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TMI Blog2014 (11) TMI 145X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company, the contention of the assessee that the same was the result of hardwork put in by the Directors cannot be ruled out - some increase in remuneration to Directors for their hard-work is certainly justified and reasonable - However, the increase in Directors’ remuneration to about 9 times cannot be justified on the basis of above increase in the turnover - it shall be fair and reasonable, keeping in view the increase in turnover to 3.6 times, the increase in Directors’ remuneration to 3.6 times of the immediately preceding year is justified – Decided partly in favour of assessee. Amount received to be treated as income or not as per Explanation to section 153 r.w.s 150 – Held that:- The AO observed that the assessee has claimed to have received advance of ₹ 21,74,747/- from Happy Yammy Foods & Beverages - The assessee explained that the advance was received for manufacturing and supply of ice cream balls machinery and that final discussion was awaited from the party and that semi-finished machine was shown as work in progress - the CIT(A) correctly decided that the amount cannot be deemed as income of the year under consideration by invoking provisions of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dineshbhai S. Panchal 1338363/- 2 Nishit D. Panchal 1338363/- 3 Yogeshbhai S. Panchal 2676726/- 4 Rohitbhai S. Panchal 2676726/- Total 8030178/- 4. The assessee further explained that there was substantial rise in sales over preceding year and therefore, it was decided to give incentive to directors on the basis of sale in addition to normal salary paid to them. Copy of Board Resolution was filed before the Assessing Officer. It was further submitted that the Directors have disclosed the said salary income in their return of income and it was submitted that all the Directors have paid tax at maximum rate of 30% on their income. 5. The Assessing Officer did not accept the above explanation of the assessee on the ground that the hike in remuneration was given because of rise in sale but no evidence was furnished to substantiate and justify that the rise in sales was attributable to the efforts of the Directors only to whom hike in remuneration was given. The Assessing Officer further observed that payment of tax at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectors. He also held that in absence of any relevant evidence, it was found that the Directors have not rendered any special service or any special exertion for increase in the sale. Hence, the AO by relying upon the decision in the case of Swadeshi Cotton Mills Co. Limited (supra) held that Directors remuneration paid in excess of ₹ 9,00,000/- was excessive, unreasonable and unjustified. Accordingly, the amount of ₹ 71,30,178/- was disallowed and added to the total income of the appellant. 4.4.1 During the appellate proceedings, the appellant has controverted the finding of the AO by stating that there was 262% rise in sale due to extraordinary skilful efforts and marketing by Directors. The appellant has also submitted statements explaining developments in business and services rendered collectively by all Co-Directors. The appellant has furnished a chart of sales made in 2008-09 and financial 2009- 10 and has stated that the sale profit availability has gone up mainly due to innovation of newly developed latest technological packing equipments by all the Directors collectively during this year. List of such machines has been furnished as follows:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter, regular liaison with customer matter, regular liaison with customers and requirement of latest equipments in the developing economy. Long of experience in marketing of machine. He looked after marketing portfolio. He understands specific requirement introduces them in to the machine design manufacture a machine as required by individual customer. This needs thought knowledge understanding of basic concept of each machine model. He handles after sale services commissioning of machine at customers site. Nishitbhai Panchai - Director - Aged about 37 years academically passed Diploma Mech Engineers. - Looking after assisting in production and quality matters factory administration. Long experience assisting in manufacture activities looking after machine design Automation. The machine as developed of which programming of these machines is success. He also co-ordinates procurement of components bought outs. Getting complicated components manufactured at our factory plant coordinating activities of timely manufacturing of even machine. 4.4.2 As held by Hon'ble Mumbai High Court in its decision in the case of Shatrunjay Diamonds, 128 taxmann 759(Bom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hal, Elder Brother 2,45,000 ADUPP6620L 5 Pravinbhai S Panchal-HUF 3,25,000 AABHP7073H 6 Himanshubhai P Panchal (Elder brother Son) 90,000 ADUPP6618E 7 Paragbhai P Panchal(Elder Brother Son) 90,000 ADUPP6616L 8 Yogeshbhai S Panchal (Third Brother) 3,75,000 ADUPP6626N 9 Yogeshbhai S Panchal-HUF 3,75,000 AABHP7075B 10 Rohitbha S Panchal (Fourth Brother) 3,75,000 ADUPP6623K 11 Rohitbhai S Panchal-HUF 3,75,000 AABHP7072G Total Share Capital 30,00,000 4.5.1 It was further submitted that Shri Pravinbhai S Patel and his family intended to transfer share in the company and stopped Working in the business, hence no salary was paid to him after 13.03.2007. Thus, as on 01.04.2007, three families were having control over in the appellant company. These are the families headed by Shri Dineshbhai S Panchal, Shri Yogeshbhai S. Panchal and Rohitbhai Panchal. All these three persons are Directors of the appellant company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f shares holding by this family to other Directors is pending, hence effectively the family of three brothers who are also Directors were entitled for distribution of profit of the business of the appellant company. Such profit during this year was distributable in the ratio of 1/3 to each family. The appellant has distributed the profit to these three families in this ratio, but not declaring dividend, but making payments to them in the garb of incentive paid to the Directors in this ratio of 1/3. This clearly shows that the payments made to the Directors in the garb of incentive was a colourable devise and such payment was in lieu of dividend payable to the shareholders belonging to these three families. 4.5.4 The motive behind such distribution of profit in the garb of incentive is the fact that when a company declares a dividend it has to pay dividend distribution tax @ 15% as per the provisions of Section 115 O of the IT. Act, 1961. At the same time, no deduction on account of such dividend declaration is allowed to a company in computation of its taxable income. Thus, the entire amount paid as dividend is taxable in the hands of the appellant company @ 30%. Besides, the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not in the ratio of shareholding of the persons who had been paid the commission, hence provisions of section 36(1)(ii) will not be applicable. The relevant observations of the Bench are as follows:- Thus, the legal position is that any expenditure on account of payment of commission to an employee will be allowable as deduction under the provisions of section 36(1)(ii), irrespective of the fact whether the employee is a shareholder or not or whether the commission has been paid for some extra services or for the some services, subject to the condition that the payment is not in lieu of dividend. However, in case extra services have been rendered for payment of commission, it will be one of the relevant factors to consider while deciding whether the case is covered by the exception provided in the section 36(1)(ii), i.e., whether the payment of commission is in lieu of dividend. In the instant case, no evidence was available on record to support the plea that the directors had rendered any extra services for payment of huge commission in addition to services rendered as an employee for which salary had been paid. [Para 7.11] The instant case involved a family business owned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the jurisdictional High Court in the case of Subodhchandra Popatlal v. CIT [1953] 24 ITR 566 (Bom.) in which the High Court while dealing with similar provisions of the old Income-tax Act held that when an expenditure fell under section 10(2)(x) [which corresponds to section 36(1)(ii)], in the sense that it is an expenditure in the nature of bonus or commission paid to an employee for services rendered, then its validity can only be determined by the tests laid down in section 10(2)(x) and not by the tests laid down in section 10(2)(xv) which corresponds to section 37(1). Following the said judgment, the payment of commission to the three director employees had been rightly considered by the authorities below under the provisions of section 36(1)(ii) and the provisions of section 37(1) would not be applicable in such cases. [Para 8.2] 4.6. On the basis of all these discussions, it is held that the incentive paid to the Directors by the appellant is not allowable as a deduction in computation of the total income as per the provision of Section 40A(2)(b) as well as the provision of Section 36(l)(ii) of the Act. Hence, the action of the AO is upheld and this ground of appeal is di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made under section 40A(2) Held, yes [Para 8] [In favour of assessee] (iii) DCIT vs. Mira Industries [2003] 87 ITD 475 (AHD) Section 40A(2) of the Income-tax Act, 1961 Business disallowance Excessive or unreasonable payments Assessment Year 1992-93 Whether since there was continuous growth and progress of assessee-company after joining of managing director remuneration (viz., 10 times increase in salary) equal to 10 per cent of net profit of assessee-company to Managing Director was reasonable and was, therefore, allowable for business consideration Held, yes. (iv) Abbas Wazir (P.) Ltd vs. CIT (Allahabad High Court) .. When a company pays a higher salary to the directors or the mangers or other officers or employees as a matter of commercial expediency, it is not for the Income-tax Officer to say that in his opinion the said salary should not have been paid. A company may decide to pay a higher remuneration to its directors, officers or employees so as to encourage them to work hard, expand the business or for a host of other commercial considerations and the matter has to be looked at from the view point of the company. (v) ACIT vs. Bombay Real Es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases. (viii) Coil Company (P) Ltd vs. ACIT (2012) 22 taxmann.com 75 (Del) (Trib.) . The commission paid to MD is linked with the sales turnover of the assessee and to the performance of the directors. It has nothing to do with the shareholding pattern. Consequently, the disallowance made by the Assessing Officer in respect of commission paid to MD in all the three years is held not to be justified. Such disallowance deleted. [Para 8] 10. On the other hand, the DR relied upon the orders of the lower authorities. 11. We find that Directors remuneration during the year under consideration has been increased to ₹ 80,30,178/- from ₹ 9,00,000/- paid in the immediately preceding year. Thus, the increase in remuneration is about 9 times of the Director s remuneration paid in the immediately preceding year. The above huge increment ought to be justified on the basis of increase in business turnover which is about 3.6 times as compared to immediately preceding year. 12. We find that the lower authorities have allowed the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided. He observed that only copy of account of Happy Yammy Foods Beverages was furnished stating that the advance received for manufacture of ice cream balls machinery and final discussion was awaited from the party and the assessee has shown semi finished work in progress in the stock. The Assessing Officer observed that the AR of the assessee even categorically declined to have further opportunities of being heard vide order sheet dated 18.12.2012. The Assessing Officer, therefore, held that the advance against order shown ₹ 21,74,747/- from Happy Yammy Foods Beverages as unexplained cash credits for failure to discharge the onus u/s 68 of the Act and added the same to the income of the assessee. 15. Before the CIT(A), the assessee has submitted as under:- The advance of ₹ 21,74,747/- from Happy Yammy Foods Beverages, copy of account was furnished and stated that the advance received for manufacture of ice cream balls machinery of which final discussion is awaited from the party and has shown as semi-finished work in progress in the stock in the accounts. The AO has gone through opening as well as closing stock of above work in progress to justify the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant as per the provisions of Section 68 of the IT. Act, 1961. But at the same time, this amount can be added to the total income in the hands of the appellant in the year in which the amount was credited in the books of accounts of the appellant company. Hence, the AO is directed to tax these amounts as income of the appellant in the assessment years 2006-07 2007-08 relevant to the financial years 2005- 06 2006-07 respectively during which the amounts were received by the appellant company, as per the provisions of explanation to Section 153 r.w.s. 150 of the IT Act, 1961. Accordingly, the addition made in the current year is directed to be deleted. 17. We have heard the rival submissions and perused the orders of the lower authorities and the material available on record. In the instant case, the Assessing Officer observed that the assessee has claimed to have received advance of ₹ 21,74,747/- from Happy Yammy Foods Beverages. The assessee explained that the advance was received for manufacturing and supply of ice cream balls machinery and that final discussion was awaited from the party and that semi-finished machine was shown as work in progress. The Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the AY 2006-07 and ₹ 15,70,793/- as income of the AY 2007-08 was not in accordance with the provisions of Section 153(3) of the Act and therefore bad in law. 26. Our above view finds support from the decision of the Hon ble Supreme Court in the case of CIT, Simla Vs. M/s. Green World Corporation in Civil Appeal No.3312 of 2009, order dated 06.05.2009, wherein the Hon ble Supreme Court has referred the case of Rajinder Nath vs. CIT, Delhi [120 ITR 14 (SC)] and observed that in the case of Rajinder Nath (supra) the Hon ble Supreme Court has held as under:- 42. The expressions finding and direction are limited in meaning. A finding given in an appeal, revision or reference arising out of an assessment must be a finding necessary for the disposal of the particular case, that is to say, in respect of the particular assessee and in relation to the particular assessment year. To be a necessary finding, it must be directly involved in the disposal of the case. It is possible in certain cases that in order to render a finding in respect of A, a finding in respect of B may be called for. For instance, where the facts show that the income can belong either to A or B and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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