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TMI Blog2014 (7) TMI 1195X X X X Extracts X X X X X X X X Extracts X X X X ..... held to be excessive and unreasonable u/s 40A(ii)(b) - Held that:- it is an undisputed position that interest has been paid to the specified persons in the earlier years at 16% which has been allowed in the respective previous years. The assessee however, has claimed deductions on the money borrowed from said ten persons at 18% in the instant year. The AO has held the same to be excessive and unreasonable in term of section 40A(2)(b) of the Act. He has referred to the interest paid to six parties at 12% and thus the difference between 18% and 12% was disallowed u/s 40A(2)(b) of the Act. We however find that it would be unfair to restrict the disallowance by adopting the interest at 12% because in earlier year interest has been allowed to such persons at 16%. Reference has been made by the authorities below to interest paid at 12% in respect of six parties. In our opinion in view of the preceding history of the ten said persons, it would be appropriate to refer to the interest paid to the said person in the earlier year for the purpose of section 4A(2)(b) of the Act. Having regard to the above, we conclude that it would be fair and appropriate to restrict the disallowance by adopt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eted and capitalized in the instant year. And it was thus submitted that it was not a case of claim of depreciation in respect of opening balance or expenditure incurred in earlier year. We find force in the claim of the assessee. There is no dispute that the plant was capitalized in the instant year. There is no dispute that additional depreciation on such plant has been allowed by the AO in respect of items which were purchased in the instant year. However, he denied the claim of depreciation on the items purchased in the earlier year. In doing so, the AO has over-looked the factual position that such expenditure was part of the installation of plant which has been capitalized in the instant year. And therefore the mere fact that the bills pertain to earlier year is an irrelevant consideration to deny the claim of additional depreciation when other condition are not in dispute. We also agree with the claim of the assessee that incentive granting provision should be liberally construed as held by the Hon’ble Supreme court which is reported in Bajaj Tempo Limited Versus Commissioner of Income-Tax(1992 (4) TMI 4 - SUPREME Court ).- Decided in favour of assessee - ITA No. 2011/Del/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning balance which were carried forward from preceding years. 3. Ground No.1 is in respect of disallowance of ₹ 60 lakhs representing commission paid to directors and disallowance u/s 36(1)(ii) of the Act. 4. During the year, the assessee company, has claimed a deduction of commission paid to the following three directors aggregating to ₹ 60 lakhs. a) Shri Ramesh Bardeja-20 lakh b) Shri Parikshit Bardeje-20 lakh c) Shri Parteek Bardeja-20 lakhs 5. The AO however disallowed the aforesaid deduction for the reason stated in para 3.1 of the order of the assessment which have been summarized by the ld CIT(A) as under:- (i) The assessee has failed to substantiate the specific services rendered by the Directors for earning such commissions over and above the remuneration. (ii) The services rendered were only in the nature of general management of affairs of the company for which salary has already been paid to the Directors. (iii) The assessee has made this arrangement just to avoid the restriction of maximum permissible remuneration as per Schedule XlIL Part-Il, Section-Il Sub-section(l)(v) of the Companies Act which says that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend has been obviously designed to check, inter alia, private companies from avoiding tax by distributing their profits to their members as bonus or commission instead of dividend (xi) In the instant case, the company is avoiding tax to the extent of 15% Dividend Distribution Tax u/s 115-0 even after accepting the argument of the assessee that directors are paying tax on commission received by them, by resorting to such means. (xii) It is not stated anywhere in the Act that the provisions of Section 36(l)(ii} are not applicable in cases wherein the payments are made to persons where there is employer- employee relationship. (xiii) The issue to be decided here is as to whether commission paid is allowed to be deducted under the head Profits and Gains of Business or Profession and not as to whether the same is taxable or otherwise under the head Salaries . In any case, the services rendered were only in the nature of general management of affairs of the company for which salary has already been paid to the Directors. 6. The ld CIT(A) upheld the disallowance by relying upon the finding of his predecessor in the case of the assessee for the Assessment Ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mar Bardeja has disclosed the income under the head 'salary'. The dividend has to be paid to all the shareholders as per their shareholding. The assessee s shareholding in the company less than 21% and no other person has been paid commission. 8. At the time of hearing before us, learned DR has vehemently contended that the above decision of the Hon'ble Jurisdictional High Court would not be applicable in the case of the assessee because the commission was for services rendered to the company. We find that the payment of commission was made in the earlier years also. That in AY 2005-06 and 2006-07, payment of commission was disallowed by the Assessing Officer on the ground that the assessee failed to deduct the tax thereon as per provisions of Section 194H. Therefore, the payment of commission was disallowed as per Section 40(a)(ia). The same was allowed by the learned CIT(A). The Revenue filed appeal before the ITAT wherein the ITAT held as under:- 5. We have considered the rival contentions and gone through the orders of the authorities below. From the record. we found that Shri 8ardeja, MD of the company was drawing salary and commission for the services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding of fact recorded by the CIT(A) as well as the Income Tax Appellate Tribunal that the services were in fact rendered by the Managing Director as an employee. This being a finding of fact, which could not be disputed by the learned counsel for the appellant, he lays stress on the first ground on which the addition was made, viz., non-deduction of tax at source. His submission in this behalf is that even if it is treated as commission for brokerage, the tax was still to be deducted under Section 36(1)(i) read with Section 40A(ia) of the Act which fact according to him, is glossed over by the assessee. 10. From the above, it is evident that the only contention of the revenue that the payment of commission was not for the services rendered by Shri Raj Kumar Bardeja has been considered and adjudicated upon by the ClT(A), ITAT as well as Hon'ble Jurisdictional High Court in the preceding two years. Admittedly, the facts of the year under consideration are identical. In view of the above, we hold that the ratio of the above decision of Hon'ble Jurisdictional High Court in the case of AMD Metplast P.Ltd. (supra) would be squarely applicable to the facts of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r what circumstances interest @ 18% was paid to 10 parties when to remaining 6 parties, which were also specified persons as per the provisions of Section 40A(2)(b), interest was paid @ 12% it may be mentioned that out of 16 parties Sh Ramesh Bardeja is the Managing Director of the Company and Sh Ashok Bardeja, Sh Raj Bardeja, Shri Parakshit Bardeja and Sh Prateek Bardeja are directors of the assessee company and the remaining 12 parties are not only associates but are family members of the Directors of the Assessee Company. As has been observed above while dealing with the issues of commission and salary and bonus paid to the directors the assessee company is avoiding to tax to the extent of 15% dividend distribution tax u/s 115 by making excessive and unreasonable payments to its directors and family members. In the case of Anandji Shah vs ClT (1990) 181 ITR 171 (Ker) it has been held that the interest payments made to relatives are clearly hit by the provisions of section 40A(2)(b) of the IT Act, 1961. The burden of proof is upon the assessee to establish that the expenditure incurred by it is not excessive or unreasonable. In cases falling u/s 40A(2)(b) it is the duty of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,320 1,88,213 94,107 The total disallowance on account of excessive and unreasonable payment of interest to specified persons works out ₹ 63,04,151/-, which is added to the income of the assessee for the year under consideration. This will mean an addition of ₹ 63,04,151/-. 12. The ld CIT(A) has sustained the said disallowance on the basis that interest paid at 18% in absence of any justification is excessive and unreasonable. And as such he also held that AO was justified in allowing interest at 12% . In support he has referred to the fact that assessee has paid interest at the rate of 12% to six different persons i.e. namely:- 1.Sh. Ashok Kumar, 2. Sh. Raj Kumar Bardeja, 3. Sh. Kanhiya Lal, 4.Raj Kumar Bardeja (HUF), 5. Kanhiya Lal Ashok Kumar (HUF), 6.Kanhiya Lal Raj Kumar (HUF). 13. Being aggrieved the assessee is in appeal before us. 14. Ld AR has submitted that the disallowance has been made without satisfying the condition provided in Section 40A(2)(b) of the Act. He referred to circular dated 06th July 1968, to contend that the provision is meant to check t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at 16% which has been allowed in the respective previous years. The assessee however, has claimed deductions on the money borrowed from said ten persons at 18% in the instant year. The AO has held the same to be excessive and unreasonable in term of section 40A(2)(b) of the Act. He has referred to the interest paid to six parties at 12% and thus the difference between 18% and 12% was disallowed u/s 40A(2)(b) of the Act. We however find that it would be unfair to restrict the disallowance by adopting the interest at 12% because in earlier year interest has been allowed to such persons at 16%. Reference has been made by the authorities below to interest paid at 12% in respect of six parties. In our opinion in view of the preceding history of the ten said persons, it would be appropriate to refer to the interest paid to the said person in the earlier year for the purpose of section 4A(2)(b) of the Act. Having regard to the above, we conclude that it would be fair and appropriate to restrict the disallowance by adopting the interest rate at 16%. In view of the above the AO is directed to disallow the interest between 18% to 16% and the balance be allowed as deduction. In the result t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rters, Factory Building etc at its two factories at Chennai and Ghaziabad. The said process had commenced in the earlier years but was completed in the year under appeal and accordingly the relevant assets were capitalized during the year under appeal. The said construction involved, at various stages, payments for small and petty amounts which, in many cases, were purchased from local vendors against payment in cash. The ld AR submitted that complete details of the additions in respect of which depreciation has been disallowed on the ground that the bills thereof do not mention the name of the Appellant Company are enclosed herewith and took our attention to Page 63-145 of PB, a review of which would according to him, reveal that the same essentially comprise of petty amounts representing purchases made from small traders who mostly belong to the unorganized sector. According to ld AR, the nature of the said expenses is such that they were germane to and a necessary ingredient of the cost of the said plant during the process of the construction and installation. This being the case, the mere fact that the name of the Appellant Company is not mentioned should not lead to any advers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om preceding years. 22. In the instant case the AO has mentioned in para 7 of the assessment order that the appellant had claimed additional depreciation on the addition made to block V and block VII of its Ghaziabad units. The AO has further observed that on perusal of bills and vouchers in respect of which additional depreciation had been claimed by the appellant it was observed that certain bills pertained to the earlier years and also that the appellant had claimed additional depreciation on the opening balance carried forward as on 01.04.2008. In view of the above findings the AO disallowed the appellant s claim of additional depreciation amounting to ₹ 19,18,699/- in respect of the assets which were not purchased during the year but had been purchased in the earlier years. 23. The ld CIT(A) has sustained the disallowance stating that:- assets on which additional depreciation have been claimed have to be purchased during the relevant previous year. 24. Being aggrieved, the assessee is before us. The ld AR contends that the action of the authorities below to deny the claim of depreciation is based on misreading of provision contained in Section 32(i)(ii)(a) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or thing, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii): Provided that no deduction shall be allowed in respect of - (a) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or (b) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house; or (c) any office appliances or road transport vehicles; or any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head Profits a gains of business or profession of anyone previous year: 28. A perusal of the aforesaid provision would show that where any new machinery or plant has been acquired and installed after 31st March 2005, by an eligible assessee then he is entitled to additional depreciation equal to 20% of the actual cost of the machinery. The AO in the instant case has held that certain bills and vouchers pertaining to the claim of additional depreciation ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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