TaxTMI 
TaxTMI 
2016 (1) TMI 366
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....he following grounds of appeal :- 1. On the facts and in law the ld. CIT(A) has erred in making addition / enhancing income of Rs. 1,00,00,000/-. (Rs.1 crores). 2. On the facts and in law the ld. CIT(A) has erred in not appreciating the fact that the commission of Rs. 1 crore was paid for the services rendered by directors / shareholders, which resulted into substantial increase in turnover and profit. 3. On the facts and in law the ld. CIT(A) has erred in not appreciating the fact that the provisions of section 36(1)(ii) are not applicable to the facts of the case of the appellant. Your appellant craves, leave to add, alter, delete above or any other ground/s of appeal. 4. The Revenue in ITA No. 2280/PN/2012 has raised the following grounds of appeal :- 1) On the facts and circumstances of the case, the CIT(A) has erred in deleting the addition of Rs. 74,66,434/- made on account of wrongly claimed as revenue expenditure. 2) On the facts and circumstances of the case, the CIT(A) has erred in not considering the fact that the expenditure on construction of Road and RCC Chambers was not yielding any extra income as admitted by the asses....
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....e has shown increase in WIP at Rs. 1,56,20,936/- and total WIP at Rs. 1,63,11,736/ - (1,56,20,936/- + 6,90,800) and in this way there is a difference in WIP of Rs. 74,66,434/- (2,37,78,170 - 1,63,11,736) which has no connection with the revenue receipt of R.A. Bill 1 and R.A. Bill No.2 and therefore it was wrongly claimed as revenue expenditure. In view thereof, the revenue expenditure claimed to the extent of Rs. 74,66,434/- was disallowed and added to the income of the assessee. 8. The CIT(A) deleted certain additions made by the Assessing Officer on account of site office, motorable road, etc., against which Revenue is not in appeal. Further, the CIT(A) also deleted addition on account of underestimation of work in progress by calculating the work in progress at Rs. 2.37 crores as against work in progress shown by the assessee at Rs. 1.63 crores, resulting in addition of Rs. 74,66,434/-. Before the CIT(A), the contention of the assessee was that it was not clear as to how the Assessing Officer had made the aforesaid addition. In respect of expenditure of Rs. 36,02,535/-, the assessee claimed that the same was incurred on construction of road from Rigaon to site and the said e....
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....he Act at all. Hence, the contention of assessee that the Assessing Officer had verified the said transaction of commission payment to the directors, was held to be not tenable by the CIT(A). The CIT(A) then, traced the work of lift irrigation system and the connection of family members and was of the view that rise in turnover and profit was due to the fact that the sub-contract was awarded by M/s. Siddhrath Construction which is the proprietary concern of first cousin of Shri Sachin Kotecha, one of the main directors of the appellant company. The appellant company only executed the sub contract on behalf of the main contractor. On these facts and circumstances, the CIT(A) held that where the dividend was payable and the same had been paid in the garb of commission. Only Rs. 1,90,000/- was proposed as dividend available out of profit of Rs. 93.48 lakh available for appropriation after payment of commission of Rs. 1 crore. The CIT(A) held that there was no justification in the contention of the assessee that increase in turnover / profit was due to extra efforts of the directors. As per the CIT(A), the payment was made with an intention to avoid full payment of taxes, hence, the co....
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....id by the assessee company to the directors was claimed to be less than 60%. Further, reliance was placed on the following decisions for the allowability of the claim of expenditure:- (i) CIT Vs. Career Launcher India Ltd. (2013) 358 ITR 179 (Del) (ii) AMD Metplast Pvt. Ltd. Vs. DCIT (2012) 341 ITR 563 (Del) (iii) New Silk Route Advisors (P.) Ltd. Vs. DCIT (2015) 55 taxmann.com 540 (Mumbai - Trib) (iv) K.L. Concast Pvt. Ltd. Vs. Addl.CIT (2013) 35 CCH 431 (Delhi - Trib) 12. The learned Authorized Representative for the assessee further pointed out that the CIT(A) had denied the said deduction as there was no evidence of extra services. He further pointed out that because of the efforts of three directors, the assessee company got contract of Rs. 70 crores, which was not only received by the assessee but was implemented during the year. Further, the directors are qualified. He further pointed out that in case the entity was registered firm, then expenses of commission would have to be allowed, just because dividend tax was payable can the yardstick be changed. The learned Authorized Representative for the assessee further pointed out that apart....
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.... the balance year to irrigate the neighboring fields using gravity, etc. as per the terms and conditions of tender work. Such projects are usually situated at river banks and majority of the pipe line passes through fields which are inaccessible by any major or arterial Roads. The assessee also explained that since project road was not available at site, it had to first set up project road and other basic infrastructure amenities in such inhospitable terrain, at site, where actual work had to be executed. The expenditure was necessitated and imperative for carrying on of the business in order to facilitate smooth and efficient movement of men and machinery / equipment. For the year under consideration, the turnover of the assessee company was Rs. 10.62 crores. The assessee had declared profit of Rs. 1,17,60,552/- and had debited commission to directors at Rs. 1 crore against the same. The claim of the assessee before the CIT(A), who had issued enhancement notice to the assessee during the course of appellate proceedings, was that the turnover and the above mentioned profit was possible only because of the efforts of the directors. The assessee claims that it had received sub-contra....
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.... subcontractor are provided in the said Agreement. Admittedly, the assessee has carried on the aforesaid sub-contract work during the year under consideration. The income arising from the said work contract has been offered to tax by the assessee. In view of the awarding and earning of contract of Rs. 70 crores, the efforts of the three directors was acknowledged by the five directors of the assessee company, who were present in the meeting of Board of Directors as on 30.03.2009. It was acknowledged that as the contract of Rs. 70 crores had been earned because of sincere efforts of the directors, since the company was a new one and hence, it was decided that the commission @ 10% of the sales would be paid to the three directors. The qualifications of Shri Sachin Prakash Kotecha is B.E (Polymers) and MBA in Finance, whereas qualification of Shri Rahul Prakash Kotecha was B.E. (Mechanical) and MBA in Marketing. Both of them were engaged in the execution of all the work and also management of the project. Another director Shri Prakash K. Kotecha was in-charge of accounts, banking and taxation. The commission paid to the three directors was as follows:- Directors Name Commission ....
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....he actual services rendered by the persons concerned. Looking at the nature of sub-contract executed by the assessee which is in specialized field, it cannot be held that the same was carried out without the efforts of concerned directors. In any case, the businessman is the best person to decide its affairs and expenditure cannot be disallowed on any surmises. We find merit in the plea of the learned Authorized Representative for the assessee that in case the concerned entity was a partnership concern, under the provisions of section 40(b) of the Act, 60% of the profits of business could be allowed as remuneration to the partners of the said entity. The assessee has furnished the details of directors' remuneration and commission paid to the directors and the total of the same does not exceeds 60% of the profits. Merely because the assessee is a private limited company and had agreed to pay the commission to the directors by passing Resolution in this regard before the close of year, the same cannot be brushed aside and the said expenditure was disallowed in the hands of assessee on mere surmises. On the other hand, remuneration paid to the same directors was allowed by the Assessi....
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....lso hold directorial positions in the assessee. Therefore, the assessee's contention that the bonus was paid to the shareholders in their managerial capacity, like in the case of other managers, cannot be questioned merely on the basis of a speculation by the revenue that such payment was to avoid tax. In such circumstances, the deduction under Section 36(1)(ii) in respect of payment of bonus to the two shareholder directors is allowed. The assessee has relied upon a number of judicial pronouncements to support its contention. However, we do not consider it necessary to discuss those decisions for ruling in its favour. Therefore, this question is answered in favour of the assessee. 19. The learned Authorized Representative for the assessee has placed reliance on series of decisions. The Hon'ble Delhi High Court in AMD Metplast Pvt. Ltd. Vs. DCIT (supra) has laid down the ratio that where commission was paid as part and parcel of salary and TDS was deducted and where the director was liable to pay tax on both the salary and component in the commission, no disallowance was warranted under section 36(1)(ii) of the Act on the surmise that the dividend had to be paid to the share....
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....ary by the assessee company as well as the managing director and tax deduction was made under section 192 of the Act treating the commission as part of salary, then the disallowance of commission paid to managing director was not justified by applying the provisions of section 36(1)(ii) of the Act. Reliance in this regard was placed on the ratio laid down by the jurisdictional High Court in AMD Metplast Pvt. Ltd. Vs. DCIT (supra). In view thereof, the reliance placed upon by the Revenue on ratio laid down by the Mumbai Special Bench of Tribunal in Dalal Broacha Stock Broking (P) Ltd. Vs. Addl.CIT (supra) was held to be not correct, in view of the decision of Hon'ble High Court, which was binding on all the subordinate Courts and Tribunals working within the jurisdiction of such High Court. The decision of Mumbai Special Bench of Tribunal is not binding, in view of the ratio laid down by the Hon'ble Delhi High Court in series of decisions as referred to by us in the paras hereinabove and consequently, we find no merit in the reliance placed upon by the CIT(A). 23. In the totality of the above said facts and circumstances, we hold that the assessee is entitled to the claim of dedu....
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....f the assessee company after the project was completed. In respect of second expenditure on RCC chambers, the learned Authorized Representative for the assessee explained that the same were constructed but because of the review of the project and later recommendations, the said RCC chambers were demolished, for which necessary details were filed by the assessee. 31. We have heard the rival contentions and perused the record. The issue arising before us is in relation to the expenditure incurred on construction of road from Rigaon to site at Rs. 36,02,535/- and expenditure on RCC chambers of Rs. 45,50,000/-. The Assessing Officer had re-computed the work in progress of the assessee by including the aforesaid amounts as part of work in progress. However, the claim of the assessee was that the said expenditure was allowable as revenue expenditure and could not be included in the work in progress. The CIT(A) vide paras 7.5 and 7.6 observed as under:- "7.5 I have carefully considered the facts of the case and rival contentions. On perusal of the same it has been noticed that the A.O. has made the addition on account of difference in WIP worked out by him by treating the expe....