2021 (7) TMI 1136 - AT - Income Tax

Allowability of enhanced compensation - AO had disallowed the expenses but CIT(A) has held that AO was not justified in disallowing the expenses - HELD THAT - Assessee has paid enhanced rent pursuant to the agreement entered into in 1996, but in any of the earlier years in the assessments that have been framed, no disallowance of rent has been made by Revenue. We agree with the contention of DR that the principle of res judicata is not applicable to income tax proceedings and each assessment year is an independent but at the same time the Hon ble Supreme court in the case of Radhasoami Satsang vs CIT 1991 (11) TMI 2 - SUPREME COURT has held that even though principles of res judicata do not apply to income tax proceedings, but where a fundamental aspact permeating through different assessment years has been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenging the order, then it would not be appropriate to allow the position to be changed in the subsequent year - based on the view of disallowance of enhanced rent paid in the year under consideration, no reassessment proceedings for earlier years has been initiated by the Revenue. Considering the totality of the aforesaid facts and relying on the aforesaid decision rendered in the case of Radhasoami Satsang (supra), we find no reason to interfere with the order of CIT(A). Thus the ground of Revenue is dismissed. Commission paid to shareholder Directors - disallowance made by AO of the commission paid to the whole time Directors of the company - HELD THAT - As undisputed fact that three whole time working Directors had been paid commission and the commission payment is as per the limits prescribed under the Companies Act, the commission payment has been approved by the shareholders in the general meeting of shareholders. It is the case of AO that no dividend has been paid by the assessee and had the assessee not paid the commission, it would have been required to distribute the amount as dividend necessitating the payment dividend tax. The aforesaid observation of the AO of assessee not paying of dividend is contrary to the fact as the assessee has been paying dividend in the past and during the year under consideration, assessee has paid dividend @ 50% to its share holders. Before us, Revenue has not pointed out any fallacy in the findings of CIT(A) nor has controverted to the factual submissions made by Learned AR. Disallowance u/s 14A r.w.r 8D - HELD THAT- It is an undisputed fact that assessee has earned dividend of ₹ 50,900/- and had suo moto worked out the disallowance u/s 14A r.w.r 8D of the Act at ₹ 3,12,523/-. AO has further disallowed ₹ 3,12,707/- u/s 14A of the Act resulting into double disallowances. We find in the case of Joint Investments Pvt. Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT has held that the disallowance u/s 14A r.w.r 8D cannot exceed the dividend income - find no reason to interfere in the order of CIT(A) and thus the ground of Revenue is dismissed.

Summary

Issues Involved:

1. Allowability of enhanced compensation paid to Sir Sobha Singh & Sons Pvt. Ltd. (SSPL).
2. Allowability of commission paid to shareholder Directors.
3. Disallowance under Section 14A read with Rule 8D of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Allowability of Enhanced Compensation Paid to Sir Sobha Singh & Sons Pvt. Ltd. (SSPL):

During the assessment proceedings, the Assessing Officer (AO) noted that the assessee had claimed compensation of ?1,26,00,000/- paid to SSPL. The AO considered this as an application of income rather than a deductible expense, disallowing the payment. The assessee argued that the payment was made under a working arrangement agreement from 1996, which stipulated a minimum rent payable, and the payment was in compliance with this agreement. The AO's disallowance was based on the view that the payment fell under the definition of application of income. However, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the expense, leading to the Revenue's appeal.

The Tribunal upheld the CIT(A)'s decision, noting that the agreement from 1996 had been consistently followed, and no disallowance had been made in previous years. The Tribunal cited the Supreme Court's decision in Radhasoami Satsang vs. CIT, emphasizing that although res judicata does not apply to income tax proceedings, consistency should be maintained if the fundamental aspects remain unchanged. The Tribunal found no reason to interfere with the CIT(A)'s order, thus dismissing the Revenue's ground.

2. Allowability of Commission Paid to Shareholder Directors:

The AO disallowed the commission of ?33,03,384/- paid to three shareholder Directors, arguing that it was an attempt to avoid dividend distribution and the associated tax. The CIT(A) reversed this disallowance, noting that the commission payments were within the limits prescribed by the Companies Act, approved by shareholders, and similar disallowances in previous years had been deleted by appellate authorities. The CIT(A) also noted that the assessee had declared a substantial dividend during the year under consideration.

The Tribunal upheld the CIT(A)'s decision, highlighting that the commission payments were duly approved and within legal limits. The Tribunal also noted that the AO's assumption of no dividend payment was factually incorrect, as the assessee had paid a 50% dividend amounting to ?4,20,00,000/-. The Tribunal found no merit in the Revenue's arguments and dismissed the ground.

3. Disallowance Under Section 14A Read with Rule 8D of the Income Tax Act:

The AO disallowed ?3,12,707/- under Section 14A read with Rule 8D, arguing that expenses were incurred to earn exempt income (dividends). The assessee contended that it had already disallowed ?3,12,523/- suo moto, and any further disallowance would result in double disallowance. The CIT(A) deleted the additional disallowance, relying on the Delhi High Court's decisions in Maxopp Investment Ltd. vs. CIT and Joint Investments Pvt. Ltd. vs. CIT, which held that disallowance under Section 14A cannot exceed the exempt income earned.

The Tribunal upheld the CIT(A)'s decision, agreeing that the disallowance should not exceed the dividend income of ?50,900/-. The Tribunal found no error in the CIT(A)'s order and dismissed the Revenue's ground.

Conclusion:

The appeal by the Revenue was dismissed on all grounds. The Tribunal upheld the CIT(A)'s decisions regarding the allowability of enhanced compensation, commission paid to shareholder Directors, and the disallowance under Section 14A read with Rule 8D, finding no merit in the Revenue's arguments.