2013 (3) TMI 10 - HC - Income Tax

Payment of specified persons u/s 40A(2) - excessive commission -held that - From the findings recorded by the Tribunal it is absolutely clear that Sri Habib Akhtar was aged about 21 years during the previous year relevant to the assessment year in question and was still studying. The Court came to the conclusion that when a company pay a higher salary to the directors or the managers or to her officers or employees as a matter of commercial expediency, it is not for the Income-tax Officer to say that in his opinion the said salary should not have been paid. A company may decide to pay a higher remuneration to its directors, officers or employees so as to encourage them to work hard, expand the business, or for a host of other commercial considerations and the matter has to be looked at from the view point of the company. Applying the principles laid down in the case of Abbas Wazir(P) Ltd. vs. Commissioner of Income-tax, 2003 (9) TMI 50 - ALLAHABAD HIGH COURT to the facts of the present case we find that in the case in hand the assessing authority has considered all the relevant factors viz. The agreement, the work done in the new factory as also the quantum of amount paid with relation to the production done in the old as well as the new factory and had acted from the view point of a prudent businessman while introducing the provision of Section 40A(2) of the Act and disallowing a part of the commission on the ground of being excessive in nature. - Decided in favor of revenue.

Summary

Issues:
1. Whether the Tribunal was justified in holding the commission paid as excessive without commercial consideration or business expediency?
2. Whether there was evidence to support the excessive commission payment to Sri Habib Akhtar?
3. Whether the application of Sec.40-A(2) in disallowing part of the commission was correct?

Analysis:

Issue 1:
The case involved the Tribunal's decision on the excessive commission payment of Rs.36,078/- to Sri Habib Akhtar, son of one of the partners. The Tribunal found Sri Habib Akhtar, a 21-year-old studying student, lacking expertise in preparing tobacco mixtures. Despite his claims, he could only recall two sellers, and his actual tasks did not align with the services for which he was paid. The Tribunal concluded the commission was unreasonable and excessive, restricting it to Rs.6,000 based on the legitimate business needs. The Tribunal's findings were supported by evidence and material on record, indicating no commercial consideration or business expediency for the excessive payment.

Issue 2:
Regarding the evidence supporting the excessive commission payment, the Tribunal's detailed analysis highlighted the discrepancies between Sri Habib Akhtar's claimed responsibilities and the actual services rendered. The Tribunal scrutinized his statement, agreement with the firm, and the nature of work performed, concluding that the payment was unjustified based on fair market value and legitimate business needs. The Tribunal's decision was based on factual findings and material on record, indicating a lack of commercial justification for the excessive commission.

Issue 3:
The application of Sec.40-A(2) in disallowing part of the commission was a crucial aspect of the case. The Tribunal invoked this provision to restrict the commission payment to Rs.6,000, considering it reasonable based on the services rendered and business needs. The Tribunal's decision aligned with the principles of commercial expediency and fair market value, as highlighted in the Division Bench decision cited by the applicant's counsel. By analyzing the agreement, work done, and payment quantum, the Tribunal acted from the viewpoint of a prudent businessman, ensuring the expenditure was legitimate and justifiable. Therefore, the Tribunal's application of Sec.40-A(2) was upheld as correct in disallowing the excessive commission payment.

In conclusion, the High Court upheld the Tribunal's decision, affirming that the commission payment to Sri Habib Akhtar was excessive without commercial consideration or business expediency. The Court answered all three questions in favor of the Revenue and against the assessee, based on the detailed analysis and findings provided by the Tribunal.