2015 (1) TMI 557 - AT - Income Tax

Commission / brokerage towards sale proceeds paid to the directors - CIT(A) deleted the addition - Held that - Ld. CIT(A) has misdirected himself in allowing the relief by simply observing that there is no bar for any person to act as a property broker. He has totally missed the fact that the persons who got commission were executive directors of the company who we al ready in receipt of the salary and were duty bound to per form the functions which were assigned to them with the remuneration paid to them. Therefore, we set aside his order and restore that of Assessing Officer - Decided against assessee. Long Term capital Gain - assessee adopting the value of industrial Plot at ₹ 138 Per sq. yard instead of ₹ 600 Per sq. yard adopted by the assessee company on the basis of valuation report of the approved Registered valuer of the Income Tax department - CIT(A) deleted the addition - Held that - Assessee has filed the valuation report from a registered valuer. However, the Assessing Officer correctly pointed out the defect that no year was mentioned against the current year. Moreover, nowhere it was mentioned in the valuation report regarding valuation of ₹ 3000/ - per square yard in the cur rent year. Normally in such a situation the matter should have been referred to the valuation cell but Assessing Officer has referred the mater to the PSIDC which is a government agency responsible for allotting the industrial plots in Mohali area where the plot of the assessee was also located. Agency itself has allotted a plot of 11245 square yard on 22.7.1981 @ ₹ 46/ - per square yard the value which was required to be found is on 1.4.1981 and the plot has been allotted by PSIEC on1 July 1981 and the period comes quite in proximity to the date of 1.4.1981 and therefore, in our opinion the Assessing Officer could have applied this rate easily. The Assessing Officer has been more than reasonable in further increasing this rate by three times to as certain the market value, therefore, the valuation as adopted by Assessing Officer seems to be correct. Therefore, we set aside the order of Ld. CIT(A) and restore that of Assessing Officer - Decided against assessee.

Summary

Issues Involved:
1. Deletion of addition on account of commission/brokerage paid to directors.
2. Deletion of addition in Long Term Capital Gain by adopting different valuation of the industrial plot.

Issue-wise Detailed Analysis:

1. Deletion of addition on account of commission/brokerage paid to directors:

The Revenue challenged the deletion of Rs. 48 lakhs added on account of commission/brokerage paid to the directors of the assessee company. The Assessing Officer (AO) disallowed the commission payments, arguing that directors, being owners and not property dealers, could not justify such payments. The company contended that the directors had put in significant efforts to sell the property, achieving a higher sale price, and thus deserved the commission. The CIT(A) agreed with the company, stating that directors could act as brokers and the commission was taxed as their personal income.

However, the Tribunal found that the company was closely held, with the majority shares owned by the directors' family, making it easy to pass self-serving resolutions. The Tribunal noted that the directors were already receiving salaries and were duty-bound to perform their roles without additional remuneration. The Tribunal referenced the Supreme Court case of Swadeshi Cotton Mills Co. Ltd. v. CIT, where similar commission payments were disallowed as not being incurred wholly and exclusively for business purposes. The Tribunal concluded that there was no evidence of extra efforts by the directors to justify the commission and that the high commission rate of 12% indicated an attempt to evade tax. The Tribunal also dismissed the argument that the commission was allowable under section 48, stating that section 36(1)(ii) applied, which disallows commission payments that could be considered dividends. The Tribunal restored the AO's order, disallowing the Rs. 48 lakhs commission.

2. Deletion of addition in Long Term Capital Gain by adopting different valuation of the industrial plot:

The Revenue also contested the deletion of Rs. 1,47,90,150/- added to the Long Term Capital Gain by adopting a different valuation of the industrial plot. The AO rejected the valuation report provided by the assessee, which used reverse indexation to determine the fair market value as of 01.04.1981. The AO instead relied on the rate provided by Punjab Small Industries and Export Corporation Ltd (PSIEC) for a similar plot allotted in 1981, adjusting it to Rs. 138 per square yard.

The CIT(A) accepted the assessee's valuation report, stating that the AO should have referred the matter to the District Valuation Officer (DVO) if there were doubts. However, the Tribunal upheld the AO's approach, noting that the reverse indexation method was not appropriate, as supported by the Special Bench of the Tribunal in Hiralal Lokchandani v. ITO and the Calcutta High Court in Jagat Mohan Kapur v. Wealth Tax Officer. The Tribunal found the AO's reliance on the PSIEC rate reasonable, as it was a concrete comparable instance. The Tribunal restored the AO's valuation and set aside the CIT(A)'s order.

Conclusion:

The Tribunal allowed the Revenue's appeal, disallowing the commission payments to the directors and upholding the AO's valuation of the industrial plot for calculating Long Term Capital Gain. The Tribunal emphasized the importance of concrete evidence and appropriate valuation methods in such cases.