2016 (10) TMI 805 - AT - Income Tax

Dis-allowance of amount paid as commission to one whole time working Direcotr who had rendered extra service to the company - Held that - Exceptional performance in profitability was due to the market boom and not otherwise. In case of assessee, high turnover and profits are have direct nexus with the efforts put in by the said Director - assessee did not pay commission when turnover and profits were both declining. In case of assessee, commission had been paid steadily over the years in a consistent manner since 1995-96, besides assessee‟s dividend policy. Thus, payment in question was with respect to services rendered by the said Director, was not avoidance of payment of tax. We find no avoidance of tax done. So, we direct the Assessing Officer to allow the same because same was paid to Director in proportion to the service rendered by him. - Decided in favor of assesssee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of commission paid to a Director.
3. Disallowance of transport charges.
4. Disallowance of expenditure on agency and cargo clearance.
5. Disallowance of foreign travel expenses.
6. Disallowance of medical expenses.
7. Disallowance under Section 36(1)(ii) of the Income Tax Act.
8. Levy of penal interest under Sections 234A, 234B, 234C, and 234D.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee had disallowed ?22,04742/- suo motu for expenses attributable to earning tax-free income. The Assessing Officer (AO) made an additional disallowance of ?4,07,771/- under Rule 8D, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal found that the AO had mechanically applied Rule 8D without recording satisfaction regarding the correctness of the assessee’s claim. It was held that the application of Rule 8D was not correct, and the AO must record satisfaction before making any disallowance. The Tribunal directed the AO to delete the additional disallowance of ?4,07,771/-.

2. Disallowance of commission paid to a Director:
The CIT(A) confirmed the disallowance of ?41,95,784/- paid as commission to a Director. The assessee argued that the commission was paid for extra services rendered by the Director, contributing significantly to the company's growth. The Tribunal noted that the payment was justified and directly linked to services rendered. The Tribunal directed the AO to allow the commission payment, distinguishing it from the case of Dalal Broacha Stock Broking Pvt. Ltd., where no extra services were proven.

3. Disallowance of transport charges:
The AO disallowed ?4,67,500/- paid to Shri Ganesh Lifters based on disallowance in previous years. The Tribunal restored the issue to the AO, directing a decision based on the facts and circumstances of the year under consideration, emphasizing the need for independent verification of the services rendered by the transporter.

4. Disallowance of expenditure on agency and cargo clearance:
The CIT(A) enhanced the disallowance to ?5 lakhs without giving notice of enhancement or rejecting the books of accounts. The Tribunal found that the principle of natural justice was not applied, and directed the deletion of the addition.

5. Disallowance of foreign travel expenses:
The AO disallowed ?10,45,483/- incurred for foreign travel by Directors and their families, as the assessee failed to substantiate the business purpose of the trips. The Tribunal upheld the CIT(A)’s decision, agreeing that the expenses were not justified with evidence linking them to business activities.

6. Disallowance of medical expenses:
The AO disallowed ?60,438/- for medical expenses of a Director, as it was not considered a perquisite and no details were provided. The Tribunal upheld the disallowance due to lack of evidence.

7. Disallowance under Section 36(1)(ii) of the Income Tax Act:
For A.Y. 2010-11, the AO disallowed ?49,15,431/- paid as commission to a Director. The Tribunal followed the same reasoning as in the previous year and decided the issue in favor of the assessee, allowing the commission payment.

8. Levy of penal interest under Sections 234A, 234B, 234C, and 234D:
The Tribunal did not provide a detailed analysis on this issue, as it was contingent on the outcome of the other issues.

Conclusion:
The appeals for both A.Y. 2009-10 and A.Y. 2010-11 were partly allowed, with specific directions for the AO to reconsider certain disallowances based on the Tribunal’s findings. The Tribunal emphasized the need for proper satisfaction and evidence before making disallowances and upheld the principle of natural justice in its decisions.