2017 (11) TMI 1278 - AT - Income Tax

Addition to salary and commission payment to directors - Held that - The provisions of Section 36(1)(ii) has no applicability since the commission payment are not in proportion to the respective shareholdings and moreover, the commission has been paid only to two directors out of four directors. The assessee has asserted that the commission has been paid in proportion to the performance achieved by respective branches being controlled by them and this fact is nowhere controverted by the revenue. Undisputedly, the provisions of Section 198 of the Companies Act, 1956 could not be applied to assessee since the same was applicable only to Public Companies and not to Private Companies. Lastly, in terms of provisions of Section 40A(2)(a), the disallowance could be made only if the Assessing Officer was of opinion that such expenditure was excessive or unreasonable having regard to the fair market value of goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom. However, the revenue is unable to point out as to how the payment were excessive or unreasonable having regard to fair market value of such services. - decided against revenue Addition made on account of commission paid to sister concern - Held that - Upon perusal of the paper book, we find that the assessee has paid the said commission @5% of net sales achieved by Bangalore Gamma Facility pursuant to agreement dated 09/04/2007, which is effective for a period of five years starting from 01/04/2007. Apparently, the commission is being paid by the assessee over past several years and which is also evident from the fact that the assessee has debited similar commission of ₹ 22,45,962/- in immediately preceding Assessment year. The assessee, in the paper book, has placed complete details of commission payment viz. agreement, month-wise calculations, ledger extracts, respective invoices & detailed calculations of the amount of commission on Page Numbers 78 to 125, which establishes the claim of the assessee. Therefore, we are of the opinion that the impugned addition qua commission is not warranted for and therefore, we delete the same.- decided against revenue

Summary

Issues Involved:
1. Deletion of service tax on commission.
2. Disallowance of commission paid to directors and a sister concern.
3. Commission paid to directors as part of remuneration.
4. Application of Section 40A(2) and Section 198 of the Companies Act.

Detailed Analysis:

1. Deletion of Service Tax on Commission:
The assessee contended that the service tax of ?3,11,135/- on the commission was not debited to the Profit & Loss Account and claimed as service tax input credit. The Commissioner of Income Tax (Appeal) [CIT(A)] erred in not deleting this amount, implicitly confirming the addition.

2. Disallowance of Commission Paid to Directors and Sister Concern:
The assessee paid a total of ?1,95,23,622/- in salary and commission to directors/shareholders and a sister concern. The Assessing Officer (AO) disallowed ?83,76,022/- under Section 36(1)(ii), Section 37(1), and Section 40A(2), arguing that these payments were disguised as dividends and the assessee failed to substantiate the services rendered. Additionally, the AO restricted the salary payment to ?70,29,292/-, being 11% of net profits as per Section 198 of the Companies Act. The CIT(A) confirmed the disallowance of ?83,76,022/- but deleted the salary disallowance of ?41,18,308/-.

3. Commission Paid to Directors as Part of Remuneration:
The assessee argued that the commission paid to directors was part of their remuneration based on the performance of branches controlled by them, not correlated with their shareholding. This payment structure was a regular feature accepted by the revenue in past assessments. The CIT(A) concurred with the assessee, noting that the provisions of Section 198 of the Companies Act, 1956, were not applicable to private companies.

4. Application of Section 40A(2) and Section 198 of the Companies Act:
The AO applied Section 40A(2) and Section 198 of the Companies Act to disallow the payments, arguing they were excessive and unreasonable. However, the CIT(A) and the tribunal noted that the commission payments were not in proportion to shareholdings, and the provisions of Section 198 were not applicable to private companies. The tribunal emphasized that the disallowance under Section 40A(2) could only be made if the payments were excessive or unreasonable, which the revenue failed to substantiate.

Conclusion:
The tribunal found that the provisions of Section 36(1)(ii) were not applicable as the commission payments were not in proportion to shareholdings and were based on performance. The disallowance of ?83,76,022/- was deleted. The tribunal also deleted the addition of ?33,31,866/- on account of commission paid to the sister concern, Mercurial Corporate Services Private Limited, as the payments were justified and substantiated by the assessee. Consequently, the assessee's appeal was allowed, and the revenue's appeal was dismissed.