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TMI Blog1985 (12) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (ix) disallowing an amount of Rs. 17,458 being the amount of commission paid to Anand Dyes Corpn. on the ground that the liability is of past year ; (x) disallowing an amount of Rs. 4,400 being bonus payment to an employee Mr. Bhurabhai Desai. 2. The assessee is a private limited company engaged in the business of manufacturing dyes. It has only three shareholders, who themselves are directors of the company. The company is in business for past more than 10 years. 2.1 In respect of the first ground regarding disallowance of selling commission paid to Anand Dyes Corpn., the ITO observed as follows in paragraph 4 of his order: "In the profit and loss account an amount of Rs. 1,26,107 is debited as commission to sole selling agents. This includes an amount of Rs. 17,458 pertaining to the earlier year. The break up of this amount shows an amount of Rs. 66,862 paid to Anand Dyes Corpn., Bombay, a partnership firm in which the director Smt. S.D. Oza has 50 per cent share and the partners may be relatives. Last year, invoking the provisions of section 40A, I held that there is no special reason for giving commission at 10 per cent to this partnership firm when the commission paid t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of disallowance in the case of the said partnership firm would not arise. But it is a case where others are paid a lesser rate of commission whereas this firm is paid at much higher rate, and therefore, the question of reasonableness arises. In the circumstances, the excess over 5 per cent is disallowed and the disallowance is worked out as under: 1. Commission paid at 10 per cent 9,361 disallowed over 5 per cent (-)4,830 4,830 2. Commission paid at 10 per cent 34,992 disallowed over 5 per cent 17,496 17,496 &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts paid to the directors by way of remuneration, bank guarantee commission, sole selling agency commission, etc. (ii) The ITO had not been provided with the materials in order to consider that the payment of the commission was justified for the services rendered by the sole selling agents. (iii) The decision of the Tribunal for the assessment year 1979-80 could be different if facts regarding huge amounts paid to the directors, etc., and the amount required to be considered as reasonable or excessive on the basis of necessary details, etc., were brought on record. 2.3 The learned counsel appearing on behalf of the assessee submitted that the ground should be treated as covered by the Tribunal's order in assessee's own case for the assessment year 1979-80 in IT Appeal Nos. 1418 and 1467 (Ahd.) of 1983, dated 22-9-1985 from which highlighting certain aspects it was submitted that commission was paid to the sole selling agents as per the permission obtained from the Company Law Board, under section 294AA of the Companies Act, 1956 and this was the tenth year when the commission was paid to the sole selling agents. Again, it was not correct to say that in past no commission at the rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es were the directors of the company. The approval by the Company Law Board regarding payment of the sole selling agents commission did not mean that it was required to be followed by the income-tax authorities because Company Law Board was concerned with public interest while income-tax authorities were concerned with allowability of expenditure incurred for the purpose of business, whether excessive or unreasonable. Besides, whole of 10 per cent rate was not disallowed, but only the excess over 5 per cent was considered for the purpose of disallowance in the absence of proper material for supporting the excess payment. Again, amount pertaining to earlier year also was properly disallowed as the case was of renewal of permission. 2.5 In our opinion, there is no reason to take a view different from the one we have taken for this very assessee in the assessment year 1979-80. Probably the income-tax authorities are not fully conversant with the history behind insertion of section 294AA which was introduced by the Companies (Amendment) Act, 1974. Clause 24 of the Notes on clauses stated as under : "It has been noticed that sole selling agents are appointed in respect of goods, the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing agents, reasons for their appointment, terms of remuneration and the proposed agreement or arrangement indicating which of the services are rendered by the sole selling agents such as securing orders, providing warehousing facilities and despatches, etc., engaging any sales promotion, after sale service, whether selling agents employed exclusive staff for marketing of company's products, etc. (v) Details regarding commission earned in past and breakup of expenditure incurred by selling agents on salaries, travelling, rent, warehousing charges and many others. (vi) There are also various other minute details required to be given in respect of direct sales and otherwise, interest of the sole selling agents in shares of the company, associate concerns of the directors and their projected target of the sales, reduction in the amount of commission if other agents are paid by way of commission, names of auditors, etc. (vii) Item 32 prescribes mention whether any portion of the sole selling agency commission has been disallowed by the Income-tax Department. 3. From the above, it would be clear that the income-tax authorities can independently consider the allowability or otherwise as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors have given the guarantee for to the bank and to what extent the banks depended upon such guarantee. (ii) The assessee-company had sufficient raw materials as well as furnished goods. (iii) There was no necessity for the directors to give extra personal guarantee to the bank. (iv) The company was silent and rather reluctant to furnish details in respect of the considerations which made the directors to give additional guarantee. (v) Considering the total amounts paid to the directors including remuneration etc., the payments were superfluous. 5.3 The learned counsel for the assessee submitted that since Assessment year 1971-72, the guarantee commission was paid and in the printed balance-sheet no figure appeared in the column for the previous year because of the change in the accounting year. It was not for the assessee to prove to what extent the banks depended upon the directors guarantee. It is common knowledge that in respect of private limited companies, banks do insist for personal guarantees of the directors and whether there was need or not cannot be the matter for judgment by the revenue authorities. Regarding the sufficiency of the assets of the company, and details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Collector called a meeting of various persons and urged to make a voluntary contribution to drain-out the dirty water in the city. The payment made cannot be treated as an expenditure for the purpose of the business as to qualify for the deduction under section 37 of the Act. There is no nexus between the expenditure and carrying on the business of the assessee-company. The expenditure incurred cannot be considered as incidental to the business. The expenditure, therefore, has been rightly disallowed by the Income-tax Officer. In any case the contribution made by the assessee towards the drainage system has to be considered as a capital expenditure because the appellant is getting the entire benefit for the drainage system." 7.2 The learned counsel for the assessee submitted that considering the nature of the business of the assessee proper discharge of the effluents is an obligation and for this purpose letter addressed by the District Collector was brought to our notice to prove that there was nexus with the business of the assessee. The necessary resolution passed in the presence of the District Collector was also brought to our notice. Reliance was placed on CIT v. Navsari C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erected out of business expediency, as was the desire of management and the staff. 10. The learned departmental representative supported the order passed by the Commissioner (Appeals). 11. Here also, in our opinion, there is no reason to reject the claim of the assessee. The expenditure is incurred and the statue is placed in the factory premises of the assessee-company and the same is in memory of the company's founder. The same is allowable under section 37 of the Act. Such expenditure is in consonance with status and image of the company apart from boosting the morale of management. Disallowance for the assessment year 1980-81 is deleted and for the assessment year 1981-82 is confirmed. 12. Coming to the claim in respect of depreciation for extra shift allowance, it was submitted by the learned counsel that the same was allowed in past as also in future years because the process in the manufacturing of the goods employed by the assessee was a continuous process and the factory was running all throughout. Because of some arithmetical mistake by the office of the chartered accountant, there was some discrepancy in claim for extra shirt allowance and, therefore, the ITO disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeals) stated that section 36 of the Act applied to the productivity based profits and, therefore, ceiling prescribed was mandatory. 17. In our opinion there is no reason to disallow the payment made on the basis of productivity. The resolution passed by the directors on 15-6-1978 clearly brings out terms regarding incentive bonus payable to the employees of the company and the resolution has the binding force. It is pertinent to note that resolution was passed before the beginning of the accounting year and there is also proof regarding increased production. Such disallowance can only be looked upon as derogatory to the spirit of the Payment of Bonus Act, 1965 because in fact, it is the philosophy of the Government to encourage productivity based distribution of profits since it will have similarity with reward on the basis of workers' participation in the business of the company. Section 31A of the Payment of Bonus Act specifically makes mention in this regard. Again, not extending the due recognition to the resolution passed by the board of private limited company goes contrary to the provisions of the Companies Act in respect of the maintenance of secretarial records like mi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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