, and the payments were made in accordance with a company resolution dated 04.03.1996. The Tribunal noted that the Directors declared these amounts in their respective returns, and the Assessing Officer did not question the bona fide nature or reasonableness of the transactions, nor did he invoke Section 40A(2)(a) of the Income Tax Act, 1961. The Tribunal concluded that the commission was a legitimate business expenditure, as it was paid for securing orders and providing personal guarantees, which were essential for the business operations. This finding was based on valid material and evidence, leading to the conclusion that the expenditure incurred was revenue in nature. Thus, the first question was answered in favor of the assessee.2. Deduction of Interest Payable in Respect of Investments Made in M/s Virgo Polymers India Limited:The second issue concerns the disallowance of Rs. 13,47,894/- as interest attributable to investments made in M/s Virgo Polymers India Limited. The Assessing Officer disallowed this amount, considering the investment unrelated to the business and alleging that borrowed funds were diverted for non-business purposes. The Tribunal, however, found that the assessee's business significantly depended on orders from M/s Virgo Polymers India Limited, constituting 80-90% of its orders. It was established that the investment was made for commercial expediency, and one of the objects of the assessee's Memorandum of Association allowed such investments. The Tribunal also noted that the investment was made before the borrowal from TIIC, and there was no evidence that borrowed funds were used for the investment. The Tribunal referenced the Supreme Court decision in S.A. Builders Ltd. v. Commissioner of Income Tax (Appeals) and Another, which emphasized the importance of commercial expediency in determining the legitimacy of such expenditures. The Tribunal's finding that the investment was made in the commercial interest of the assessee was upheld, and the second question was also answered in favor of the assessee.Conclusion:The appeal filed by the revenue was dismissed as both substantial questions of law were answered in favor of the assessee. The Tribunal's findings were based on valid materials and evidence, confirming the legitimacy of the commission paid to the Directors as a business expenditure and the interest deduction related to the investment made in M/s Virgo Polymers India Limited due to commercial expediency.