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TMI Blog2012 (5) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 14A to Rs. 50,000/-. 4. Being aggrieved with the order of ld. CIT(A), the assessee is in appeal before us and has taken following grounds of appeal: - 1. "That the Commissioner of Income tax (Appeals) erred on facts and in law in upholding disallowance of expenses to the extent of Rs. 50,000/- made by the AO under section 14A of the I.T. Act, 1961 on the ground that certain overhead expenses must have been incurred in relation to earning of exempt dividend income. 1.1 That the Commissioner of Income tax (Appeals) erred on facts and in law in not appreciating that only expenditure incurred having direct relation with earning of exempt income could have been disallowed u/s 14A of the Act. 2. The Commissioner of Income tax (Appeals) erred on facts and in law in upholding the action of the AO in disallowing commission paid to director, amounting to Rs. 39 lacs u/s 36(1)(ii) of the Act on the alleged ground that the same was paid in lieu of distribution of profits as dividend, resulting in avoidance of dividend distribution tax." 5. Brief facts apropos ground no. 1 and 2 are that the assessee had earned dividend income of Rs. 6,79,767/-, which had been claimed as tax free. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture on some reasonable basis. 10. We are in agreement with ld. DR that no rider can be put on the AO while deciding the issue as he has to follow the decision of Hon'ble jurisdictional High Court. Moreover, once the order of ld. CIT(A) is set aside, his findings cannot be given any credence. 11. In view of above discussion, we restore this matter to the file of AO to quantify the expenditure incurred for earning dividend on some reasonable basis. 12. In the result, this ground is allowed for statistical purposes. 13. Brief facts apropos ground no. 3 are that assessee had claimed expenses on account of commission to director amounting to Rs. 39 lacs. Since in the opinion of AO this claim was prima-facie not allowable as per the provisions of 36(1)(ii), he required the assessee to furnish details of commission to director with the basis thereof and to also justify its allowability u/s 36(1)(ii). The assessee vide his letter dated 26.12.2007 submitted that commission amounting to Rs. 39 lacs had been paid @ 1% of net profit (wrongly mentioned as total turnover in asstt. order). It was further pointed out that the commission was paid as remuneration for the services rendered by Ms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unjal as a shareholder. viii) it is not the case of the AO that aggregate remuneration (including commission) paid to the whole time director was excessive having regard to the nature of services rendered. The assessee placed reliance on the decision of Hon'ble Supreme Court in the case of Shahzada Nand & Sons vs. CIT 108 ITR 358, wherein it was, inter-alia, held that for allowability of commission it is not necessary u/s 36(1)(ii) that some extra services should have been rendered. ix) the commission was paid in earlier years also in accordance with the terms of employment, with reference to percentage of profit and was allowed. Therefore, in view of the decision of Hon'ble Supreme Court in the case of Radha Swami Satsang vs. CIT 193 ITR 321 the assessee's claim should have been allowed. Ld. CIT(A) dismissed the assessee's ground of appeal observing in para 3.3 as under: - "Keeping in view the facts and circumstances of the case, it is held that the AO was right in disallowing the commission payment u/s 36(1)(ii) which as per the AO ensures that company did not resort to avoiding payment of tax by distributing the profit to their specific members/directors/shareholders as bon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the 10th Annual General Meeting held on August 18, 2001. Her Basic Salary was revised to Rs. 1,35,000 with an increase of 10% in each of the financial year during the remaining period of her tenure in the 12th Annual General Meeting held on July 14, 2003. Thereafter, the Remuneration Committee in their meeting held on April 18, 2005 after having due consideration of the Remuneration Policy of the Company and of her increased job responsibilities in the present business scenario of the company have recommended her appointment as the Managing Director of the Company. Thereafter the Board of Directors have approved her appointment for a period of 5 (five) years from September 1, 2005 subject to your approval on the following remuneration (including minimum remuneration) and other terms and conditions as stated below: I. Basic Salary: Rs. 2,00,000/- (Rupees two lacs only) per month, subject to an increase of 10% per annum effective April 1, 2006 and thereafter on the first day of each financial year. II. Commission: The appointee shall be allowed remuneration by way of Commission in addition to Basic Salary, Perquisites and any other Allowances, benefits or amenities subject to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l/2009 vii. Maxopp Investment Ltd. vs. CIT:203 Taxman 364 20. Ld. Counsel further submitted that since Ms. Renu Munjal was holding only 1% share, therefore, in any case, Rs. 39 lacs could not have been paid as dividend which clearly shows that the commission had been paid for services rendered by her and not in lieu of dividend. Ld. Counsel further pointed out that decision of Tribunal has been upheld by Hon'ble Delhi High Court in the case of Bony Polymers (P) Ltd. vide ITA No. 1298/2011 dt. 19/10/2011. 21. Ld. DR submitted that the basic question is whether the commission was paid for services rendered or not. She referred to page 9 & 10 of paper book to demonstrate that Ms. Renu Munjal had not sufficient qualifications which could justify her alleged services to the company. She pointed out that Mr. Brij Mohan Lal, the Chairman of the Company, was honorary Member of the Indian Institution of Industrial Engineering. Similarly, Sh. Om Prakash Munjal was Co-Chairman & CEO of Hero Cycles Ltd. Mr. Pawan Munjal was also a Graduate in Mechanical Engineering. Considering the qualifications of all these directors, Ms. Renu Munjal had no such qualifications. She referred to page 18 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was commensurate to the market value of the services. Thus, the decision of the Tribunal in A.Y. 2004-05 (supra), cannot be considered as precedent for the plea that huge commission had been paid for extra services or that payment was commensurate to market value of services. As pointed out earlier, no evidence of any extra services to justify huge commission payments has been produced before the lower authorities or even before us. 7.13 We have to evaluate the case on basis of material available on record. On careful perusal of financial performance statistics tabulated earlier, we note that both the turnover and the profit was exceptionally high in A.Y. 2000-01 compared to the earlier year and subsequent three year period. But this was because of the reason that there was stock market boom which had peaked in A.Y. 2000-01 and the bubble had burst only towards the fag end of that year, which was the reason for exceptional performance in that year. The assessee is a share broker who gets commission on sale/purchase of shares by investors/traders. The income of the assessee is assured irrespective of the fact whether the investor/trader losses or gains in the transaction. The com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e annual report have not given any reason for not declaring dividend. The reason given before us is that the assessee did not declare dividend to improve net worth to attract FIIs who do transactions only through high net worth brokers. This argument is not convincing at all because whether the assessee pays commission or dividend the net worth is reduced by the same amount. It is also to be noted that commission has been paid only to the director employees and commission has been paid as 10% of profits subject to a limit of Rs. 40.00 lacs which also shows that the assessee company distributed part of the profits to the director employees who were the only shareholders. Therefore, on the facts and circumstances that dividend in case of the assessee company was payable and that the same has been paid in the garb of commission." 22. She further pointed out that the decision in the case of Bony Polymers P. Ltd., Celsius Refrigeration P. Ltd., Mandavi Motors P. Ltd. & Carrier Launcher P. Ltd. have duly been considered by the Spl. Bench. She submitted that in the light of the decision of Spl. Bench, the matter may be restored to the AO for deciding the issue denovo. In this regard she ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36(1) "The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 ...... (ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission" 26. The basic conditions for allowability of deduction u/s 36(1)(ii) are as under: i) the expenditure is on account of bonus or commission paid to an employee ii) the amount is paid for services rendered iii) the commission is not in lieu of payment of dividend. 27. As noted earlier, the AO has merely disallowed the commission invoking the 3rd ingredient noted above i.e. the commission has been paid in lieu of dividend. In order to arrive at a proper conclusion, it is necessary to find out the object with which section 36(1)(ii) has been incorporated in the Act. This provision has been incorporated to check, inter-alia, Private Companies from avoiding tax by distributing their profits to their members (showing them to be their employees) by way of commission and not by way of dividend. For successfull ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Bony Polymers Ltd. as noted the observations of Hon'ble Mumbai High Court in the case of Loyal Motor Service Company Limited vs. CIT, 14 ITR 647 which are reproduced hereunder: - "3. Now the facts as shown by the reference are that this company was formed by fourteen persons, thirteen of whom were originally owner drivers of motor vehicles, the fourteenth member contributing in money. The thirteen not only contributed their motor vehicles but also their services and accordingly became employees of this company. Besides the thirteen there are twenty-eight other employees making a total of forty-one. In the year in question the company granted a bonus at the rate of two month's salary to its forty-one employees and the total sum required to pay this bonus was Rs. 6,084/- of which Rs. 1,954/- went to the twenty-eight other employees and Rs. 4,130/- to the thirteen shareholder employees was by reference to their salaries and not to their stakes in the company. A tabulated result is set out in the application for this reference and is printed on page 12 of the record. It is there shown that of the thirteen shareholders employees six employees got less bonus than they wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. If that is the construction which is to be placed upon this sub-section, then the answer to the question is, that the whole of the sum of Rs. 4,130 paid as bonus to the shareholder employees is allowable as deduction under the provisions of s. 10(2)(x). I answer the question referred to us in the affirmative. The CIT must pay the costs of this reference." (emphasis supplied) 10. In the same decision, Kania. J. had observed: "7. In my opinion, that construction of the clause is not correct. The word "such" must refer to what had been previously mentioned in the same clause in connection with the word "sum". To find that out we must look to the first part of the clause. That refers to "any" sum. Reading the clause in that way the plain meaning appears to be that when a particular amount was paid by way of bonus to any employee, if the same amount would have been paid to him as a shareholder as dividend or profit, the company cannot be allowed a deduction on the ground of payment of bonus. To put it in other words the clause is intended to prevent an escape from taxation by describing a payment as bonus, when in fact ordinarily it should have reached the shareholder as profit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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