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2024 (7) TMI 1481 - AT - Income TaxDisallowance of commission paid to the Director u/s 36(1)(ii) - AO rejected the submission of the assessee on the ground that it is only an arrangement to avoid dividend distribution tax and deduction cannot be allowed - as per AO board resolution cannot be considered as evidence of extra service provided by the director as the board is constituted by the director employee to whom payment is made - HELD THAT - AO primarily relied on the case of Dalal and Broacha Stock Broking Pvt. Ltd. 2011 (6) TMI 251 - ITAT, MUMBAI which is factually distinguishable. In the present case, the assessee has provided substantial evidence demonstrating the services rendered by Shri Girish Chovatia/Director and the resultant benefits to the company. The case laws cited by the assessee before the Ld.CIT(A), particularly M/s Nat Steel Equipment Pvt. Ltd. 2018 (6) TMI 750 - ITAT MUMBAI and M/s.Marks Shipping Pvt. Ltd. 2016 (10) TMI 805 - ITAT MUMBAI support the view that commission paid for actual services rendered cannot be disallowed merely on the presumption of tax avoidance. AO did not provide concrete evidence to show that the payment was made to avoid DDT. The assessee has clearly distinguished the judgement relied upon by the AO and the Ld.CIT(A). Thus, we hold that the commission paid to director/Shri Girish Chovatia is an allowable business expenditure u/s 36(1)(ii). Disallowance of weighted deduction claimed u/s 35(2AB) - claim denied relying upon Form 3CL issued by DSIR - HELD THAT - AO's reliance solely on the DSIR report, without considering the detailed books of accounts and certification by a Chartered Accountant, is not justified. The principles of natural justice require that any reduction in the claim should be substantiated with clear reasons and the assessee should be given an opportunity to respond. Following the judgment in Bosch Ltd. vs. Secretary, DSIR 2016 (4) TMI 1294 - KARNATAKA HIGH COURT we hold that the restriction of the weighted deduction u/s 35(2AB) of the Act by the AO is not sustainable. Accordingly, the disallowance made by the AO and confirmed by the Ld.CIT(A) is deleted, and the assessee's claim is allowed in full. Assessee appeal allowed.
Issues Involved:
1. Disallowance of commission paid to the Director under section 36(1)(ii) of the Income Tax Act. 2. Restriction of weighted deduction under section 35(2AB) of the Income Tax Act. Issue 1: Disallowance of Commission Paid to Director under Section 36(1)(ii) The Assessing Officer (AO) disallowed the commission payment of Rs. 52,34,373/- to the Director, Shri Girish Chovatia, under section 36(1)(ii) of the Income Tax Act, on the grounds that it was an arrangement to avoid dividend distribution tax (DDT). The AO relied on the case law of Dalal and Broacha Stock Broking Pvt. Ltd., where it was held that no evidence was available to support the fact that the Director had rendered extra services for the payment of commission or remuneration. The assessee argued that Shri Girish Chovatia, a qualified MBA (Marketing), was responsible for product development and sales, leading to significant growth in export sales. The assessee provided substantial evidence, including board resolutions, proof of meetings, and sales figures, to support the claim that the commission was paid for actual services rendered. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the assessee failed to prove why other directors were not paid commission and relied on the judgment of the Special Bench of Mumbai ITAT and the Delhi High Court in Schneider Electric vs. CIT. Upon appeal, the Tribunal noted that the AO did not provide any evidence that the commission payment was made to avoid DDT. The assessee provided substantial evidence of the Director's services and the resultant benefits to the company. The Tribunal distinguished the case from Dalal and Broacha Stock Broking Pvt. Ltd. and relied on judicial precedents, including M/s Nat Steel Equipment Pvt. Ltd. and M/s Marks Shipping Pvt. Ltd., which supported the view that commission paid for actual services rendered cannot be disallowed merely on the presumption of tax avoidance. The Tribunal held that the commission paid to Shri Girish Chovatia is an allowable business expenditure under section 36(1)(ii) and deleted the disallowance made by the AO and confirmed by the CIT(A). Issue 2: Restriction of Weighted Deduction under Section 35(2AB) The AO restricted the assessee's claim for weighted deduction under section 35(2AB) by Rs. 26.33 lakhs based on the report in Form 3CL issued by the Department of Scientific and Industrial Research (DSIR), which quantified the eligible expenditure. The AO ignored the report of the Chartered Accountant submitted in Form No 3CLA, which certified the expenses. The assessee argued that the DSIR did not provide any breakup or details of the expenses treated as ineligible and did not give the assessee an opportunity to respond. The assessee maintained separate books of accounts, verified and certified by a Chartered Accountant, and provided all details to the DSIR. The CIT(A) upheld the AO's decision, relying on the DSIR report and stating that the assessee failed to prove how the expenses were related to scientific research. The Tribunal found merit in the assessee's contention, noting that the AO's reliance solely on the DSIR report without considering the detailed books of accounts and certification by a Chartered Accountant was not justified. The Tribunal emphasized the principles of natural justice, requiring clear reasons for any reduction in the claim and an opportunity for the assessee to respond. Following the judgment in Bosch Ltd. vs. Secretary, DSIR, the Tribunal held that the restriction of the weighted deduction under section 35(2AB) by the AO was not sustainable. The Tribunal deleted the disallowance made by the AO and confirmed by the CIT(A), allowing the assessee's claim in full. Conclusion: The Tribunal allowed the appeal filed by the assessee, deleting the disallowances made by the AO and confirmed by the CIT(A) on both grounds. The commission paid to the Director was held to be an allowable business expenditure, and the restriction of the weighted deduction under section 35(2AB) was found to be unjustified.
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