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2016 (9) TMI 1439 - AT - Income TaxDisallowance U/s.40A(2) - payments of commission - payment as excessive and unreasonable having regard to the market value of the goods/services - Held that - It is not correct for the Assessing Officer to begin a fresh litigation in the absence of any new material or change in the circumstances on the premise that there are new views, closer and more intelligent analysis. Assessing Officer had not doubted the genuineness of the payment and Shri E.K. Parthasarathy, Managing Director has admitted the receipt as his income in his return of income and paid the relevant taxes. Therefore, we do not find any infirmity in the order of Ld.CIT(A) and the order of Ld.CIT(A) is upheld and the ground raised by the revenue on the addition of profit commission to Mr. E.K. Parthasarathy stands dismissed. Payment of commission to guarantors - allowable busniss expenditure - Held that - The company has chosen to make the payment of guarantee commission as a source of income to the directors and the facts of the Hon ble Karnataka High court in the case of United Breweries 2011 (10) TMI 443 - KARNATAKA HIGH COURT are clearly applicable in the assessee s case. Accordingly, we hold that the payment of commission to guarantors is not wholly and exclusively incurred for the purpose of business and is not allowable deduction u/s. 37(1) of income tax act. Accordingly, the addition made by the AO is confirmed - decided against assessee. Addition u/s 40A(2)(a) - commission paid to John Bruce (UK) LTD. - the expenditure was not incurred wholly and exclusively for the purpose of business - Held that - The paper book submitted by the AR is not certified by either assessee or the AR. Therefore, we are of the opinion that the material placed before the Bench is not made available to the AO. The assessee had submitted the details of commission paid, and the invoice amounts, but not placed the copies of invoices to verify whether the sales were made through the JBUK or not? CIT(A) examined the agreements and came to conclusion that the expenditure was incurred for the purpose of business but he has not given any opportunity to the AO. This issue requires further verification to examine the genuiness of expenditure. Disallowance u/s 40A(2)(a) - payment of profit commission to Ms.Priya Sriram, D/o. Mr.Parthasarathy - Held that - As evident from the above trading results that there were no additional efforts or services rendered by Mrs.Priya Sriram to make the payment of profit commission over and above the fixed salary. Since the fixed was already increased from ₹ 35.50 lacs in 2010-11 to ₹ 60.01 lacs there was no reason for payment of commission on overall profit of the company without incremental benefit. Though there are three whole time Directors and senior officers working in the company only Mrs. Priya Sriram was paid profit commission on the total profit without considering and evaluating the incremental benefit derived by the company. The A.R has not substantiated the additional responsibilities or services given to her and discharged by her with the terms and conditions of employment. Therefore we are in agreement with the AO that no additional services were rendered by Mrs. Priya Sriram for payment of profit commission and the payment was not in the business interest. Accordingly we set aside the order of CIT(A) and restore the order of the AO. - Decided in favour of revenue Disallowance U/s.40A(2)(a) - payments of rent in respect of accommodation leased from Mr.Sriram Sivaram son in Law of Mr.E.K.Parthasarathy CMD of the company - Held that - Mr.Sriram Sivaram is a whole time director and there are other directors but no such facility was extended to any of the other directors. The leased accommodation is a taxable perquisite in the hands of Mr.Sriram Sivaram, which is much lower in rate. Mr.Sriram Sivaram is a Director of the company and drawing salary. Section 40A(2) was brought into Act to curb the incidence of tax evasion, curbing such practice of distributing profits without making the payment of legitimate tax. Therefore, we agree with the CIT(A) s order and the entire transaction is nothing but an arrangement wherein benefit is bestowed upon individual of the family rather than the company deriving any benefit. Therefore, AO has rightly disallowed the expenditure as unreasonable - Decided in favour of revenue
Issues Involved:
1. Disallowance of profit commission to the Chairman and Managing Director under Section 40A(2). 2. Disallowance of guarantee commission paid to directors under Section 40A(2). 3. Disallowance of commission paid to John Bruce (UK) Ltd. under Section 40A(2). 4. Disallowance of profit commission to the daughter of the Chairman and Managing Director under Section 40A(2). 5. Disallowance of rent paid for accommodation leased from the son-in-law of the Chairman and Managing Director under Section 40A(2). Detailed Analysis: 1. Disallowance of Profit Commission to CMD: The Assessing Officer (AO) disallowed the profit commission paid to the Chairman and Managing Director (CMD) under Section 40A(2) of the Income Tax Act, considering it excessive. The CMD had received substantial commissions in addition to a fixed salary. The AO argued that the commission was unreasonable and not justified by the services rendered. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, stating that the commission was reasonable and aligned with the company's legitimate needs. The Tribunal upheld the CIT(A)'s decision, noting that the AO failed to provide tangible evidence that the commission was excessive relative to the services rendered. 2. Disallowance of Guarantee Commission: The AO disallowed the guarantee commission paid to the directors for personal guarantees given for bank loans, arguing that the expenditure was not incurred wholly and exclusively for business purposes. The CIT(A) allowed the expenditure, referencing judicial precedents that supported the payment of guarantee commissions. However, the Tribunal found that the company's financial soundness and the collateral securities provided negated the necessity for personal guarantees, thus confirming the AO's disallowance. 3. Disallowance of Commission Paid to John Bruce (UK) Ltd.: The AO disallowed the commission paid to John Bruce (UK) Ltd., questioning the necessity and genuineness of the expenditure. The CIT(A) deleted the disallowance, accepting the assessee's explanation that the commission was for promoting sales to specific markets. The Tribunal, however, noted that the AO had not been given an opportunity to examine the agreements and supporting documents. Consequently, the matter was remitted back to the AO for further verification. 4. Disallowance of Profit Commission to CMD's Daughter: The AO disallowed the profit commission paid to the CMD's daughter, asserting that it was not justified by any special services rendered. The CIT(A) deleted the disallowance, viewing the payment as reasonable. The Tribunal, however, found that the incremental benefits to the company did not justify the commission, especially given the substantial increase in her fixed salary. The Tribunal restored the AO's disallowance, emphasizing the lack of specific evidence of additional responsibilities or services warranting the commission. 5. Disallowance of Rent Paid for Accommodation: The AO disallowed the rent paid for accommodation leased from the CMD's son-in-law, considering it a form of profit distribution rather than a legitimate business expense. The CIT(A) upheld the disallowance, noting that the arrangement primarily benefited the director rather than the company. The Tribunal agreed, emphasizing that such transactions are precisely what Section 40A(2) aims to curb. The Tribunal confirmed the disallowance, dismissing the assessee's appeals on this issue. Conclusion: The Tribunal's detailed analysis upheld the CIT(A)'s decisions in some instances while remanding others for further verification. The judgments consistently emphasized the need for tangible evidence and the principle of consistency in tax assessments. The Tribunal's decisions reflect a careful consideration of the statutory provisions, judicial precedents, and the specific facts of each case.
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