2014-VIL-909-ITAT-DEL

Equivalent Citation: [2014] 36 ITR (Trib) 119 (ITAT [Del])

Income Tax Appellate Tribunal DELHI

ITA No.3821 /Del/ 2008 (A.Y. 2004-05), ITA No.2281 /Del/ 2009 (A.Y. 2005-06)

Date: 29.08.2014

ACIT, CIRCLE-3 (1) , NEW DELHI

Vs

M/s BOTIL OIL TOOLS (INDIA) PVT. LTD.

For the Appellant by : Shri Manoj Kumar Chopra, Sr. D.R.
For the Respondent by : Shri Anil Bhalla, C.A.

BENCH

SMT. DIVA SINGH AND SHRI J.S. REDDY, JJ.

JUDGMENT

PER J.S. REDDY,A.M:

1. These appeals filed by the Revenue are directed against the orders of ld. Commissioner of Income Tax (Appeals)-XVIII, New Delhi dated 14.10.2008 for the A.Y. 2004-05 and ld. Commissioner of Income Tax (Appeals)-VI, New Delhi dated 03.03.2009 for the A.Y. 2005-06.

2. Facts in brief:

The assessee is a company which is engaged in the manufacturer of “Oil Field Drilling and Production Equipment”, which are used for drilling Wells and to pull out oil from the wells.

3. The facts of the issue before us are brought out at Paras 3 & 4 of the assessment order, which is extracted for ready reference:-

“COMMISSION PAID:

During the year the assessee has paid commission of Rs. 52,22,514/- to the directors who we also shareholders of the assessee company. The details of the same as seen from the clause 8(b) of the Auditors report and Annexure VII of clause 18 of 3CD Report as under:

Sh. H.L. Khushalani Rs. 32,64,071

Sh. Vivek Khushalani Rs. 13,05,628

Sh. Raksha Walia Rs. 6,52,814

Total Rs. 52,22,514

The assessee company was asked to explain vide questionnaire dated 01.09.06 why the above commission paid to the directors who were also the shareholders of the company should not be disallowed as per Section 36( I )(ii) of" 1.T. Act, 1961. The assessee vide submission dated 06.12.06 stated as under:

The Commission was paid as per the See 309 r w.s J 98 and Schedule XIII of the Companies Act 1956 and the provisions of Section 36(1)(ii) are not attracted to the said commission. We therefore submit that the commission paid to directors which is part of the terms of appointment are fully allowable u/s 37(1) of I.T. Act 1961.

The submissions filed by the assessee company were considered and found not tenable. The commission paid by the assessee company cannot be considered as a part of the salary or remuneration. After considering the facts and circumstances of the case, it is considered that these payments have been paid to the persons who have vested interest, to reduce the net profits and to avoid tax liability. Section 36(1)(ii) of the I.T. Act 1961 clearly talks about the conditions laid for the allowability of commission and bonus payments. The same is reproduced as under:

"36. Other deductions.

36(1)(ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission;”

As seen from the above section, commission is allowed only when the same would not have bee payable as profits or dividend. This means any commission paid to the shareholders forms part of the profits or dividends of the company and hence not allowable. Since in the case of the assessee company, the' sum paid as commission to the shareholders forms part of profits or dividend payable, the same cannot be allowed as deduction to the assessee company. Therefore, the commission amounting to Rs. 52,22,514/- is disallowed and added to the total income declared by the assessee.

(Disallowance : Rs. 52,22,514)”

4. The First Appellate Authority at Pages 4 & 5 at Paras 5 & 6 held are as follows:-

5) I have considered the facts of the case and submissions made by the appellant. Section 36(1 )(ii) of the Act provides as under:

"36(1 )(ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission."

6) It will be seen that, section 36(1 )(ii) of the Act provides that any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it has not been paid as bonus or commission, the same is an allowable deduction. In other words, section 36(1)(ii) of the Act seeks to provide that commission paid to an employee is an allowable deduction paid to an employee is an allowable deduction unless and until such sum would not have been payable as profits or dividend. In the instant case, the appellant company paid remuneration to the Directors of the company and as such, the ministerial remuneration is in accordance with the companies Act. The Assessing Officer in the order has not established that, such commission paid to shareholders was payable as profits or dividend of the company. Since such sum was not payable to the shareholders or Directors as profits or dividend of the company, the deduction claimed by the company in respect of remuneration paid of Rs. 52,22,514/- is allowable under section 37(1) of the Act. Hence disallowance so made is deleted.”

5. Aggrieved the Revenue is in appeal on the following grounds:-

“In the facts and circumstances of the case, the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 5222514/- made by the AO as paid to Directors of the company as commission even though it was not an allowable expenditure within the meaning of section 36(1)(ii) as well as section 37(1) of the I.T. Act, 1961.

The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”

6. We have heard Shri Manoj Kumar Chopra, ld. Sr. Departmental Representative on behalf of the Revenue and Shri Anil Bhalla ld. counsel on behalf of the assessee.

7. On a careful consideration of the facts and circumstances of the case and perusal of the papers on record and the orders of the authorities below as well as case laws cited, we hold as follows.

8. As per the proposition laid down by the Jurisdictional High Court, in the case of Metaplast P. Ltd. Vs. DCIT 341 ITR 563 (Delhi), Section 36(1)(ii) is not attracted if the payment of commission is part of salary paid by the company in terms of the appointment order, which is approved at the Annual General Meeting.

9. In the case of one hand, the commission in question is paid as per the terms of appointment and has been approved at the Annual General Meeting of the company held on 15.09.2004. The Annual General Meeting approved the remuneration package of (1) Mr. H.L. Khushalani (2) Mr. Vivek Khushalani and (3) Mrs. Raksha Walia w.e.f. 01.04.2004.

10. The approval was granted in accordance with the provisions of Sections 198, 269, 309, 310 and Schedule XIII of the Companies Act 1956.

11. Perusal of the resolution demonstrate that the commission in question is nothing but another form of salary which is paid for service rendered. Thus, the order of the ld. CIT(A) has to be upheld.

12. The issue is also covered in the decision of the jurisdictional High Court in the case of CIT-1 Vs. Convertech Equipments Pvt. Ltd- 2012-TIOL-1002-HC-DEL-IT where it is held as follows:-

“Moreover, a Division Bench of this Court in Metaplast Pvt. Ltd. v. DCIT, (2012) 341 ITR 563, after referring to the judgment of the Bombay High Court in Loyal Motors Services Company Ltd. v. CIT, (1946) 14 ITR 647 opined that the commission, if found to be paid for services rendered by the director as per the terms of the appointment, cannot be said to be distribution of dividend or profits in the guise of commission. It was noticed while commission was paid as a form of remuneration for actual services rendered, dividend is a return of investment and is paid to all its shareholders equally. It was thus held that if the commission is paid for actual services rendered, section 36(1)(ii) will not apply.”

13. The ld. Departmental Representative relied on the decision of the Special Bench of the Tribunal in the case of M/s Dalal Broacha Stock Broking Pvt. Ltd. in ITA No.5792/MUM/2009 order dated 22.06.2011.

14. As we have applied the binding decision of the jurisdictional High Court to the facts of the case, we need not consider the decision of the Mumbai Special Bench on the issue.

15. Other objection raised by the ld. D.R. is that Board resolution was not available for the A.Y. 2005-06. Copy of the resolution is produced before us. Hence, this objection is not sustainable.

16. The issues are the same for both the assessment years and hence we upheld the order of the ld. CIT(A) for both the assessment year.

17. In view of above discussion, we dismiss both the appeals.

The order is pronounced in the open Court on 29.08.2014

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.