2015 (11) TMI 294 - AT - Income Tax

Addition on account of commission paid to the director - CIT(A) deleted the addition - Held that - Assessing Officer has disallowed the commission paid to Shri Gautam Khandelwal, shareholder and director of the company on the ground that it is actually dividend. However, as recorded by the learned Commissioner (Appeals), Shri Gautam Khandelwal, is only 4.28% of the shareholder of the company and distribution of dividend, if at all, it is declared by the company would be very negligible, hence, it is hard to believe that for avoiding payment of distribution tax on such negligible amount of dividend, the assessee would have paid dividend to Shri Gautam Khandelwal in the garb of commission. Moreover, the assessee has produced material on record to show that commission payment is in terms with the terms of appointment and towards services rendered by the director. Nothing has been brought on record by the Assessing Officer to controvert the aforesaid claim of the assessee. That being the case, the disallowance of commission paid, in our view, is without any valid reason. Accordingly, finding no infirmity in the order of the learned Commissioner (Appeals) - Decided against revenue. Disallowance of plantation expenses - CIT(A) deleted the addition - Held that - As could be seen the only reason on which the Assessing Officer disallowed the expenditure is it is of enduring benefit, hence, is a capital expenditure. Having held so, strangely enough, the Assessing Officer did not allow any depreciation. However, as could be seen from the submissions made by the assessee right from the assessment stage, the expenditure incurred was not merely for beautification of the factory premises but for Prevention of Pollution Control and Environment Safety. It is also evident, the assessee has to incur such expenditure as mandated by pollution control and environmental safety laws. It is also evident that the allegation of the Assessing Officer that such expenditure is not recurring in nature is without any basis as the learned Commissioner (Appeals) has recorded a finding of fact that the assessee had been incurring such expenditure from earlier assessment years and the Assessing Officer has allowed such expenditure fully. Considering the aforesaid facts and circumstances, we do not find any reason for disallowance of the plantation expenditure claimed by the assessee. Accordingly, we uphold the order of the learned CIT(A) - Decided against revenue.

Summary

Issues:
1. Disallowance of commission paid to the director.
2. Disallowance of plantation expenses.

Analysis:

Issue 1: Disallowance of Commission Paid to the Director
The Department challenged the deletion of the addition of commission paid to the director by the first appellate authority. The Assessing Officer disallowed the commission payment, treating it as dividend, under section 36(1)(ii) of the Act. The company argued that the commission was part of the director's salary and was authorized by a board resolution. The first appellate authority found that the director held only 4.28% shares, making any potential dividend negligible. The authority also distinguished a previous Tribunal decision involving a private limited company with 100% shareholders receiving commission. The Commissioner (Appeals) relied on Delhi High Court decisions to support that commission for services rendered should not be treated as dividend. The Tribunal upheld the Commissioner's decision, noting the lack of evidence to support the Department's claim that the commission was a means to avoid dividend distribution tax.

Issue 2: Disallowance of Plantation Expenses
The Assessing Officer disallowed plantation expenses, considering them as capital expenditure due to enduring benefits. However, the Commissioner (Appeals) found that the expenses were for environmental safety and pollution control, mandated by laws. The Commissioner noted that similar expenses were allowed in previous years and relied on High Court judgments to delete the addition. The Tribunal upheld this decision, emphasizing that the expenses were essential for environmental compliance and not merely for beautification. The Tribunal found no valid reason for disallowance and dismissed the Department's appeal.

In conclusion, the Tribunal upheld the Commissioner (Appeals) decisions on both issues, dismissing the Revenue's appeal.