2017 (10) TMI 1248 - AT - Income Tax

Disallowance u/s 37(1)(iii) - commission paid to Managing Director and Working Director - Held that - Similar disallowances were made consistently from AY 2006-07 onwards till AY 20010-11 but only year 2006-07 where Tribunal has deleted the disallowance which was followed in AY 2009-10. For other years, appeals are pending either at CIT(A) stage or before Tribunal. We find that during the year under consideration, the assessee company has already declared the dividend of ₹ 5.40 crores and hence, it cannot be doubted that the payment of dividend was made in the guise of commission to the directors. Disallowance of legal and consultancy charges - Held that - We find that this issue is settled in the case of Chemosyn Ltd (2015 (2) TMI 863 - BOMBAY HIGH COURT) wherein held that the amounts which were paid by the respondent assessee for the purpose of purchase of its shares, to its shareholder for subsequent cancellation was an expenditure incurred only to enable smooth running of the business. Thus, the expenditure was incurred for carrying on its business smoothly and therefore, was a deductible expenditure. Thus, the impugned order of the Tribunal is essentially a finding of fact. The respondents have not been able to show that these findings are in any manner perverse or arbitrary. Disallowance on payment of assessee s contribution to PF/ESIC made beyond due date of the respective statutes - Held that - The payments are within due date of filing of return on income under section 139(1) of the Act and once, the payments are within the due date of filing under section 139 of the Act, the payments are to be allowed as deduction. Revenue appeal dismissed.

Summary

Issues Involved:
1. Disallowance of commission paid to managing director and working director.
2. Disallowance of legal and consultancy charges.
3. Disallowance of payment of assessee’s contribution to PF/ESIC made beyond due date.

Issue-wise Detailed Analysis:

1. Disallowance of Commission Paid to Managing Director and Working Director:

The first issue pertains to the disallowance of ?84,00,000/- as commission paid to the managing director and two working directors. The Assessing Officer (AO) disallowed this expenditure under section 36(i)(ii) of the Income Tax Act, 1961, arguing that the commission was paid to directors who were also shareholders, and hence, should have been paid as dividends. The CIT(A) deleted the disallowance, relying on the Tribunal's decision for earlier years where similar disallowances were made but later deleted. The Tribunal observed that the commission was part of the directors' remuneration, which was within the limits prescribed by the Companies Act and was reasonable compared to market standards. The Tribunal found that the commission was paid to only two working directors out of 29 shareholders and was justified to ensure accountability and link remuneration to the company's profitability. The Tribunal affirmed the CIT(A)'s order, noting that similar disallowances in previous years were deleted by the Tribunal, and the AO had not challenged the reasonableness of the expenses.

2. Disallowance of Legal and Consultancy Charges:

The second issue involves the disallowance of ?27,05,996/- as legal and consultancy charges incurred due to a legal dispute among directors and shareholders. The AO disallowed these expenses, considering them related to inter-se disputes between two factions of directors. The CIT(A) allowed the claim, referencing the Bombay High Court's decision in CIT vs. Chemosyn Ltd. and the Supreme Court's judgment in CIT vs. Malayalam Plantations Ltd., which held that such expenses are allowable if incurred for the smooth running of the business. The Tribunal upheld the CIT(A)'s decision, noting that the expenses were incurred to protect the company's interests and ensure its smooth operation, thus qualifying as deductible business expenses.

3. Disallowance of Payment of Assessee’s Contribution to PF/ESIC Made Beyond Due Date:

The third issue concerns the disallowance of payments made towards employees' contribution to PF/ESIC beyond the due dates prescribed under the respective statutes. The AO disallowed these payments, but the CIT(A) noted that the payments were made within the due date for filing the return of income under section 139(1) of the Act. The Tribunal confirmed the CIT(A)'s finding, stating that if the payments are made within the due date for filing the return, they are allowable as deductions.

Conclusion:

The Tribunal dismissed the Revenue's appeal on all three issues, affirming the CIT(A)'s decisions. The Tribunal relied on precedents and judicial pronouncements to conclude that the disallowances made by the AO were not justified. The Tribunal's order was pronounced in the open court on 27-10-2017.