2019 (3) TMI 1250 - AT - Income Tax

Commission paid to directors - paid in lieu of dividend or not - increase of commission @15% - whether unreasonable and excessive - Addition u/s 40A(2)(b) - Disallowance u/s 36(1)(ii) - Allegation to evade dividend distribution tax u/s 115-O - Directors paying tax at the maximum rate on income including commission - applicability of Section 198 and 309 of the Companies Act - HELD THAT - Section 198 and 309 are not applicable to the assessee company as the assessee being neither a public company nor a private company which is the subsidiary of a public company hence are not applicable and neither received any payment beyond the provisions of sub section 1(a) of section 309. As per the Board Resolution maximum commission of 27% over the turnover can be paid to the Directors whereas the total payments is only 1.25% of the value of the export orders achieved by them. AO has not brought anything on record nor gathered any evidence about the contribution of the Directors which goes contra to the payments they received. AO has not brought any comparative cases to determine as to how the commission paid to the Directors is excessive. There is no doubt about the qualifications and contribution of the Directors for obtaining the orders and increasing the turnovers. The payment of commission has been the practice of the company for the past seven years. The Directors who have been receiving the commission are also paying tax at the maximum merchant rate so as the company hence no revenue leakage could also be found based on the tax payments. Even the dividend distribution tax in the hands of the company @ 12.5% and tax free in the hands of the recipient would not be give any credence to the alleged surreptious tax planning. Increase in personal expenses and comparing it with the increase in Directors remuneration cannot be accepted as a methodology to calculate the reasonable remuneration. The company can determine the rates of salary, remuneration, commission as long as it doesn t infarct any law enforce which is the case of the assessee. Hence we hereby delete the addition made and hold that no interference is called for pertaining to the commission paid by the assessee to the Directors. - Decided in favour of assessee Addition u/s 14A - STT payment, is directly related to the dividend income, disallowance was already made under Rule 8D(2)(i) suo-moto disallowance Rule 8D(2) regarding administrative expenses - HELD THAT - AO did not examine this plea in nor could find any fault in the claim of the assessee having regards to its account. The interpretation of the AO regarding the applicability of the provisions of Rule 8D is certainly incorrect and not in accordance with the law as interpreted in the case of Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT OF INDIA . Since the AO did not record any satisfaction on regarding the claim of the assessee having its accounts, the AO was not empowered to invoke Rule 8D at the first place. Accordingly, the action of the AO of making disallowance there under is not justified. Assessee has given details of interest expenses, none of which had any nexus with the dividend income. Accordingly, no disallowance under Rule 8D(2)(ii) was called for. Evidently, the assessee had already made disallowance under sub-clause (i) and (iii) of Rule 8D(2), therefore, no further disallowance was called for u/s 14A. - Decided in favour of assessee Income from trading of shares - Short Term Capital Gains or business income - correct head of income - HELD THAT - CIT(A) has deleted the addition on a factual ground holding that the assessee has already paid tax @30% on the amount of ₹ 9,36,208/- out of the total profits amounting to ₹ 9,64,305/-. Hence there was no need to convert the capital gains into business income. The balance amount was earned out of sale of securities and mutual funds. Since it was found by the authorities below those deliveries were duly taken and period of holding was substantial, in the absence of any contrary findings on record we hereby decline to interfere in the order of the Ld. CIT(A). Disallowance of Rent - unreasonable payment to related persons - CIT(A) deleted the addition based on the orders in the case of the assessee for the A.Y. 2007-08 and 2008-09 - maintenance charges were included in the rent - HELD THAT - CIT(A) also held that there was no excessive or unreasonable payment to related persons as per the provisions of Section 40A(2)(b). Since we find that the Assessing Officer has not considered the payment of the maintenance charges, location, and applicability of the provisions of Section 40A(2)(b) and since no evidence regarding unreasonableness of the rent paid has been brought on record we hereby decline to interfere in the order of the Ld. CIT(A).- Decided in favour of assessee Taxability of Keyman Insurance Policy - accrual or receipt basis - HELD THAT - The proceeds from Insurance company in respect of Keyman Policy will be taxable only on receipt basis. From, the provisions of section 2(24)(xi) read with section 28(vi), it is evident that the amount of bonus on Keyman Insurance Policy is to be taxed on receipt basis only. Hence the addition made by the Assessing Officer taxing the income on accrual basis cannot be held to be valid in the eyes of the law. Hence we decline to interfere in the order of the Ld. CIT(A).- Decided in favour of assessee

Summary

Issues Involved:
1. Commission to Directors
2. Disallowance under Section 14A
3. Short Term Capital Gains
4. Disallowance of Rent
5. Keyman Insurance Policy

Issue-wise Detailed Analysis:

1. Commission to Directors:
The assessee company is a buying agent engaged in consultancy and commission income. The Assessing Officer (AO) disallowed commission expenses deemed excessive under section 36(1)(ii) and made additions under section 40A(2)(b), alleging an evasion of dividend distribution tax under section 115-O. The commission was paid to directors with significant contributions and qualifications in the apparel industry. The assessee argued that the commission was for actual services rendered and not related to shareholding. The Tribunal found no evidence from the AO to prove the commission unreasonable or excessive and noted the company's discretion in paying dividends. The Tribunal held that the commission was deductible as it was paid for services rendered, and deleted the AO's additions.

2. Disallowance under Section 14A:
The AO observed that the assessee received dividend income and disallowed an additional amount under Rule 8D, despite the assessee's own disallowance. The Tribunal noted that the AO did not record any dissatisfaction with the assessee's claim and failed to justify invoking Rule 8D. The Tribunal found that the interest expenses disallowed by the AO were unrelated to earning dividend income. Consequently, the Tribunal upheld the deletion of the additional disallowance made by the AO.

3. Short Term Capital Gains:
The AO reclassified the profit from trading shares as business income based on the assessee's regular trading activities. The Tribunal upheld the CIT(A)'s decision that the assessee had already paid tax at 30% on a substantial portion of the profits and that the remaining profits from securities and mutual funds were held for a substantial period. The Tribunal found no contrary evidence and upheld the CIT(A)'s order, declining to reclassify the capital gains as business income.

4. Disallowance of Rent:
The AO restricted the rent paid by the assessee based on a comparison with another premise. The assessee argued that the two premises were in different locations and that maintenance charges were included in the rent for one premise but not the other. The Tribunal upheld the CIT(A)'s decision, noting the AO's failure to consider maintenance charges, location differences, and the applicability of Section 40A(2)(b). The Tribunal found no evidence of unreasonable rent payments and upheld the deletion of the AO's addition.

5. Keyman Insurance Policy:
The AO taxed the bonus on the Keyman Insurance Policy on an accrual basis. The Tribunal noted that under sections 28(vi) and 2(24)(xi), such income is taxable only on a receipt basis. The Tribunal found the AO's addition invalid and upheld the CIT(A)'s order, declining to interfere with the treatment of the Keyman Insurance Policy proceeds.

Conclusion:
The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeals, finding the AO's additions and disallowances unjustified and unsupported by evidence. The Tribunal emphasized the importance of proper examination and justification by the AO before making such disallowances and additions.