2018 (6) TMI 750 - AT - Income Tax

Disallowance u/s 40A(2)(b) - addition 30% of total commission and legal & professional fees paid to related parties - Held that - Lower authorities had carried out the disallowance u/s 40A(2)(a) on an adhoc basis without placing on record any material which could prove to the hilt that the payments were excessive or unreasonable, having regard to the fair market value of the services or keeping in view the legitimate needs of the business of the assessee - hence we are of the considered view that in the absence of satisfaction of the basic condition for invoking of Sec. 40A(2)(a) by both of the lower authorities, the disallowance of 30% of the related party expenses made u/s 40A(2)(a) cannot be sustained - thus deleted. Levy of interest u/s 234B, 234C and 234D - Held that - Levy of interest under the above statutory provisions would be rendered as consequential in nature and thus disposed off. Disallowance u/s 36(1)(ii) for payment of commission - whether the commission paid by the assessee company to Mr. Darayus A. Bathena for sale orders procured by him as a sales agent for the company was allowable as an expense under Sec.36(1)(ii)? - Held that - As observed Sec. 36(1)(ii) which contemplates the allowance of an amount paid as bonus or a commission to an employee of a company disallowance carved out in the exception contemplated under Sec.36(1)(ii), would be invoked only in a situation where the payment of the bonus or commission had been made to an employee, and not otherwise. We thus, are of the considered view that the qualification regulating the allowability of bonus or commission as an expense while computing the income of an assessee under Sec. 28, would only be applicable in a case where the same had been paid to an employee, and not otherwise - Sec. 36(1)(ii) is intended to prevent an escape from taxation by describing a payment as bonus or commission, when in fact ordinarily it should have reached the shareholder as profit or dividend In the case of the assessee company before us, as Mr. Darayus A. Bathena during the year under consideration was not an employee of the assessee company, thus the qualification or the rider embodied in the latter part of Sec. 36(1)(ii) would not come into play in the case of the assessee, on the said count itself - the rider or the exception carved out in Sec. 36(1)(ii) would apply only to an employee who is also a shareholder in the company - Decided against revnue

Issues Involved:
1. Disallowance of 30% of total commission paid to related parties under Sec. 40A(2)(b).
2. Disallowance of 30% of salary treated as commission instead of salary.
3. Disallowance of 30% of legal and professional fees paid to related parties under Sec. 40A(2)(b).
4. Levy of interest under Sec. 234B, 234C, and 234D.
5. Deletion of addition made under Sec. 36(1)(ii) for commission paid to Managing Director.
6. Disallowance of remuneration and commission paid under Sec. 40A(2)(a).

Issue-wise Detailed Analysis:

1. Disallowance of 30% of Total Commission Paid to Related Parties under Sec. 40A(2)(b):
The assessee challenged the CIT(A)’s decision to uphold the disallowance of 30% of the total commission paid to related parties, amounting to ?27,07,582/-. The AO had disallowed this amount under Sec. 40A(2)(a), asserting that the payments were excessive and unreasonable. The assessee contended that the payments to related parties were in line with those made to unrelated parties and that the AO had not provided any evidence to support the claim of excessiveness. The Tribunal found that the AO and CIT(A) had made an arbitrary disallowance without substantiating that the payments were excessive or unreasonable. Consequently, the Tribunal deleted the disallowance of ?38,87,705/- under Sec. 40A(2)(a).

2. Disallowance of 30% of Salary Treated as Commission Instead of Salary:
The AO had treated ?12,00,000/- paid to Mr. Zoru Bathena, the general manager, as commission instead of salary, leading to a disallowance of ?3,60,000/-. The Tribunal noted that the AO had incorrectly classified the payment and that the salary paid was reasonable. Hence, the disallowance was deleted.

3. Disallowance of 30% of Legal and Professional Fees Paid to Related Parties under Sec. 40A(2)(b):
The CIT(A) upheld the disallowance of 30% of legal and professional fees amounting to ?8,20,123/- paid to a related party. The Tribunal found that the AO had not provided any evidence to show that the payments were excessive or unreasonable. The disallowance was made on an arbitrary basis, and thus, the Tribunal deleted the disallowance under Sec. 40A(2)(a).

4. Levy of Interest under Sec. 234B, 234C, and 234D:
The Tribunal noted that the levy of interest under Sec. 234B and 234C is mandatory as per the Supreme Court’s judgment in CIT vs. Anju M.H. Ghaswala. Therefore, the challenge to the levy of interest was rendered consequential. The interest charged under Sec. 234D was also deemed consequential to the Tribunal's order.

5. Deletion of Addition Made under Sec. 36(1)(ii) for Commission Paid to Managing Director:
The AO had disallowed ?1,16,83,883/- paid as commission to the Managing Director under Sec. 36(1)(ii), claiming it was an attempt to evade tax on dividend distribution. The CIT(A) deleted this addition, noting that the Managing Director was not an employee and hence, the disallowance under Sec. 36(1)(ii) was not applicable. The Tribunal upheld the CIT(A)’s decision, stating that the commission was paid for services rendered and was not in lieu of dividend. The Tribunal also noted that the payment was within reasonable parameters and not a colorable device for tax evasion.

6. Disallowance of Remuneration and Commission Paid under Sec. 40A(2)(a):
The AO had disallowed ?34,15,500/- (30% of ?1,13,85,000/-) paid to Mr. Zoru Bathena under Sec. 40A(2)(a), treating it as commission. The CIT(A) found that the payment was made as salary, not commission. The Tribunal agreed with the CIT(A), noting that the AO had misconceived the facts and that the payment was reasonable for the services rendered as a general manager. The Tribunal upheld the deletion of the disallowance.

Conclusion:
The Tribunal allowed the appeals of the assessee for A.Ys 2009-10 and 2010-11, deleting the disallowances made under Sec. 40A(2)(a) and Sec. 36(1)(ii). The appeals filed by the revenue for both years were dismissed, upholding the CIT(A)’s decisions. The Tribunal emphasized the need for the AO to substantiate claims of excessiveness or unreasonableness with concrete evidence, which was lacking in this case.

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