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TMI Blog2018 (6) TMI 750X X X X Extracts X X X X X X X X Extracts X X X X ..... im as a sales agent for the company was allowable as an expense under Sec.36(1)(ii)? - Held that:- As observed Sec. 36(1)(ii) which contemplates the allowance of an amount paid as bonus or a commission to an employee of a company disallowance carved out in the exception contemplated under Sec.36(1)(ii), would be invoked only in a situation where the payment of the bonus or commission had been made to an employee, and not otherwise. We thus, are of the considered view that the qualification regulating the allowability of bonus or commission as an expense while computing the income of an assessee under Sec. 28, would only be applicable in a case where the same had been paid to an employee, and not otherwise - Sec. 36(1)(ii) is intended to prevent an escape from taxation by describing a payment as bonus or commission, when in fact ordinarily it should have reached the shareholder as profit or dividend In the case of the assessee company before us, as Mr. Darayus A. Bathena during the year under consideration was not an employee of the assessee company, thus the qualification or the rider embodied in the latter part of Sec. 36(1)(ii) would not come into play in the case of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid ₹ 80,60,000/-) (Eighty lakhs sixty thousand only) paid to Zoru Bhathena, the general manager of the company. (4) The learned CIT (A) has erred in law, facts and circumstances of the case in confirming the disallowance of 30% of legal professional fees paid to an Advocate [Total fees paid: ₹ 27,33,745/-] ( Twenty seven lakhs thirty three thousand seven hundred forty five only) amounting to ₹ 8,20,123/- (Eight lakhs twenty thousand one hundred twenty three only) on the ground of payment to related parties u/sec 40A (2) (b) of Income Tax Act, 1961. (5) The learned CIT(A) has erred in law, facts and circumstances of the case in confirming the disallowance of 30% of commission amounting to ₹ 8,20,123/- (Eight lakhs twenty thousand one hundred and twenty three only) on adhoc basis without ascertaining the Fair value of services provided to related parties u/sec 40A (2)(b). (6) The Learned CIT (A) has erred in law, facts and in circumstances of the case by confirming the levy of interest u/s 234B, 234C and 234D. (7) Your Appellant craves leave to add to, alter, amend, delete and/or modify the above grounds of appeal on or before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Adv. Nevia Bhathena 2 7,33,745 Legal and professional Total 1,29,59,018 The ld. A.R before adverting to the maintainability of the aforesaid disallowance submitted that the salary of ₹ 12,00,000/- paid to Mr. Zoru Bathena as general manager of the assessee company was wrongly considered by the A.O as payment by way of commission. It was submitted by the ld. A.R that as the respective payments made to the aforementioned related parties were in conformity with those made to the unrelated parties, hence the A.O had most arbitrarily carried out a disallowance under Sec. 40A(2)(a) of ₹ 38,87,745/- in the hands of the assessee. It was submitted by the ld. A.R that the A.O while making the disallowance under Sec. 40A (2)(a) had failed to place on record any such material which could evidence that the payments made by the assessee for the services rendered by its related parties were excessive or unreasonable, having regard to the fair market value of the services for which the same were made. It was thus, the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he records that the assessee on being called upon by the A.O to substantiate the reasonableness of the payments made to its related parties, however had failed to place on record any documentary evidence in support thereof. The A.O was of the view that the assessee had paid commission to its related parties at an exorbitant rate of 10% of the sale value. It was further observed by the A.O that not only the payments made by the assessee to its related parties appeared to be unreasonable, but rather 90% of the total payments were found to have been made to such related parties. We find that on the basis of the aforesaid deliberations, the A.O after characterising the payments made by the assessee to its related parties as unreasonable and excessive had disallowed 30% of such payments and made a consequential addition of ₹ 38,87,705/- in its hands. 7. We have deliberated at length on the issue under consideration and are unable to persuade ourselves to subscribe to the view taken by the lower authorities. We find from a perusal of Sec. 40A(2)(a) that it is only where an assessee incurs an expenditure in respect of which a payment has been or is to be made by an assessee to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as general manager, however the same was considered by the A.O as payment towards commission. We are of the considered view that the lower authorities had carried out the disallowance under Sec. 40A(2)(a) on an adhoc basis viz. 30% of the payments made to the related parties and made a disallowance of ₹ 38,87,705/- without placing on record any material which could prove to the hilt that the payments were excessive or unreasonable, having regard to the fair market value of the services for which the same were made or keeping in view the legitimate needs of the business of the assessee or the benefit derived by or accruing to the assessee therefrom. Be that as it may, we are of the considered view that in the absence of satisfaction of the basic condition for invoking of Sec. 40A(2)(a) by both of the lower authorities, the disallowance of 30% of the related party expenses i.e ₹ 38,87,705/- made under Se. 40A(2)(a) cannot be sustained. We thus, delete the disallowance of ₹ 38,87,705/- sustained by the CIT(A) under Sec.40A(2)(a) of the Act. The Grounds of appeal Nos. 1 to 5 are allowed. 8. That as the levy of interest under Sec. 234B and 234C are mandatory pursua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anaging director viz. Mr. Darayus A. Bathena, who held the majority shareholding of 75% of total shares in the assessee company. It was further noticed by the A.O that though Mr. Darayus A. Bathena played an important role in day to day activities of the assessee company, however no salary was shown to have been paid to him. On the basis of the aforesaid facts, the A.O held a conviction that the assessee had deliberately arranged the aforesaid transaction to avoid disallowance of payment of commission under Sec.36(1)(ii) and to evade the payment of taxes on distribution of dividend. The A.O was of the view that in case if the assessee company would have shown payment of salary to Mr. Darayus A. Bathena, the same would had led to disallowance of commission payment under Sec.36(1)(ii) of the Act. On the basis of the aforesaid deliberations, it was concluded by the A.O that the assessee had deliberately not paid any salary to Mr. Darayus A. Bathena, despite the fact that he was playing an active role in the day to day activities of the assessee company. The A.O held a conviction that the assessee in order to facilitate his arrangement to avoid payment of taxes, had claimed to have mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said facts further observed that the commission of ₹ 1,16,83,883/- paid to Mr. Darayus A. Bathena who was concededly the main and controlling person of the assessee company was found to be well within the reasonable parameters. On the basis of his aforesaid deliberations, the CIT(A) not finding favour with the view taken by the A.O deleted the disallowance of ₹ 1,16,83,883/- made under Sec. 36(1)(ii) of the Act. 14. The revenue being aggrieved with the order passed by the CIT(A) had carried the matter in appeal before us. The ld. Departmental Representative (for short D.R ) at the very outset of the hearing of the appeal took us through the facts of the case in context of the issue under consideration. It was submitted by the ld. D.R that the assessee company had clearly manoeuvred the payment of salary to its managing director Mr. Darayus A. Bathena in the garb of commission payment. The ld. D.R in order to drive home his contention that there was no justifiable reason for the assessee company to have paid any commission to M/s Darayus A. Bathena, submitted that despite being afforded sufficient opportunity, no details of the services rendered by him to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed to be dwindled by merely describing the payment as commission, if the same was made in lieu of dividend of the assessee company. It was thus, the claim of the ld. D.R. that as the assessee in the present case had failed to discharge the onus and prove to the hilt that the amount of ₹ 1,16,83,883/- was paid to Mr. Darayus A. Bathena for services rendered by him to the assessee company as a sales agent, hence the CIT(A) had erred in summarily allowing the same as an expense in the hands of the assessee. 15. Per contra, the ld. Authorized Representative (for short A.R ) for the assessee rebutted the aforesaid contentions of the revenue. The ld. A.R took us through a letter dated 31.03.2005 addressed to the assessee company by Mr. Darayus A. Bathena (Page 1-2) of APB, wherein it was confirmed by him that on the basis of the discussions held with the assessee company, he had taken the responsibility of giving services as a sales agent for marketing of the products manufactured and/or traded by the assessee company with effect from 01.04.2005. The ld. A.R taking us through the contents of the aforesaid letter submitted that the complete nature of activities which were to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame could not be questioned merely on the basis of speculation by the revenue that the same was to avoid payment of dividend tax. It was submitted by the ld. A.R that the Tribunal on the basis of its aforesaid observations had deleted the disallowance made under Sec. 36(1)(ii) of the Act. The ld. A.R further referring to the order of the Special bench of the ITAT Mumbai Bench D in the case of Dalal Barocha Stock Broking (P) Ltd. Vs. Addl. CIT, Range-4(1), Mumbai (2011) 11 Taxman.com 426 (Mum)(SB), relied upon by the ld. D.R, submitted that the same was distinguishable on facts. The ld. A.R to fortify his aforesaid contention and to impress upon us that the facts involved in the case before the Special bench of the Tribunal were distinguishable, took us through the said order of the Tribunal. 16. The ld. A.R further in order to dislodge the observations of the lower authorities that the assessee had manoeuvred its true profits and suppressed the same in the garb of payment of commission of ₹ 1,16,83,883/- to its Managing director, viz. Mr. Darayus A. Bathena, submitted that if the said amount had been paid in the form of salary for the services rendered by him, then k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 100/- each, would have worked out to 550%, which could not have been paid as dividend under any circumstances. The ld. A.R taking support of the aforesaid facts submitted that now when it stood established that the commission of ₹ 1,16,83,883/- paid to Mr. Darayus A. Bathena was not an amount which was otherwise payable to him as dividend, hence no disallowance under Sec. 36(1)(ii) was called for in the hands of the assessee company. The ld. A.R further relied on the judgment of the High Court of Delhi in the case of AMD Metplast (P) Ltd. Vs. DCIT (2012) 341 ITR 563 (Del). The ld. A.R taking support of the aforesaid judicial pronouncement submitted that now when it stood proved to the hilt that the commission paid to Mr. Darayus A. Bathena was for the services rendered by him as a sales agent of the assessee company and the said amount could by no means have been paid to him as dividend, hence the same was duly allowable as an expense and did not fall within the realm of the exception carved out in Sec. 36(1)(ii) of the Act. 17. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material placed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction on the ground of claiming the payment of the same as a bonus or commission to such shareholder. To put it in other words, Sec. 36(1)(ii) is intended to prevent an escape from taxation by describing a payment as bonus or commission, when in fact ordinarily it should have reached the shareholder as profit or dividend. Rather, to be brief and explicit, a plain reading of the aforesaid statutory provision viz. Sec. 36(1)(ii) reveals that the profits of a business will not be allowed to be dwindled by merely describing the payment as bonus or commission, if the payment is in lieu of dividend or profit. We are of the considered view that as in the case of the assessee company before us, as Mr. Darayus A. Bathena during the year under consideration was not an employee of the assessee company, thus the qualification or the rider embodied in the latter part of Sec. 36(1)(ii) would not come into play in the case of the assessee, on the said count itself. Rather, on a broader perspective, as Mr. Darayus A. Bathena is not an employee of the assessee company, hence the allowability of the commission paid to him by the assessee company would by no means be regulated by Sec. 36(1)(ii) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablished to the hilt, hence deduction of commission even otherwise cannot be disallowed as an expenditure under Sec. 36(1)(ii) of the Act. 19. We are further persuaded to be in agreement with the view taken by the CIT(A) that keeping in view the present economic scenario, wherein all the medium range companies are remunerating their managing directors in the range of ₹ 5 to 10 lacs per month, the payment of commission to Mr. Darayus A. Bathena, even if it was to be considered to have been paid in lieu of salary, keeping in view the fact that he was the main and controlling person of the company looking after its affairs, was well within the reasonable parameters. 20. We have also deliberated at length on the observations of the lower authorities, which had been taken support of by the ld. D.R. in his attempt to persuade us to subscribe to his contention that the payment of commission was used by the assessee company as a colorable device for tax evasion. We are unable to persuade ourselves to subscribe to the said view of the lower authorities. As observed by the CIT(A), the assessee in neither way would had benefited by making the payment of ₹ 1,16,83,883/- to Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of commission is also found to be as per the provisions of the Companies Act. We are further of a strong conviction that the veracity of the payment of commission to Mr. Darayus A. Bathena can safely be gathered from a perusal of the fact, that the turnover of the assessee company had witnessed an increase due to the efforts put in by him. As observed by us hereinabove, the fact that the entire commission of ₹ 1,16,83,883/- would not have become payable to the assessee as dividend cannot also be lost sight of, as the same takes the case of the assessee beyond the sweep of the disallowance contemplated in Sec. 36(1)(ii) of the Act. We thus, on the basis of our aforesaid deliberations are of the considered view that the applicability of the disabling rider of Sec. 36(1)(ii) would stand ousted in respect of the commission payment made to Mr. Darayus A. Bathena for two fold reasons viz. (i) that he was not the employee of the assessee; and (ii). the commission was paid to him for the services rendered as a sales agent to the assessee company. In the backdrop of our aforesaid observations, we are of the considered view that the allowability of the commission of ₹ 1,16,83,8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of 30% of legal professional fees paid to two Advocates [Total fees paid: ₹ 48,00,000/-] amounting to ₹ 14,40,000/- on the ground of payment to related parties u/sec. 40A(2)(b) of Income Tax Act, 1961. (4) The learned CIT(A) has erred in law, facts and circumstances of the case in confirming the disallowance of 30% of commission amounting to ₹ 14,40,000/- on adhoc basis without ascertaining the Fair value of services provided to related parties u/sec 40A(2)(b). (5) The Learned CIT(A) has erred in law, facts and in circumstances of the case by confirming the levy of interest u/s 234B, 234C and 234D. (6) Your Appellant craves leave to add to, alter, amend, delete and/or modify the above grounds of appeal on or before the final date of hearing. (7) Prayer: The Appellant prays your honor for allowing the appeal. 26. Briefly stated, the facts of the case are that the assessee had filed its return of income for A.Y 2010-11 on 15.10.2010, declaring total income of ₹ 40,71,103/-. The A.O while framing the assessment made the following additions/disallowances:- Sr. No. Particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of commission to Shri Darayus Bathena is covered by the exception clause of Section 36(i)(ii) of the Income Tax Act,1961. (iii) The Learned CIT(A) has erred on facts and in law, iii deleting the addition of ₹ 34,15,500/-(@ 30% of ₹ 1,13,85,000/-) made by the Assessing Off icer u/s. 40A(2)(b) of the Income Tax Act, 1961, without properly appreciating the factual and legal matrix as clearly brought out by the Assessing Officer. (iv) The Learned CIT(A) has erred on facts and law, in deleting, the addition of ₹ 34,15,500/- made by the Assessing officer u/s. 40A(2)(b) of the Income Tax Act, 1961, in respect to payment to Shri Zoru Bathena relying on the additional evidence without giving opportunity to the assessing officer. 31. We find, that as the facts and the issue as regards the addition of ₹ 1,20,00,000/- made by the A.O under Sec.36(1)(ii) in context of commission paid to Mr. Darayus A. Bathena during the year under consideration remain the same, as were there before us in the appeal of the revenue for A.Y 2009-10 in ITA No. 4681/Mum/2013, hence our order passed in context of the issue under consideration in A.Y 2009-10 while dispo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such services rendered by him, could by any stretch of imagination have been disallowed under Sec.40A(2)(a) of the Act. We are also not impressed with the contention of the revenue that the CIT(A) had admitted the Form No. 16 issued by the assessee company to Mr. Zora Bathena, without affording any opportunity to the A.O. We are unable to comprehend that even if the Form No. 16 placed on record by the assessee was not to be taken cognizance of by the CIT(A), how the revenue would justify the disallowance of the payments made to Mr. Zoru Bathena, which contrary to the claim of the A.O were never paid by the assessee company towards commission, legal and professional expenses. We thus, finding ourselves to be in agreement with the view taken by the CIT(A) that as the payment of ₹ 1,13,85,000/- was made by the assessee company to Mr. Zoru Bathena for the services rendered by him in the capacity of general manager of the company, therefore, in the absence of any adverse inferences as regards the reasonableness of the payments made by the assessee company for such services rendered by him, no disallowance was called for in the hands of the assessee under Sec.40A(2)(a) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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