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TMI Blog2003 (12) TMI 308X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure on account of sales commission to its three directors, namely, Shri A. Ramadoss, Smt. R. Lalathi, wife of Shri Ramadoss and Shri R. Chakravarthy S/o Shri Ramadoss, amounting to Rs. 1,20,000 each to the first two, and Rs. 1,80,000 to the third. While framing assessment, the AO asked for justification of the above payments. The appellant-company replied that the commission had been duly accounted for and that all the recipients are income-tax assessees and they had declared the commission received, in their respective returns of income. Further, the AO required the appellant to show what services were rendered by each of the recipients of the commission. The AO made addition of this commission of Rs. 4,20,000 and disallowed the entire claim of the appellant-company by giving the reasons that the appellant had not furnished specific evidence in support of the services rendered by the directors and also that orders attributed to them could not have been secured. Aggrieved, the appellant moved before the first appellate authority, Tiruchirapally. 4.1 The learned CIT(A), by giving various reasons, upheld the order of the AO and confirmed the addition made on account of the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This being the case, there is no reason why this appellant did not show the commission in question under the head "guarantee commission" which would have been appropriate. The reasons for showing the commission under the wrong head 'sales commission' have not been explained." The counsel further argued that s. 40A(2) was not invoked while disallowing this sales commission by the AO. 4.3 On this issue, we have heard rival submissions and contentions and perused the materials placed before us. The counsel also placed before us, a paper book containing pp. 1 to 36. It is seen that the sales commission was paid to the three directors @ 5 per cent of the total value of the order secured from M/s Balaji Poly Packs for the value of Rs. 30.72 lakhs for the year 1996-97, 32.24 lakhs for 1997-98 and Rs. 25.34 lakhs for the year 1998-99. For these years, all the three directors stood personal guarantees for the performance and value of goods and in order to meet the above demand of personal guarantees by the directors, the appellant-company had paid sales commission/guarantee commission as insisted by Shree Balaji Poly Packs vide letter dt. 26th Feb., 1996 and all the directors had declare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d interest payable in respect of investment made in M/s Virgo Polymers India Ltd. The AO, while framing the assessment saw that the appellant-assessee had claimed a loss of Rs. 31,70,350 in the P&L a/c on account of the investment. Since the appellant-assessee had made investment to the tune of Rs. 95,09,550 as on 31st March, 1997, in acquiring 3,98,200 shares of M/s Virgo Polymers India Ltd., the AO after taking over the investment for the asst. yr. 1997-98 at Rs. 74,88,300 and by applying a flat rate of 18 per cent on this investment, the interest worked out was Rs. 13,47,895. The AO disallowed this amount of interest as not relating to business even though it was stated before the AO that the investment had not been made out of any borrowed funds and that no interest had been paid for the amount invested in shares. The AO treated the amount invested as loans taken from TIIC. For making the addition, he gave the finding that the amounts borrowed were invested in various fields such as shaking trade, machineries, etc. Repayments are being made out of the day-to-day transactions realised during the course of business. This being the case, it cannot be stated that no portion of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest-bearing loans and investment made by the appellant-company. Further, it was argued that the funds so utilised were not in the nature of borrowals, let alone, interest-bearing borrowals. The investment made in shares is for the purpose of business and only for the purpose of business and he also drew our attention to the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Amritaben R. Shah (2000) 158 CTR (Bom) 195 : (1999) 238 ITR 777 (Bom). He distinguished this case of the Hon'ble Bombay High Court on the facts that, there the shares held were not for controlling the other company. He also stated that there was improvement in the business after making the investment in the shares and even on disallowance of interest, he argued that it was not a notional interest. For this purpose, he drew our attention towards the apex Court judgment in the case of CIT vs. Rajendra Prasad Moody 1978 CTR (SC) 141 : (1978) 115 ITR 519 (SC). The learned counsel alternatively argued that proportionate interest should have been allowed as deduction either under s. 57(i) or s. 57(iii) or s. 37(1) of the IT Act. He drew our attention to the fact that the memorandum of association provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seen from copy of the memorandum of association of the appellant-company that investment in shares was one of the appellant's business objectives. Since the memorandum of association provides, as one of its objectives, to make investment, why the same should not be considered as part of the appellant's business activity even though the appellant had made investment through public issue. The learned Departmental Representative argued that the memorandum of association no doubt lists one of the objects as to invest any money of the company in such investment other than stock or share in the company as may be thought. He further argued that this however, does not mean that any and every listed item will have to be considered as business activity of the company. It is not right on the part of the learned Departmental Representative that when a particular activity listed in the memorandum of association or article of association of a company states that when investment of the money of the company is listed as one of the objects, undoubtedly, the memorandum states that only surplus funds are authorised to be invested in stocks and shares. It is pertinent to mention that either the AO o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot notional interest as envisaged by CIT(A). Sec. 57(iii) reads: "any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income". Sec. 57(iii) refers to expenditure actually incurred and that too only exclusively and necessarily for the purpose of earning income from other sources and not to notional interest and the present is not notional interest. Since, if at all the CIT(A) did not agree with the first plea of the appellant-company, atleast proportionate interest disallowed by the AO should have been considered for deduction under the head "income from other sources", as envisaged under s. 57(iii). It is clear that the investment made by the appellant was made with a view to earning dividends. From the foregoing discussions, it is clear that proportionate interest attributed to investment made by the appellant-company in M/s Virgo Polymers Ltd. should have been allowed as deduction under s. 57(iii) but since the issue is decided in favour of the assessee on the first plea and the action of the CIT(A) in confirming AO's disallowance of interest paid on the investment made by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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