2019 (9) TMI 543 - AT - Income Tax

Disallowance by invoking provisions of section 36 (1) (ii) - amount of commission and exgratia paid to one of the director Sh. Anshuman Magazine who is a share holder of this company holding 24% share holding - HELD THAT - Since the commission paid to Sh. Anshuman Magazine, director of the assessee company was deleted by the CIT(A) in the preceding years and the order of the Tribunal dismissing the appeal filed by the revenue has not been challenged by the revenue in the preceding two years and further considering the fact that the Assessing Officer in the orders passed u/s. 143 (3) for subsequent assessment years from 2010-11 to 2014-15 has allowed similar commission/ incentive, therefore, following the rule of consistency, we are of the considered opinion that no disallowance u/s. 36 (1) (ii) is called for in the instant case. We, therefore, set aside the order of the CIT(A) on this issue and allow the grounds of assessee Excessive claim of remuneration - as alleged statutory approval were not obtained by the assessee - submission of the assessee that in the assessment year 2008-09 amount as disallowed u/s. 36 (1) (ii) which included the amount of excess remuneration, therefore, again the same amount cannot be brought to tax in the impugned assessment year - HELD THAT - We find merit in the above argument of the ld. Counsel for the assessee. From the details furnished by the assessee, it is seen that the amount of ₹ 3,04,30,061/- was a part of the amount of ₹ 6,47,27,888/- being the amount of disallowance u/s. 36 (1) (ii) for A. Y.2 008-09. We, therefore, restore this part of the disallowance to the file of the Assessing Officer for verification and if the above amount was a part of disallowance made u/s. 36 (1) (ii) then it relates to A. Y. 2008-09 and cannot be disallowed during the current year. AO shall decide the issue as per fact and law after giving due opportunity of being heard to the assessee. Excess remuneration paid to Sh. Anshuman Magazine - necessary approval seeked - HELD THAT - We find the assessee has obtained approval of the competent authority though on 18.07.2011 i.e. much after the date on which such remuneration has been paid. In our opinion although the approval has been obtained after date of payment, however it will relate back to the year under consideration. Since the approval was granted by the competent authority vide letter dated 18.07.2011 for three financial at a time i.e. financial year 2007- 08, 2008-09 and 2009-10, therefore, it is wrong on the part of the AO and the CIT(A) to hold that remuneration is not allowable since the approval has been obtained after the payment of remuneration to the concerned director. Above amount was a part of ₹ 6,64,64,442/- which was disallowed by the Assessing Officer u/s. 36 (1) (ii). However, we have already deleted such disallowances. No finding of the AO and CIT(A) that the expenditure incurred is not for the purpose of business of the assessee. Further the amount has already suffered to tax in the hands of Sh. Anshuman Magazine. In view of the above discussion we are of the considered opinion that the disallowance is not justified under the facts and circumstances of the case.

Summary

Issues Involved:
1. Disallowance of commission paid to the director under section 36(1)(ii) of the Income Tax Act.
2. Disallowance of excess remuneration paid to the director.

Issue-wise Detailed Analysis:

1. Disallowance of Commission Paid to the Director under Section 36(1)(ii):

The primary contention revolves around the disallowance of ?6,64,64,442/- paid as commission to the director, Sh. Anshuman Magazine, by invoking section 36(1)(ii) of the Income Tax Act. The Assessing Officer (AO) observed that the commission could have been paid as a dividend, which would have attracted dividend distribution tax, thus reducing the company's taxable income. The AO inferred that the payment was made to avoid such tax. The CIT(A) upheld this disallowance, noting that the director held a significant shareholding (24%) and that the resolution for commission payment was intended to avoid dividend distribution tax. The CIT(A) distinguished this case from others, emphasizing that the resolution was passed when the director held 99.99% of shares, indicating an intention to avoid tax.

The Tribunal, however, found that the facts of this year were identical to the preceding years where similar disallowances were deleted by the CIT(A) and upheld by the Tribunal. The Tribunal noted that the revenue did not challenge the Tribunal's order for the preceding years and had allowed similar commission payments in subsequent years. Thus, following the principle of consistency, the Tribunal set aside the CIT(A)'s order and allowed the grounds of appeal, stating that no disallowance under section 36(1)(ii) was warranted.

2. Disallowance of Excess Remuneration Paid to the Director:

The second issue concerns the disallowance of ?7,77,69,909/- on account of alleged excessive remuneration paid to the director. The AO disallowed this amount, noting that the assessee failed to obtain prior approval for the remuneration expenses. The CIT(A) upheld the disallowance, stating that any payment made in contravention of the Companies Act, even if waived, cannot be considered an allowable expense under the Income Tax Act if it was not for the business purpose and was a device to reduce tax liability.

The Tribunal found merit in the assessee's argument that ?3,04,30,061/- related to the preceding assessment year 2008-09 and was already disallowed under section 36(1)(ii), thus it could not be disallowed again in the current year. The Tribunal directed the AO to verify this and ensure no double addition. Regarding the remaining ?4,73,39,848/-, the Tribunal noted that the approval for excess remuneration was obtained from the competent authority, albeit after the payment date, but it related back to the year under consideration. The Tribunal also observed that the amount was part of the ?6,64,64,442/- disallowed under section 36(1)(ii), which was already deleted. There was no finding that the expenditure was not for business purposes, and similar expenditure was allowed in preceding and succeeding years. Thus, the Tribunal directed the AO to delete the disallowance.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, setting aside the CIT(A)'s order on both issues and directing the AO to delete the disallowances after due verification.