TaxTMI 
TaxTMI 
TaxTMI 
2018 (6) TMI 750
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....s erred in law, facts and circumstances of the case in confirming the disallowance of 30% of total commission [Total commission: Rs. 90,25,273/-] (Ninety lakhs twenty five thousand two hundred and seventy three only) amounting to Rs. 27,07,582/- (Twenty lakhs seven thousand five hundred and eighty two only) paid to related parties u/sec 40A(2)(b) of Income Tax Act, 1961. (2) The learned CIT (A) has erred in law, facts and circumstances of the case in confirming the disallowance of 30% of commission amounting to Rs. 27,07,582/- (Twenty lakhs seven thousand five hundred and eighty two only) on adhoc basis without ascertaining the Fair value of services provided to related parties u/sec 40A(2)(b) and further erred in not considering the fact that commission paid to independent agents at the same rate of 12% as paid to related parties. (3) The learned CIT (A) has erred in law, facts and circumstances of the case in confirming the disallowance of 30% of salary amounting to Rs. 3,60,000/- (Three lakhs sixty thousand only) by treating Rs. 12,00,000/- (Twelve lakhs) as commission instead of salary (Total salary paid Rs. 80,60,000/-) (Eighty lakhs sixty thousand only) paid to Zoru Bha....
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....The assessee being aggrieved with the sustaining of the disallowance of Rs. 38,87,705/- made by the A.O under Sec. 40A(2)(a) has carried the matter in appeal before us. The ld. Authorized Representative (for short 'A.R') for the assessee took us through the facts of the case and submitted that the A.O had disallowed an amount of Rs. 38,87,705/- being 30% of the payments made by the assessee to its related parties under Sec.40A(2)(a) of the Act, as under : Sr. No. Name Total Payment Head of Payment 1. Katie Bathea 69,47,220 Commission 2. Farad Bathena 20,78,053 Commission 3. Zoru Bathena 12,00,000 Commission 4. Adv. Nevia Bhathena 2 7,33,745 Legal and professional Total 1,29,59,018 The ld. A.R before adverting to the maintainability of the aforesaid disallowance submitted that the salary of Rs. 12,00,000/- paid to Mr. Zoru Bathena as general manager of the assessee company was wrongly considered by the A.O as payment by way of commission. It was submitted by the ld. A.R that as the respective payments made to the aforementioned related parties were in conformity with those made to the unrelated parties, hence the A.O had most arbitr....
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....bly disallowed 30% of such payments under Sec. 40A(2)(a), which however had wrongly been set aside by the CIT(A). 6. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that the fact that the assessee had made an aggregate payment of Rs. 1,29,59,018/- to its related parties by way of commission /legal and professional charges is not in dispute. It is further discernible from the records that the assessee on being called upon by the A.O to substantiate the reasonableness of the payments made to its related parties, however had failed to place on record any documentary evidence in support thereof. The A.O was of the view that the assessee had paid commission to its related parties at an exorbitant rate of 10% of the sale value. It was further observed by the A.O that not only the payments made by the assessee to its related parties appeared to be unreasonable, but rather 90% of the total payments were found to have been made to such related parties. We find that on the basis of the aforesaid deliberations, the A.O after characterising the payments made by the assessee to its rela....
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....ive or unreasonable, having regard to either the fair market value of the services for which the payment was made by the assessee or the legitimate needs of its business or the benefit derived by or accruing to the assessee therefrom. Rather, the manner in which the A.O had carried out the disallowance under Sec. 40A(2)(a) can be gathered from the fact that though the assessee company had paid salary to one of its related party viz. Mr. Zoru Bathena for his services rendered as general manager, however the same was considered by the A.O as payment towards commission. We are of the considered view that the lower authorities had carried out the disallowance under Sec. 40A(2)(a) on an adhoc basis viz. 30% of the payments made to the related parties and made a disallowance of Rs. 38,87,705/- without placing on record any material which could prove to the hilt that the payments were excessive or unreasonable, having regard to the fair market value of the services for which the same were made or keeping in view the legitimate needs of the business of the assessee or the benefit derived by or accruing to the assessee therefrom. Be that as it may, we are of the considered view that in the ....
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.... the assessment proceedings, it was observed by the A.O that the total payment of commission made by the assessee comprised of related party payments of Rs. 2,19,09,156/- and those made to the independent parties were to the tune of Rs. 26,30,893/-. It was further observed by the A.O that during the year under consideration the assessee had made substantial payment of commission of Rs. 1,16,83,883/- to its Managing director viz. Mr. Darayus A. Bathena, who held the majority shareholding of 75% of total shares in the assessee company. It was further noticed by the A.O that though Mr. Darayus A. Bathena played an important role in day to day activities of the assessee company, however no salary was shown to have been paid to him. On the basis of the aforesaid facts, the A.O held a conviction that the assessee had deliberately arranged the aforesaid transaction to avoid disallowance of payment of commission under Sec.36(1)(ii) and to evade the payment of taxes on distribution of dividend. The A.O was of the view that in case if the assessee company would have shown payment of salary to Mr. Darayus A. Bathena, the same would had led to disallowance of commission payment under Sec.36(1)....
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.... had played an important role in the day to day activities of the assessee company. On the basis of his aforesaid observations, the CIT(A) concluded that now when the A.O had himself admitted that Mr. Darayus A. Bathena was rendering services to the assessee company, hence the deduction of commission was allowable as an expenditure under Sec.36(1)(ii) of the Act. The CIT(A) in the backdrop of the aforesaid facts further observed that the commission of Rs. 1,16,83,883/- paid to Mr. Darayus A. Bathena who was concededly the main and controlling person of the assessee company was found to be well within the reasonable parameters. On the basis of his aforesaid deliberations, the CIT(A) not finding favour with the view taken by the A.O deleted the disallowance of Rs. 1,16,83,883/- made under Sec. 36(1)(ii) of the Act. 14. The revenue being aggrieved with the order passed by the CIT(A) had carried the matter in appeal before us. The ld. Departmental Representative (for short 'D.R') at the very outset of the hearing of the appeal took us through the facts of the case in context of the issue under consideration. It was submitted by the ld. D.R that the assessee company had clearly manoeuv....
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....fits of the business for the year in question made it reasonable to pay the amount granted as allowance; and (iv) the general practise in similar business or trade justified the payment of the amount as bonus. The ld. D.R taking support of the aforesaid observations of the High Court submitted that a plain reading of Sec. 36(1)(ii) revealed that the profits of a business could not be allowed to be dwindled by merely describing the payment as commission, if the same was made in lieu of dividend of the assessee company. It was thus, the claim of the ld. D.R. that as the assessee in the present case had failed to discharge the onus and prove to the hilt that the amount of Rs. 1,16,83,883/- was paid to Mr. Darayus A. Bathena for services rendered by him to the assessee company as a sales agent, hence the CIT(A) had erred in summarily allowing the same as an expense in the hands of the assessee. 15. Per contra, the ld. Authorized Representative (for short 'A.R') for the assessee rebutted the aforesaid contentions of the revenue. The ld. A.R took us through a letter dated 31.03.2005 addressed to the assessee company by Mr. Darayus A. Bathena (Page 1-2) of APB, wherein it was confirmed b....
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....he ITAT, Pune bench 'B' in the case of Arihantam Infra Projects (P) ltd. Vs. Jt. CIT, Range-2 Nashik (2015) 64 Taxmann.com 404 (Pune). The ld. A.R taking us through the aforesaid order, submitted that the Tribunal had concluded that when the directors of the assessee company had given services and in recognition thereof, there was payment of commission to them, the same could not be questioned merely on the basis of speculation by the revenue that the same was to avoid payment of dividend tax. It was submitted by the ld. A.R that the Tribunal on the basis of its aforesaid observations had deleted the disallowance made under Sec. 36(1)(ii) of the Act. The ld. A.R further referring to the order of the 'Special bench' of the ITAT Mumbai Bench 'D' in the case of Dalal Barocha Stock Broking (P) Ltd. Vs. Addl. CIT, Range-4(1), Mumbai (2011) 11 Taxman.com 426 (Mum)(SB), relied upon by the ld. D.R, submitted that the same was distinguishable on facts. The ld. A.R to fortify his aforesaid contention and to impress upon us that the facts involved in the case before the 'Special bench' of the Tribunal were distinguishable, took us through the said order of the Tribunal. 16. The ld. A.R furth....
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....servations of the CIT(A) that if the commission paid to Mr. Darayus A. Bathena was to be disallowed, then the maximum dividend that could have been declared by the assessee company would have been Rs. 87,65,347/-. On the basis of the aforesaid facts, it was submitted by the ld. A.R that a dividend of Rs. 87,65,347/- on 15,952 equity shares of Rs. 100/- each, would have worked out to 550%, which could not have been paid as dividend under any circumstances. The ld. A.R taking support of the aforesaid facts submitted that now when it stood established that the commission of Rs. 1,16,83,883/- paid to Mr. Darayus A. Bathena was not an amount which was otherwise payable to him as dividend, hence no disallowance under Sec. 36(1)(ii) was called for in the hands of the assessee company. The ld. A.R further relied on the judgment of the High Court of Delhi in the case of AMD Metplast (P) Ltd. Vs. DCIT (2012) 341 ITR 563 (Del). The ld. A.R taking support of the aforesaid judicial pronouncement submitted that now when it stood proved to the hilt that the commission paid to Mr. Darayus A. Bathena was for the services rendered by him as a sales agent of the assessee company and the said amount c....
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....e. We are of the considered view, that the purpose of jeopardising the right of an assessee to claim the payment of bonus or commission as an expense, by making available the disabling rider in Sec. 36(1)(ii) is that when a particular amount was to be paid to the shareholder as dividend, the company cannot be allowed a deduction on the ground of claiming the payment of the same as a bonus or commission to such shareholder. To put it in other words, Sec. 36(1)(ii) is intended to prevent an escape from taxation by describing a payment as bonus or commission, when in fact ordinarily it should have reached the shareholder as profit or dividend. Rather, to be brief and explicit, a plain reading of the aforesaid statutory provision viz. Sec. 36(1)(ii) reveals that the profits of a business will not be allowed to be dwindled by merely describing the payment as bonus or commission, if the payment is in lieu of dividend or profit. We are of the considered view that as in the case of the assessee company before us, as Mr. Darayus A. Bathena during the year under consideration was not an employee of the assessee company, thus the qualification or the rider embodied in the latter part of Sec. ....
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....ovisions of Sec. 36(1)(ii), as observed by us hereinabove, would not be applicable to the commission payment made to Mr. Darayus A. Bathena for the reason that he is not the employee of the assessee company, however, even otherwise as the rendering of services as a sales agent by him to the assessee company is established to the hilt, hence deduction of commission even otherwise cannot be disallowed as an expenditure under Sec. 36(1)(ii) of the Act. 19. We are further persuaded to be in agreement with the view taken by the CIT(A) that keeping in view the present economic scenario, wherein all the medium range companies are remunerating their managing directors in the range of Rs. 5 to 10 lacs per month, the payment of commission to Mr. Darayus A. Bathena, even if it was to be considered to have been paid in lieu of salary, keeping in view the fact that he was the main and controlling person of the company looking after its affairs, was well within the reasonable parameters. 20. We have also deliberated at length on the observations of the lower authorities, which had been taken support of by the ld. D.R. in his attempt to persuade us to subscribe to his contention that the paymen....
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....les agent of the assessee company. We further find that the assessee company had duly proved before the lower authorities that the payment of commission to Mr. Darayus A. Bathena was as per the terms of appointment and Memorandum and Articles of association of the assessee company. The payment of commission is also found to be as per the provisions of the Companies Act. We are further of a strong conviction that the veracity of the payment of commission to Mr. Darayus A. Bathena can safely be gathered from a perusal of the fact, that the turnover of the assessee company had witnessed an increase due to the efforts put in by him. As observed by us hereinabove, the fact that the entire commission of Rs. 1,16,83,883/- would not have become payable to the assessee as dividend cannot also be lost sight of, as the same takes the case of the assessee beyond the sweep of the disallowance contemplated in Sec. 36(1)(ii) of the Act. We thus, on the basis of our aforesaid deliberations are of the considered view that the applicability of the disabling rider of Sec. 36(1)(ii) would stand ousted in respect of the commission payment made to Mr. Darayus A. Bathena for two fold reasons viz. (i) tha....
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.... further erred in not considering the fact that commission paid to independent agents at the same rate of 12% as paid to related parties. (3) The learned CIT(A) has erred in law, facts and circumstances of the case in confirming the disallowance of 30% of legal & professional fees paid to two Advocates [Total fees paid: Rs. 48,00,000/-] amounting to Rs. 14,40,000/- on the ground of payment to related parties u/sec. 40A(2)(b) of Income Tax Act, 1961. (4) The learned CIT(A) has erred in law, facts and circumstances of the case in confirming the disallowance of 30% of commission amounting to Rs. 14,40,000/- on adhoc basis without ascertaining the Fair value of services provided to related parties u/sec 40A(2)(b). (5) The Learned CIT(A) has erred in law, facts and in circumstances of the case by confirming the levy of interest u/s 234B, 234C and 234D. (6) Your Appellant craves leave to add to, alter, amend, delete and/or modify the above grounds of appeal on or before the final date of hearing. (7) Prayer: The Appellant prays your honor for allowing the appeal." 26. Briefly stated, the facts of the case are that the assessee had filed its return of income for A.Y 2010-....
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....f commission to Shri Darayus Bathena is covered by the exception clause of Section 36(i)(ii) of the Income Tax Act,1961. (iii) The Learned CIT(A) has erred on facts and in law, iii deleting the addition of Rs. 34,15,500/-(@ 30% of Rs. 1,13,85,000/-) made by the Assessing Off icer u/s. 40A(2)(b) of the Income Tax Act, 1961, without properly appreciating the factual and legal matrix as clearly brought out by the Assessing Officer. (iv) The Learned CIT(A) has erred on facts and law, in deleting, the addition of Rs. 34,15,500/- made by the Assessing officer u/s. 40A(2)(b) of the Income Tax Act, 1961, in respect to payment to Shri Zoru Bathena relying on the additional evidence without giving opportunity to the assessing officer." 31. We find, that as the facts and the issue as regards the addition of Rs. 1,20,00,000/- made by the A.O under Sec.36(1)(ii) in context of commission paid to Mr. Darayus A. Bathena during the year under consideration remain the same, as were there before us in the appeal of the revenue for A.Y 2009-10 in ITA No. 4681/Mum/2013, hence our order passed in context of the issue under consideration in A.Y 2009-10 while disposing off the appeal of the revenu....