2014 (11) TMI 1151 - AT - Income Tax

Disallowance u/s 36(1)(ii) being the commission paid to the managing director and working director of the company - Held that - 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 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 Tribunal in the case of Dalal Broacha Stock Broking P. Ltd. v. Addl. CIT (2011 (6) TMI 251 - ITAT Mumbai) is concerned we find that the facts of the present case are quite distinguishable. In the said case there were only three shareholders who were directors of the company and no dividend was declared and there was no explanation as to why the dividend was not declared. Under such circumstances we find force in the contention of the Ld. A.R. that company was justified in paying the commission to the working directors which was quite reasonable. The lower authorities have not noticed these facts while deciding the issue under consideration. Disallowance of professional fees paid to three relatives under section 40A(2)(b) - Held that - We find that the amount of remuneration paid was quite reasonable in view of the qualification of the said persons. It is not the case of the Revenue that the amount is excessive in comparison to market rates. The above said relatives of the assessee are duly qualified in their respective fields and in our view the assessee did not commit any illegality while availing their services and paying them reasonable remuneration for the purposes of business necessity. We therefore allow this issue in favour of the assessee. Disallowance being the consultation and legal charges - Held that - Shri R. Vaze family filed a petition for operation and mismanagement before the Company Law Board. Due to the above disputes company was not functioning efficiently with a view to bring settlement between the brothers/directors consultancy and legal fees were incurred for valuation purposes. The fee was also incurred for operation of new manufacturing facilities at Vashivali near Panvel Raigad district. From the above arguments it is clear that most of the legal and consultancy charges were incurred were related to inter-se dispute between two factions of the directors of the company. Even the other expenses as observed by the AO are of capital nature and are not allowable as revenue in nature. We do not find any infirmity in the orders of the lower authorities while disallowing the said expenditure. This issue is accordingly decided against the assessee.

Summary

Issues Involved:
1. Disallowance under section 36(1)(ii) for commission paid to directors.
2. Addition of excise duty to the valuation of closing stock.
3. Disallowance of professional fees paid to relatives under section 40A(2)(b).
4. Disallowance of consultation and legal charges.

Detailed Analysis:

Issue 1: Disallowance under section 36(1)(ii) for commission paid to directors
ITA No.7256/M/2010 (A.Y. 2006-07):
- The assessee challenged the disallowance of Rs. 8,85,000/- commission paid to the managing director and working director.
- The AO disallowed the commission, arguing it would have been payable as dividends due to the directors' shareholding.
- The CIT(A) upheld the disallowance, but the ITAT found the commission reasonable and in line with market rates, noting that the company had declared Rs. 3 crore in dividends and had 29 shareholders.
- The ITAT distinguished this case from "Dalal Broacha Stock Broking P. Ltd. v. Addl. CIT," where no dividends were declared.
- The ITAT set aside the lower authorities' order, allowing the commission as a deductible expense.

ITA No.7257/M/2010 (A.Y. 2007-08):
- The disallowance of Rs. 84 lakhs commission was contested. The facts were similar to the previous year, but no dividend was declared due to shareholder disputes.
- The ITAT allowed the assessee to produce additional evidence, remanding the issue to the AO for fresh consideration.

ITA No.678/M/2012 (A.Y. 2008-09):
- The disallowance of Rs. 84 lakhs commission was again contested. The ITAT, referencing the previous year's decision, remanded the issue to the AO for fresh consideration.

Issue 2: Addition of excise duty to the valuation of closing stock
ITA No.678/M/2012 (A.Y. 2008-09):
- The assessee contested the addition of Rs. 10,94,18,059/- excise duty to the closing stock valuation.
- The CIT(A) upheld the AO's addition, but the ITAT did not address this issue substantively as the assessee did not press these grounds during the hearing, resulting in their dismissal.

Issue 3: Disallowance of professional fees paid to relatives under section 40A(2)(b)
ITA No.678/M/2012 (A.Y. 2008-09):
- The AO disallowed Rs. 3,42,000/- paid to three relatives, considering it excessive.
- The CIT(A) confirmed the disallowance, but the ITAT found the fees reasonable given the relatives' qualifications and contributions.
- The ITAT allowed the appeal, overturning the disallowance.

Issue 4: Disallowance of consultation and legal charges
ITA No.678/M/2012 (A.Y. 2008-09):
- The AO disallowed Rs. 1,32,74,005/- in consultation and legal charges, arguing they were not wholly and exclusively for business purposes and were capital in nature.
- The CIT(A) upheld the disallowance, noting the expenses were related to inter-se disputes among directors and capital expenditures.
- The ITAT agreed with the lower authorities, confirming the disallowance as the expenses were not for the business's exclusive benefit and were capital in nature.

Conclusion:
- ITA No.7256/M/2010 (A.Y. 2006-07): Allowed.
- ITA No.7257/M/2010 (A.Y. 2007-08): Allowed for statistical purposes.
- ITA No.678/M/2012 (A.Y. 2008-09): Partly allowed.