2015 (12) TMI 375 - AT - Income Tax

Addition on account of bogus purchases - CIT(A) deleted the addition - Held that - No reason to interfere with the decision of the learned Commissioner (Appeals) on this issue. As can be seen, the learned Commissioner (Appeals), on verifying the books of account of the assessee for the relevant assessment year has given a factual finding that the actual purchases made by the assessee during the year under consideration from Samarth Enterprises, was to the tune of ₹ 11,238. The Department has failed to bring any material before us to disturb the aforesaid factual finding of the learned Commissioner (Appeals). - Decided against revenue. Disallowance of commission paid to directors - allegation that commission was paid to avoid dividend distribution tax - CIT(A) deleted the addition - Held that - the assessee during the year not only has paid dividend to the directors but has also paid commission @ 3% of the profits. It is also not disputed by the learned Departmental Representative that the assessee is continuously following the practice of payment of dividend as well as commission to the directors from past several years. It is also not disputed that the dividend payment to directors over the years has increased substantially and for the impugned assessment year, as noted by the learned Commissioner (Appeals), the assessee has declared dividend of approximately 55% of the profits. It is also not denied that the assessee has paid dividend distribution tax on the dividend declared. That being the case, there being a quantum jump in the dividend paid to the shareholders, it is difficult to believe that the assessee would have adopted a mechanism to avoid payment of dividend distribution tax on 3% of the profit by treating it as commission payment to the directors. More so, when it is a fact on record that such commission payment to directors is continuing for past several years and department has never questioned such commission payment. As rightly held by the learned Commissioner (Appeals), there being no nexus between the two payments i.e., commission and dividend to the directors, the disallowance made could not have been sustained. Accordingly, we uphold the order of the learned Commissioner (Appeals) - Decided against revenue.

Summary

Issues:
1. Restriction of addition on account of bogus purchases
2. Deletion of addition made on account of disallowance of commission paid to directors

Issue 1: Restriction of addition on account of bogus purchases

The appeal by the Revenue challenged the decision of the Commissioner (Appeals) to restrict the addition on account of bogus purchases to a specific amount. The assessee, engaged in manufacturing and sale of submersible pumps, faced scrutiny due to alleged bogus purchases from a specific entity. The Assessing Officer disallowed a significant amount, considering the purchases as not genuine. However, the Commissioner (Appeals) found that the actual purchases were only a fraction of the disallowed amount. The Tribunal upheld this decision, stating that the Commissioner (Appeals) had factual findings based on the assessee's books of account and no new evidence was presented to challenge this.

Issue 2: Deletion of addition made on account of disallowance of commission paid to directors

The second issue concerned the disallowance of a substantial amount as commission paid to directors. The Assessing Officer disallowed the commission, alleging tax avoidance through profit distribution to shareholders without paying dividend distribution tax. The Commissioner (Appeals, however, noted the regular payment of dividends and commissions, finding no correlation between the two payments for tax avoidance. The Tribunal agreed, emphasizing the long-standing practice of dividend and commission payments, substantial dividend declaration, and payment of dividend distribution tax. The Tribunal held that the disallowance lacked merit, as there was no nexus between commission and dividend payments to directors, ultimately upholding the Commissioner (Appeals) decision.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the decisions of the Commissioner (Appeals) on both issues. The judgment highlights the importance of factual findings, regular business practices, and the absence of tax avoidance motives in determining the legitimacy of expenses and additions in tax assessments.