2019 (5) TMI 1888 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - mandation of recording of satisfaction - HELD THAT - Provisions of Section 14A(2) makes it abundantly clear that the Assessing Officer is empowered to compute the disallowance in accordance with Rule 8D of the Rules only if he is satisfied that the computation made by the assessee with respect to the expenditure incurred for earning exempt income s not appropriate or cannot be relied upon. Therefore it is mandatory for the AO to record such satisfaction as to why the computation made by the assessee is to be rejected. In the case of the assessee it is apparent that the Ld.AO had not even ventured to examine the computation made by the assessee with respect to the expenditure incurred by the assessee for earning exempt income for all the relevant assessment years. Disallowance u/s.36(1)(ii) being commission paid to the Managing Director of the company - HELD THAT - As decided in AMD METPLAST P. LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX 2011 (12) TMI 320 - DELHI HIGH COURT Managing Director and in terms of the Board resolution is entitled to receive commission for services rendered to the company. It is a term of employment on the basis of which he had rendered service. Accordingly he was entitled to the said amount. Commission was treated as a part and parcel of salary and TDS has been deducted. Managing Director was liable to pay tax on both the salary component and the commission. Payment of dividend is made in terms of the Companies Act 1956. Dividend has to be paid to shareholders equally. This position cannot be disputed by the Revenue. Dividend is a return on investment and not salary or part thereof. Herein the consideration in the form of commission which was paid was for services rendered by him as per terms of appointment as a Managing Director. Thus addition made by the AD u/s 36 (1) (ii) is hereby deleted. - Decided in favour of assessee.

Summary

Issues Involved:
- Disallowance under Section 14A r.w.r. 8D of the Rules
- Disallowance under Section 36(1)(ii) of the Act for commission paid to the Managing Director

Issue 1: Disallowance under Section 14A r.w.r. 8D of the Rules:

The Revenue contested the deletion of additions made by the Assessing Officer (AO) for disallowance under Section 14A r.w.r. 8D of the Rules. The AO disallowed amounts for the assessment years 2012-13, 2013-14, and 2014-15, citing investments earning exempt income and dividend income. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted these additions as the AO did not examine the actual expenditure incurred by the assessee for earning exempt income. The CIT(A) relied on a Delhi High Court decision and ruled in favor of the assessee for all relevant assessment years. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, emphasizing the AO's failure to record satisfaction for rejecting the assessee's computation.

Issue 2: Disallowance under Section 36(1)(ii) of the Act for commission paid to the Managing Director:

The AO disallowed commission payments made to the Managing Director by the assessee company for the assessment years 2012-13, 2013-14, and 2014-15 under Section 36(1)(ii) of the Act. The CIT(A) deleted these additions based on a Delhi High Court decision, stating that the commission payment was justified by the terms and conditions of the appointment of the Managing Director. The ITAT upheld the CIT(A)'s decision, noting that the facts aligned with the court's ruling, and the commission was part of the Managing Director's salary.

In conclusion, the ITAT Chennai partially allowed the Revenue's appeals, upholding the CIT(A)'s decisions to delete the additions for both issues. The judgments were based on legal precedents and the specific circumstances of the case, ensuring a fair and thorough analysis of the disputed matters.