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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 ..... g paid to Mrs. Renu Munjal, she would not have received dividend to the extent of Rs. 39 lacs because her holding was only .1%. The dividend would have been much less than the commission actually paid to Mrs. Renu Munjal. Thus, sum of Rs. 39 lacs, in any case, would not have been paid to Mrs. Renu Munjal as profits or dividend if it had not been paid as commission. Following the decision in the case of Loyal Motor Service Company Limited vs. CIT, decided in favor of assessee. - ITA No.4329/Del/2010 - - - Dated:- 27-4-2012 - S V Mehrotra, A D Jain, JJ. For Appellant: Shri Ajay Vohra, Adv. Smt Shikha Sharma, CA For Respondent: Ms Y S Kakkar, Sr. DR ORDER Per: S V Mehrotra: This appeal is filed by the assessee and directed against the order of ld. CIT(A) dated 31.08.2010 for the A.Y. 2005-06. 2. Brief facts of the case are that in the relevant assessment year the assessee company was engaged in the business of hire purchase, leasing and financing, mainly of motorcycles sold by M/s Hero Honda Motors Ltd. It had filed its return of income declaring total income of Rs. 42,62,50,140/-. The assessment was completed at a total income of Rs. 43,03,88,060/- after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. 6. Ld. CIT(A) after considering the assessee s submissions restricted the disallowance to Rs. 50,000/-, inter-alia, observing that it could not be denied that some expenditure had necessarily to be attributed to earning such dividend income on account of establishment charges, administration expenses and other expenses etc. Ld. Counsel for the assessee submitted that disallowance has been confirmed to the extent of Rs. 50,000/- purely on adhoc basis without establishing any nexus between earning of dividend and incurring of expenditure under the aforementioned heads. 7. Ld. DR submitted that under such circumstances Tribunal is consistently restoring the matter to the file of AO in view of the decision of Hon ble jurisdictional High Court in the case of Maxopp Investment Limited others vs. CIT, 203 Taxmann 364 . 8. Ld. Counsel in the rejoinder submitted that even if the matter is to be restored, the disallowance should not exceed Rs. 50,000/- as the assessee cannot be worse off. Ld. DR, however, submitted that since matter is to be restored to the AO in view of the jurisdictional High Court, no rider can be put on AO while deciding the issue having regard to the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s was not allowable as per the provisions of sec. 36(1)(ii). 14. Before ld. CIT(A) the assessee, inter-alia, advanced following submissions: - i) the amount of commission was paid in accordance with the terms of employment of Ms. Renu Munjal as a whole time director, which was duly approved by the Board of Directors and subsequently ratified by the shareholders. ii) the amount of commission was computed on the basis of 1% of net profit to be arrived at in accordance with the provisions of sec. 198 read with section 349 of the Company s Act, 1956. iii) Ms. Renu Munjal held .1% of shares in assessee company. iv) the commission was paid in lieu of services rendered and not in lieu of distribution of dividend to shareholders. v) during the relevant previous year, the assessee company proposed final dividend @ Rs. 15 per share which was distributed amongst all the shareholders, including Ms. Renu Munjal/ whole time director. Thus, the dividend was additionally distributed in proportion to shareholding of Ms. Renu Munjal in the company, in line with distribution made to other shareholders. vi) there was no whisper or any evidence being brought on record by the AO in the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which read as under: - Commission: The appointee shall be allowed remuneration by way of commission in addition to Basic Salary, Perquisites and Allowances, Benefits or amenity subject to the condition that the amount of commission shall not exceed 1% of the net profits of the company in a particular financial year as computed in the manner referred to in Section 198 of the Companies Act, 1956. 16. He pointed out that the terms of appointment as set out in the meeting held on 5th August, 2000 were partially modified in the 12th Annual General Meeting of the members held on 14th July, 2003 as under: RESOLVED THAT in partial modification of the earlier resolution passed with respect to the re-appointment of Renu Munjal (Ms.), Whole-time Director of the Company in the 10th Annual General Meeting of the Company held on August 18, 2001, the consent of the company be and is hereby accorded under sections 309, 310 read with Schedule XIII and other applicable provisions, if any, of the Companies Act, 1956 to increase here Basic Salary as set out in the Explanatory Statement annexed hereto for the remaining period of her tenure. 17. He, therefore, submitted that the comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with sec. 198 read with section 349 of the Company s Act is contained which is reproduced hereunder: - 14) Computation of net profit in accordance with sec. 198 read with sec. 349 of the Companies Act, 1956 Particulars (Rupees in lacs) Profit before tax as per profit loss a/c 2004-05 2003-04 Add: Managerial remuneration 4,071.02 3,427.44 Less: Profit on sale of fixed assets as per profit loss a/c 93.25 69.81 Less: Loss on sale of assets as per Section 350 of the Companies Act, 1956 15.53 57.76 Net profit as per section 349 of the Companies Act, 1956. 3,930.23 3,229.26 Commission @ 1% of the above 39.30 32.29 Profit for the Whole-time Director for the year restricted to 39.00 32.00 19. With reference to above computation, ld. Counsel submitted that since the commission was paid in accordance with the terms of employment and hence was part of salary. Therefore, the impugned amount was not distributable as dividend. He pointed out that Companies Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egarding mode of fixation of commission had been filed by the assessee so as to justify such high commission paid to her. She referred to the decision of Spl. Bench in the case of M/s Dalal Broacha Stock Broking P. Ltd. vs. Addl. CIT and referred to para 7.12 to 7.14 of the said decision which is reproduced hereunder: - 7.12 The A.Y. 2004-05 was the first year when the asessee started paying commission of Rs. 40.00 lacs to each working director in addition to salary. In the immediately preceding year, the directors had been paid only salary which was Rs. 6.00 lacs per annum in case of Chairman and Rs. 12.00 lacs per annum in case of the other two directors. The Tribunal in the said order has not given any finding whether substantial payment of Rs. 40.00 lacs was for any extra services rendered. The Tribunal basically allowed the claim on the ground that in the immediate preceding year, salary expenditure had been allowed and payment of commission was supported by the Board Resolution and that there was no tax advantage to the assessee. The Tribunal confirmed the finding of the CIT(A) which had been reproduced in para 7 of the order of the Tribunal as per which the CIT(A) delete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommission in A.Y. 2000-01 when there was exceptional profit was nothing but dividend because had it been a genuine commission, the assessee would have continued the payment of commission and even may have increased in the subsequent three year period to improve performance but no commission was paid in these years even though turnover and profit were both declining. Obviously, sharp fall in profits had forced the company management not to pay dividend in the garb of commission in the next years. The stock market started recovery from A.Y. 2004-05 and had steadily gained till A.Y. 2008-09 which is reflected in steady increase in both turnover and profit. The assessee again started showing payment of commission from A.Y. 2004-05. The profit before tax but after deduction on account of commission was Rs. 4.55 crores in A.Y. 2004-05 which steady rise in performance was due to improved market conditions and not because of any extra service rendered by the directors as no evidence has been produced for rendering of extra services. The equity capital of the company which is entirely owned by the three directors was Rs. 6.50 crores. Investors in equity shares expect a reasonable return on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct the ITO to make appropriate modifications. It is well known that an appellate authority has the jurisdictiol as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh, unless forbidden from doing so by statute. 23. Ld. DR further referred to page 19 of the paper book, wherein the Directors Attendance record is contained and point out that Ms. Renu Munjal was the only director to whom commission had been paid. She further referred to page 20 wherein the shareholders/investors grievance committee has been constituted in which it has been stated that the shareholder base of the company is very small. She further referred to page 22 wherein category of shareholders as on 31st March, 2005 is given as per which promoters holding was 64.74% and non-promoters holding (dealers associate employees etc. was 35.26%) she submitted that percentage of holding is not relevant for sec. 36(1)(ii). 24. Ld. Counsel in the rejoinder submitted that neither the AO nor ld. CIT(A) has disputed the reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion package to Ms. Renu Munjal and thus, it created an overriding title in favour of Ms. Renu Munjal by creating a charge against the profits of the company. However, its allowability was subject to sec. 36(1)(ii). The AO s conclusion that the corpus for paying the dividend had reduced does not reflect the correct legal position with reference to section 36(1)(ii). Whenever any commission is paid to an employee it is bound to reduce the corpus available for distribution as dividend. But that ipso-facto cannot be the basis for holding that commission is in lieu of dividend. All the facts and circumstances of the case have to be taken into consideration for arriving at right conclusion. In the present case the declared profits of the company were Rs. 42 crores and dividend had also been paid to all the shareholders including Ms. Renu Munjal. It cannot be disputed that the company as well as Ms. Renu Munjal were bracketed in the highest income tax slab and the only effect was on account of saving dividend distribution tax to the company which was very minimum keeping in view the overall profits of the company. This cannot be held to be device for reducing the overall tax effect in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that is to be placed upon para (x) of sub-sectin (2) of sec. 10. It should be noted that the body of this sub-section provides an allowance and the qualifying part of it is by way of exception to that allowance. What is to be allowed is any sum paid to an employee as bonus or commission for services rendered and the exception is, where such sum would not have been paid to him as profits or dividends if it had not been paid as bonus or commission. In the exception the words such sum can, in my opinion, only refer to the last and the only antecedent, which is any sum paid as commission or bonus. Therefore, unless the commission or bonus would be paid to the assessee as profits or dividends the exception to the allowance does not operate . Mr. Setalvad on behalf of the CIT has pointed out with considerable force that strictly construed there can hardly ever be a case which comes within the ambit of the exception. Sir Jamshedji Kanga on behalf of the assessee company suggests two such cases, viz, in the case of what is generally called a one-man-company which is not unlawful under the Indian Companies Act, and also in a case in which a company, in declaring a dividend, or a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be investigated and disallowed. An illustration will perhaps make the position clear. Five persons in a firm realizing that the profits of the year were Rs. 50,000 and they had an equal share in the profits of the business decide that instead of receiving Rs. 10,000 each as the share of profits each of them will be paid Rs. 10,000 as bonus or commission. In such a case the firm, when sought to be assessed, may contend that Rs. 10,000 were paid as bonus. The contention will be clearly rejected. But the safeguards do not end there. The firm will have to provide to the satisfaction of the taxing authority that the five partners were employees, in the first instance. Secondly, that the bonus was a reasonable amount having regard to the pay of the employee and the conditions of his service. Thirdly, that the profits of the business for the year in question made it reasonable to pay the amount granted as allowance, and lastly, the general practice in similar businesses or trade justified the payment of the amount as bonus. It seems to me that the plain reading of the clause means that the profits of a business will not be allowed to be dwindled by merely describing the payment as bonu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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