2019 (11) TMI 646 - AT - Income Tax

Addition on account of commission income - miscellaneous income - HELD THAT - Sale/ purchase/ investment/ loans made from bogus parties i.e. outside parties is to the extent of ₹ 97,42,41,410/- and addition on balance turnover of ₹ 56,47,72,218/- which is made from outside parties is already estimated at the rate of 1%. We also noted that foreign exchange fluctuation, interest income, sundry debtors written off and profit on sale of unquoted shares, the assessee company had credited miscellaneous income of ₹ 4,07,18,363 to its profit and loss account and since all loans and advances given and share held by the assessee company are not genuine, the income derived there from is also not genuine and represented the commission income accrued to the assessee. Apart from foreign exchange fluctuation other components of other income aggregating to ₹ 3,66,32,003/- credited to profit and loss account represented commission income and CIT(A) computed the assessable commission income being 1% of the aggregate of new investments and sales to outside parties and held that since the assessee company has already offered income which is more than the commission income, no further addition can be made in the hands of the company. Hence, we find no infirmity in the order of the CIT(A). Adhoc disallowance being 10% of salary expenses incurred by the appellant company on the pretext that the profit of 0.375% on HR Services rendered by the appellant company is very low - HELD THAT - We noted that AO as well as CIT(A) has just on the basis of presumption made disallowance just on adhoc basis. No reason whatsoever is cited, hence, we are of the view that this disallowance confirmed by CIT(A) on adhoc basis of ₹ 26,23,800/- is without basis. Hence, we delete the disallowance and allow the appeal of the assessee. Disallowance of expenses being ROC fee paid on further public issue of bogus shares - HELD THAT - Total expenses for issue of bonus share capital is amounting to ₹ 56,52,580/- out of the total expenses incurred for increase in authorized share capital at ₹ 86,80,163/-. It means that this amount of ₹ 56,52,580/- cannot be allowed being expenses incurred for issue of bonus share capital being capitalization of reserve merely by reallocation of companies funds and there was no inflow of fresh funds or increase in capital employed. Therefore, we are of the view it could not be said that the assessee company has acquired a benefit or advantage of enduring nature and the total funds available with the company would remain the same and issue of bonus share would not result in expansion of capital base of the assessee company. Therefore, we are of the view that the expenditure incurred on issue of bonus share would be revenue expenditure allowable. For balance sum of ₹ 30,27,583/-, we are of the view that this is increase in share capital and will not be allowed. This issue of the assessee s appeal is partly allowed.

Summary

Issues Involved:
1. Deletion of addition on account of commission income.
2. Adhoc disallowance of salary expenses.
3. Disallowance of expenses for ROC fees paid on further public issue of shares.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Commission Income:

The Revenue's appeals challenged the deletion of additions amounting to ?4,07,48,957/- and ?3,09,50,705/- respectively, on account of commission income. The Assessing Officer (AO) added these amounts based on the assumption that the assessee earned commission from bogus purchases and sales. The AO computed a commission of ?97,98,271/- at 0.30% of total transactions and later reassessed the commission income at ?4,07,48,976/- at 1% of the aggregate new investment and total sales.

The CIT(A) found no specific evidence of commission income except for statements given by Shri Devang Master. The CIT(A) concluded that the rate of 1% was reasonable but applied it only to outside party transactions, resulting in a commission income of ?3,10,06,562/-. Since the assessee had already shown miscellaneous income of ?3,66,32,003/-, which included commission income, no further addition was justified. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeals.

2. Adhoc Disallowance of Salary Expenses:

The AO disallowed 30% of salary expenses amounting to ?78,71,402/- on an adhoc basis, suspecting inflation of expenses due to low profit margins. The CIT(A) reduced the disallowance to 10% (?26,23,800/-), still based on conjecture and surmises. The Tribunal found the disallowance arbitrary and without basis, thus deleting the adhoc disallowance and allowing the assessee's appeal.

3. Disallowance of Expenses for ROC Fees Paid on Further Public Issue of Shares:

The AO disallowed expenses of ?86,80,163/- incurred for increasing the authorized share capital, deeming them capital in nature. The CIT(A) upheld this disallowance, citing Supreme Court decisions in Punjab State Industrial Development Corpn. Ltd vs. CIT and Brooke Bond India Ltd vs. CIT, which classified such expenses as capital expenditures.

The Tribunal noted that ?56,52,580/- of the total expenses related to the issue of bonus shares, which should be considered revenue expenditure as it did not result in fresh fund inflow or capital base expansion. However, the remaining ?30,27,583/- was rightly disallowed as capital expenditure. Thus, the Tribunal partly allowed the assessee's appeal on this issue.

Conclusion:

The Tribunal dismissed the Revenue's appeals regarding the deletion of commission income additions and allowed the assessee's appeal on adhoc salary disallowance. The Tribunal also partly allowed the assessee's appeal on the disallowance of ROC fees, distinguishing between expenses for bonus shares and those for increasing share capital.