TaxTMI 
TaxTMI 
2014 (11) TMI 1151
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....o the managing director and working director of the company. 3. The brief facts of the case are that the Assessing Officer (hereinafter referred to as the AO) noted that the assessee had debited the above noted amount to the profit and loss account under directors' remuneration on account of commission at the rate of 1% of the net profit paid to Shri G.D. Kelkar and Shri R. Vaze. The AO further noted that Shri G.D. Kelkar & Shri R. Vaze had held 10082 and 6049 shares respectively in the company because of which they were also entitled to receive dividend. The AO also noted that the assessee company had substantial reserve and surplus. The AO therefore held that the commission paid to Shri G.D. Kelkar & Shri R. Vaze would have otherwise been payable to them as dividend if the same benefit would not have been paid as commission. He therefore disallowed the claim of deduction in respect of payment of commission to the above said directors in view of the provisions of section 36(1)(ii). 4. In first appeal, it was pleaded before the Ld. CIT(A) that the payment of commission to the above said directors was for commercial expediency being reasonable consideration for their qualifica....
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..... He therefore has submitted that the commission paid to the directors was reasonable and was part of the salary of the directors and as such the disallowance made by the lower authorities was not justified. On the other hand, the ld. D.R., while relying upon the decision of the special bench of the Tribunal in the case of "Dalal Broacha Stock Broking P. Ltd. v. Addl. CIT" (2011) 131 ITD 36, has contended that the disallowance made by the lower authorities was justified. 7. We have considered the rival submissions. A perusal of the impugned order of the Ld. CIT(A) reveals that the amount of salary plus commission paid to the directors has not been held to be excessive by the lower authorities. There is no denial of the fact that the amount paid was reasonable in comparison to the remuneration paid for the services in the market. There is no denial of the fact that the dividend of Rs. 3 crore was declared in the year under consideration. There seems merit in the contention of the ld. AR that the company has 29 shareholders and 4 directors whereas the commission was paid to two working directors only. So far the reliance of the Ld. D.R. on the special bench decision of the Tribuna....
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.... Vaze for A.Y. 2007-08 (Paper Book II Pg. (87 - 90) (iv) Order dt.4/9/2009 (Paper Book II Pg. (91 - 93)" 11. The Ld. A.R. has further relied upon the order dated 04.09.09 of Company Law Board to show that the accounts of the assessee were not approved, hence, there was a reasonable cause for not declaring the dividend. The evidence sought to be produced by the assessee was not filed before the lower authorities. The documents sought to be produced, in our view, are necessary for the just decision of the case. 11.1 We, therefore, allow the application of the assessee to produce additional evidence and remand the issue to the file of the AO for decision afresh. The AO will properly appreciate the documents produced as additional evidence by the assessee and thereafter decide the issue afresh in accordance with law. This appeal of the assessee is allowed for statistical purposes. ITA No.678/M/2012 (A.Y. 2008-09) 12. In this appeal, the assessee has taken the following grounds of appeal: A) Sustaining disallowance of Rs. 10,94,18,059/- being the excise duty to the valuation of closing stock of finished goods, raw materials, packing material, fuel etc. ....
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....d in law in sustaining the disallowance of Rs. 1,32,74,005/- being the consultation and legal charges incurred by the appellant during the year under consideration. 11. The learned CIT(A) failed to appreciate that the expenses were wholly and exclusively incurred for the purposes of business and hence, were allowable in nature. 12. The appellant prays to your honour to delete the disallowance of Rs. 1,32,74,005/- being the consultation and legal charges incurred during the year. E) General: 13. The above grounds of appeal are without prejudice to one another and the appellant craves leave to add alter, amend, delete or modify any of the above grounds of appeal." 13. The Ld. A.R. of the assessee has stated at bar that as per the instructions of his client he does not press ground Nos.1 to 3. Accordingly, the grounds Nos.1 to 3 are dismissed as being not pressed. Ground Nos.4 to 6 14. Ground Nos.4 to 6 are relating to disallowance of commission of Rs. 84 lakhs under section 36(1)(ii) of the Act. The facts of this case being identical to assessment year 2007-08 and in view of the application for additional evidence of the assessee dated 16.....
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....of consultation charges of Rs. 2,13,29,091/- and legal expenses of Rs. 1,23,83,759/-. The AO observed that the assessee had mainly incurred the expenses in connection with Company Law Board proceedings in the case file by the group of shareholders of 'Shri R. Vaze family' on account of dispute regarding changes made in share holding pattern and the valuation of assets etc. The AO observed that the said expenses were not incurred wholly and exclusively for the purpose of business of the assessee rather the same were the expenditure for settlement of inter-se dispute between the directors. He thereafter made the following observations in respect of some of the expenditure claimed by the assessee. "Consultancy Charges: - (i) Rs. 40,30,050/- paid to Wealthtree: The expenditure claimed to have been incurred for preparing data as required by DDR auditors. For this purpose, the past records of the company including of tax matters and physical verification of assets was carried out. This shows that the expenditure claimed has not been incurred wholly and exclusively for the purpose of the business of the assessee. The consultancy fees paid for preparation for bus....
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....exclusively for the purpose of assessee's business. (vii) Rs. 8,00,000/- paid to Widia Ghandy & Company: The expenditure claimed to have been incurred were for verification of legal documents of land and immovable property, purchase deeds etc. in connection with legal matters related to proceedings pending before Company Law Board on account of petition filed by the group of members of director. Thus, the expenditure was for settlement of dispute between the directors and not against the company. Therefore, the expenditure incurred were not wholly and exclusively for the purpose of assessee's business. The above expenses claimed under the head 'consultation charges and legal expenses' are not deductible under sections 30 to 36 and hence their allowability has to be considered u/s. 37. As per the provision of section 37, the expenditure not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purpose of business shall be allowed. Unless the entire expenditure incurred is exclusively with sole motive of promoting the business, the expenditure will not qualify for deduction as....
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....es in its state-of-art production facilities. Backed by strong research and instrumental support, more than 100 molecules are now available from the company's ingredients business unit. The business of the company heavily depends on the chemical formulations. Such formulations are based on certain formula which is secreted by the owners as there is a risk of such formulations being copied and replicated. * These research activities of new formulations and recipes and inventions are done by the Managing Director and Working Director and their family members. Because of the continuous research and experience of your appellant company Managing Director and Working Director for the last more than 50-55 years which has enabled the company to maintain its status of market leader and had also led your appellant company to successfully overcome the competition from some of the foreign companies such as Givaudan, International Flavours and Fragrances etc. * Due to disagreement on certain decisions of the Board of Directors a group of shareholders, viz. Ajit S. Vaze, Mr. Girish S. Vaze and their families filed a operation u/s. 397-398 of the Companies Act against the co....
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....nudan, IFF etc, and to meet the working capital requirements for the newly established manufacturing facility at Vashivali your appellant company had to carry out in the field of finance, Taxation, Business due diligence etc. from various agencies." 5.5 It is very clear from the above that the whole exercise of Consultancy and other Legal Expenses was carried out as there were to fractions in the management of the company who were fighting with each other and the entire company was to be divided with each other. For this very purpose the exercise of due diligence and valuation of various assets was carried out and fees were paid for the same. Therefore, in my opinion these expenses were certainly not wholly and exclusively for the purpose of the appellant's business and as observed by the A.O. the element of Capital Expenditure can also not be denied. Therefore, the disallowance made by the A.O. is confirmed. This ground of appeal is, therefore, dismissed." 22. Before us, the Ld. A.R. of the assessee has submitted that the legal expenditure was paid for representing and defending the company in the legal matters before the Company Law Board. It has been further contende....