2019 (11) TMI 1008 - HC - Income Tax

Addition u/s.36(i)(ii) - Commission paid to directors - whether in the nature of Dividend - rule of consistency - AO was of the view that the payment to Directors/shareholders was hit by the provisions of section 36(1)(ii) as the said commission would have been payable to the Directors as dividend and accordingly, disallowed the same - ITAT deleted the additions - order passed by the Tribunal, to point out that such payment of commission made by the assessee to the Directors since assessment year 2006- 07 was allowed up to assessment year 2010- 11, that is, continuously for a period of five years, whereafter the dispute has been raised HELD THAT - Where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and the parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. In the present case, the payment of commission made by the assessee Company to its Directors has been allowed for five continuous assessment years. Nothing has been pointed out to show that the position has changed in the year under consideration. Under the circumstances, the Tribunal was wholly justified in allowing the ground of appeal. The said ground of appeal, therefore, does not give rise to any question of law, much less, a substantial question of law, warranting interference. Bogus purchases - HELD THAT - This court concurred with the findings of the Commissioner (Appeals) and the Tribunal and held that the estimate made by the two appellate authorities did not warrant interference as, even otherwise, whether the estimate should be at a particular sum or at a different sum, can never be an issue of law. This court is in agreement with the concurrent findings recorded by the Tribunal and the Commissioner (Appeals), namely, that the assessee had shown purchases as well as sales. If the sales were accepted, the Assessing Officer could not have rejected the purchases. Once the purchases are accepted, the difference between the inflated and actual price of purchases would be required to be disallowed and as to what would be the extent of difference would be a matter of estimate. Commissioner (Appeals) has estimated this difference at 3% of the bogus purchases and the Tribunal has accepted the same. As has been held by this court in Sanjay Oilcake Industries v. Commissioner of Income tax 2008 (3) TMI 323 - GUJARAT HIGH COURT whether an estimate should be at a particular sum or at a different sum can never be an issue of law. Under the circumstances, this ground of appeal also does not give rise to a question of law, much less, a substantial question of law. Disallowance of insurance expense - Allowable revenue expenditure - HELD THAT - Tribunal was of the opinion that insurance premium paid by the assessee on the purchase of an old or new car is an expenditure of revenue nature, which should be allowed in the year when it has been incurred and that under the provisions of section 31(ii) of the Act, any premium paid in respect of any insurance against the risk of damage or destruction to machinery, plant or furniture, which includes car, is allowable as revenue expenditure and accordingly, held that the disallowance of insurance expense by the Assessing Officer and Commissioner (Appeals) is against the mandate of the section. The Tribunal, accordingly, allowed the ground of appeal. This court is in total agreement with the view adopted by the Tribunal, namely, that insurance premium paid by the assessee towards purchase of new car is revenue in nature, which should be allowed in the year in which it is incurred. Under the circumstances, the said ground of appeal also does not give rise to any question of law. It cannot be said that the impugned order passed by the Tribunal suffers from any illegality or infirmity so as to give rise to any question of law

Issues Involved:
1. Deletion of addition under Section 36(1)(ii) of the Income-tax Act, 1961.
2. Reduction of addition on account of bogus purchases.
3. Deletion of addition on account of disallowance of gratuity expense.
4. Deletion of addition on account of disallowance of insurance expense.
5. Deletion of addition of additional remuneration to Directors.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 36(1)(ii):
The appellant challenged the Tribunal's decision to delete the addition of commission payments to Directors/shareholders under Section 36(1)(ii) of the Income-tax Act, 1961. The Assessing Officer had disallowed these payments, arguing they should be treated as dividends. The Tribunal, however, noted that such payments had been consistently allowed in previous years (2006-07 to 2010-11) and emphasized the rule of consistency, citing the Supreme Court's decision in Commissioner of Income-Tax v. Excel Industries Ltd. The Tribunal concluded that without any change in circumstances, the Assessing Officer was not justified in disallowing the commission payments.

2. Reduction of Addition on Account of Bogus Purchases:
The Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision to restrict the addition for bogus purchases to 3% of the total purchases. The assessee had shown purchases from entities identified as bogus by the Investigation Wing, Mumbai. The Commissioner (Appeals) found that while the suppliers were bogus, the purchases were genuine and used in manufacturing diamond jewellery. The Tribunal agreed with this assessment, noting that the sales of diamond jewellery were accepted by the Assessing Officer. The Tribunal's decision was supported by precedents like Vijay Proteins Ltd. v. Commissioner of Income Tax, which justified partial disallowance of purchases in similar scenarios.

3. Deletion of Addition on Account of Disallowance of Gratuity Expense:
The Tribunal deleted the addition related to the disallowance of gratuity expenses, aligning with the Supreme Court's decision in Commissioner of Income-tax v. Textool Co. Ltd. The Tribunal found that the assessee had incurred the gratuity expense in accordance with established legal principles, and thus, the disallowance was unwarranted.

4. Deletion of Addition on Account of Disallowance of Insurance Expense:
The Tribunal allowed the deduction for insurance expenses incurred on a new motor car, which the Assessing Officer had treated as a capital expenditure. The Tribunal reasoned that insurance premiums are recurring expenses meant to protect the vehicle from risks and should be treated as revenue expenditure under Section 31(ii) of the Income-tax Act. The Tribunal's view was consistent with the legal provision that insurance premiums against risk of damage to machinery, plant, or furniture are allowable as revenue expenditure.

5. Deletion of Addition of Additional Remuneration to Directors:
The Tribunal deleted the addition of additional remuneration to Directors under Section 36(1)(ii), reiterating the principle of consistency and the absence of any change in circumstances from previous years. The Tribunal emphasized that the payments had been allowed in earlier years, and there was no justification for a different treatment in the assessment year under consideration.

Conclusion:
The High Court dismissed the appeals, affirming the Tribunal's decisions on all issues. The court found no substantial question of law warranting interference, emphasizing the principles of consistency and the proper application of legal provisions. The Tribunal's findings were deemed to be in accordance with established legal precedents and the facts of the case.

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