2012 (6) TMI 267 - AT - Income Tax

Commission to Managing Director holding 39.9% of shareholding - dis-allowance on ground that assessee has not distributed the dividend from the very inception and the amount of commission could be paid as a profit or dividend income - Held that - Distribution of dividends is one component. It does not give the meaning that if an assessee failed to distribute the dividend, then payment of any commission would take the colour of dividend. The commission paid to managing Director is linked with the sales turnover of the assessee and to the performance of the directors. It has nothing to do with the shareholding pattern - dis-allowance held to be unjustified - Decided in favor of assessee. Admission of additional evidences - Rule 46A - first appellate authority deleted the addition made by AO after admitting and going through additional evidences - Held that - Sub-rule (3) of Rule 46A suggests that first appellate authority shall not take into consideration any evidence produced under sub-rule (1) of Rule 46, unless the Assessing Officer has been given an opportunity to rebut the evidence taken on record. Since no opportunity was given to the AO, therefore, order is set aside on this issue and issue restored to the file of the Assessing Officer for readjudication.

Issues Involved:
1. Allowability of commission paid to the Managing Director under section 36(1)(ii) of the Income-tax Act, 1961.
2. Allowance of depreciation on computer peripherals at 60%.
3. Deletion of Rs. 20,06,234 added by the Assessing Officer by making a disallowance out of miscellaneous expenses.

Detailed Analysis:

Issue 1: Allowability of Commission Paid to the Managing Director
The primary issue in all three appeals concerns the allowability of commission paid to the Managing Director, Shri Sucha Singh, under section 36(1)(ii) of the Income-tax Act, 1961. The assessee company, engaged in manufacturing and sales, had passed a resolution on 10.3.2003 to pay a sales promotion commission of 1% of the total turnover to its Managing Director. The Assessing Officer disallowed the commission for the assessment years 2005-06, 2006-07, and 2007-08, arguing that the commission could be paid as profit or dividend, thus not allowable as a deduction under section 36(1)(ii). The CIT(A) upheld the disallowance for 2005-06 and 2007-08 but allowed it for 2006-07.

The Tribunal examined the shareholding pattern and noted that the commission was linked to the sales turnover and performance, not the shareholding. It was observed that only 39.9% of the commission would be attributable to Shri Sucha Singh based on his shares, with the rest going to other shareholders. The Tribunal concluded that the commission was paid for services rendered and not as a profit or dividend. Citing authoritative pronouncements from the Delhi High Court, the Tribunal allowed the appeals for 2005-06 and 2007-08 and rejected the revenue's appeal for 2006-07, thereby deleting the disallowance of the commission.

Issue 2: Allowance of Depreciation on Computer Peripherals
The revenue's appeal for the assessment year 2006-07 included a ground on the allowance of depreciation at 60% on computer peripherals. The CIT(A) had allowed this depreciation based on the Delhi High Court's decision in the case of BSES Rajdhani Powers Ltd. The Tribunal, after reviewing the CIT(A)'s reliance on this judgment and the ITAT's order in a similar case, found no merit in the revenue's ground and upheld the CIT(A)'s decision to allow the depreciation at 60%.

Issue 3: Deletion of Rs. 20,06,234 Added by the Assessing Officer
The third issue in the revenue's appeal for 2006-07 was the deletion of Rs. 20,06,234 out of miscellaneous expenses. The Assessing Officer had disallowed this amount, observing a 100% increase in miscellaneous expenses compared to the previous year and deeming some expenses as capital in nature. The CIT(A) admitted additional evidence from the assessee under Rule 46A, concluding that the Assessing Officer had not provided sufficient opportunity for the assessee to justify the expenses.

The Tribunal agreed with the CIT(A) on the admission of additional evidence but noted that the Assessing Officer was not given a chance to rebut the evidence as required under sub-rule (3) of Rule 46A. Therefore, the Tribunal set aside the CIT(A)'s order on this issue and remanded it back to the Assessing Officer for re-adjudication, allowing the assessee to produce further evidence and ensuring the Assessing Officer provides a due opportunity of hearing.

Conclusion:
The appeals of the assessee for the assessment years 2005-06 and 2007-08 were allowed, and the revenue's appeal for 2006-07 was partly allowed for statistical purposes. The Tribunal upheld the allowability of the commission paid to the Managing Director and the depreciation on computer peripherals, while the issue of disallowance out of miscellaneous expenses was remanded for re-adjudication.

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