Madhya Pradesh High Court
Principal Commissioner Of Income Tax vs M/S Shriji Polymers Private Ltd. on 13 February, 2017
Author: Rajeev Kumar Dubey
Bench: Rajeev Kumar Dubey
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HIGH COURT OF MADHYA PRADESH : BENCH AT INDORE
D.B.: HON'BLE MR. S. C. SHARMA AND
HON'BLE MR. RAJEEV KUMAR DUBEY, JJ
I. T. A. No. 117 / 2016
PRINCIPAL COMMISSIONER OF INCOME TAX
UJJAIN
Vs.
M/S. SHRIJI POLYMERS PVT. LTD., UJJAIN
*****
ORDER
( 13/02/2017) PER : S. C. SHARMA, J :-
The present appeal has been filed u/S. 260-A of the Income Tax Act, 1961 against the order dated 22/4/2016 passed by the Income Tax Appellate Tribunal, Bench Indore in I.T.A. No. 147/Ind/2015 for the assessment year 2011/2012.
Facts of the case as stated in the appeal reveal that the assessee Company is engaged in the manufacture of HDP Containers and PP closers. The return of the Income declaring total income of Rs.6,52,57,590/- was filed on 22/9/2011 and the case was selected for scrutiny. The
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Assessing Officer made additions of Rs.49,75,054/- on account of Keyman Insurance Policy of Rs.23,23,241/- on account of disallowance of commission under Section 40A(2)(a) and 40A(2)(b) and Rs.4,25,032/- on account of expenses.
The assessee being aggrieved by the order passed by the Assessing Officer preferred an appeal before the CIT (A) and the CIT (A) has partly allowed the appeal. The CIT(A) has deleted the addition of Rs.49,75,054/- on account of Keyman Insurance Policy stating that the documents regarding expenses were produced before the CIT(A) and it was held that the amount of withdrawal / redemption will be the income of the Company. The CIT(A) also deleted the addition of Rs.23,23,241/- on account of disallowance of commission expenses as expenses were incurred wholly and exclusively for business purpose and the expenses fulfilled two criteria of being fair market value and legitimate needs of the business. The CIT(A) also restricted the addition of Rs.4,25,032/- to Rs.2,12,515/- on account of expenses.
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The Department being aggrieved by the order passed by the CIT(A) preferred an appeal before the Income Tax appellate Tribunal and the ITAT has dismissed the appeal, meaning thereby, the relief in respect of Keyman Insurance Policy to the tune of Rs.45,75,054/- has been granted to the assessee and further relief of allowance of Rs.23,23,241/- on account of excess commission paid to the raided party has also been granted. The ITAT has held that Arpit Bangur and Shweta Jajoo who are Directors of the Company are highly qualified persons, as key persons who are playing vital role in the affairs of the Company. The Company has taken a policy in order to protect the business against the financial loss which may occur on account of death of keyman. The Tribunal in paragraphs 7 to 13 has held as under :
7. We have heard the rival contentions of both the parties.
We find that Shri Arpit Bangur and Smt. Shweta Jajoo were Directors of the Company. Shri Arpit Bangur is highly qualified technical person and graduate engineer from IIT, Roorkee. Shri Arpit Bangur is serving in the field of carryingout intensive study on the product of the company and also suggesting ways and means to improve the quality of the product, cost cutting measures to be adopted by the company and promptly attending the complaints received from the customers and attending them to minimize the same. Similarly, Smt. Shweta Jajoo is B. Com graduate and she is looking after all the administrative and HRD related work. Thus, both these keypersons were playing vital role in
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the affairs of the company. The company has taken said policy in order to protect the business against the financial loss which may occur from the Director's premature death, termination of employment etc. A 'Keyman' is an employee or a director, whose services are perceived to have a significant effect on the profitability of the business. We find that the assessee could not furnish copy of insurance policy before the AO as the same was not available at that time, but it was submitted afterwards before the CIT(A). We have perused the CBDT Circular no. 762 dated 18.2.1998, which has provided Explanatory Notes on the provisions relating to Direct Taxes contained in Finance (No.2) Act, 1996. The matter relating to Keyman insurancepolicy has been explained in para 14.4 of the circular. We find that in the case of DelT vs. M/s Navinchandra Securities Pvt. Ltd. ITA No. 2564/Ahd/2008, it was held that "the premium paid on the keyman insurance policy is to be allowed as business expenditure. The only thing to be seen is whether the Keyman falls within the definition laid down in the Explanation below section 10(10D). The Explanation states that " Explanation: For the purposes of this clause, "Keyman insurance policy" means a life insurance policy taken by a person on the life of another person is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first- mentioned person;. As per the Explanation, the only requirement is that "Keyman" should be an employee or a director and/or should be connected in some manner with the business of the firm. The Board's circular no. 762 has further clarified that the "keyman" would be an employee or a director, whose services are perceived to have a significant effect on the profitability of the business. It is noteworthy that the words used are "whose services are perceived to have a significant effect on theprofitability". This would imply that it is for the concern to identify the key person or the keyman, having regard to his contribution to the profitability etc. It is for the firm to decide who would or would not be is keyman. It is highly improbable that any firm would incur the expenditure of a substantial amount for insuring the life of a person who has no contribution to make to the affairs of the firm .... The premium under such policy has been categorically declared by the Board to be allowable as deduction, specifically in view of the fact that the maturity amount receivable under the policy is no longer exempt from tax. It is a cardinal principle that where any income is subject to tax, the expenditure incurred on earning of such income would be allowable. The Board has merely reiterated
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this principle. We uphold the action of the ld. CIT(A) in holding that on redemption/withdrawal of the amount under the above policy will have to be taken as income in the hands of the company as business income u/s 28(vi) in the relevant year and as such there will be double taxation if the said amount is disallowedand added to the income under present assessment year. Our interference is not required. Ground of the Revenue fails.
8. Next ground relates to the deletion of addition by the ld. CIT(A) of Rs. 23,23,241/- on account of disallowance of commission u/s 40A(2)(a) and 40A(2)(b) of the Act.
9. The short facts of the case are that the AO found that the Company has paid commission of Rs. 71,02,500/- to M/s. Padma Polytex (India) Pvt.Ltd. @ 5.74 % and commission of Rs. 35,98,604/- to M/s. Arpit Plastics Pvt.Ltd. @ 4.20 % on sales realized through these parties. The AO observed that there are common Directors in the above Companies and commission is paid at very higher rate as comparison with other parties to whom commission payment is made. Therefore, commission payment made to these parties was restricted to 4% of sales realized through them. The AO made addition of Rs. 23,23,241/- out of commission on sale paid to above two parties invoking provisions of Section 40A(2)(a) and 40A(2)(b) of the Act.
10. The matter carried to the ld. CIT(A) and the ld. CIT(A) deleted this addition holding that the AO has not givenemphasis on the nature and scope of the work and the services rendered and as per Section 40A(2), which made it apparent that regard must be had to the 'fair market value' of the services, as well as to the 'legitimate needs of the business'. The assessee has proved that these two criteria were satisfied and hence no disallowance was warranted and the ld. CIT(A) deleted the addition amounting to Rs. 23,23,241/- .
11. The Ld. DR relied upon the order of the AO.
12. The ld. Authorized Representative contended that the addition has been made on irrelevant fact, hypothetical ground and on conjunctures. During the year he assessee has paid commission of Rs. 71,02,500/- on sale to M/s Padma Polytex Pvt. Ltd and Rs. 35,98,604/- to M/s Arpit Plastic Pvt. Ltd. The commission agents were engaged for the sale of products of the Company. The ld. Authorized
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Representative further contended that the commission of Rs. 71,02,500/- was paid to M/s. Padma Polytex (India) Pvt. Ltd, @ 5.7 % on sale of Rs. 12,37,65,528/- made to M/s Lupin Limited. The said agent has registered sale of Rs. 12.38 Crore, which was far morethan sales effected by the other agents. Besides this there was a term of payment of 30 days from the date of invoice in respect of above party, which was also shorter period as compared to other parties which varied from 45 to 70 days. Therefore, agent M/s. Padma Polytex Pvt. Ltd. has been paid highest rate of commission for making efforts in collecting sales proceed within such shorter period and registering a handsome sales. Further, commission of Rs 35,98,604/- was paid to M/s Arpit Plastics Pvt. Ltd @ 4.2 % on sale of Rs. 8,56,81,047/- made to M/s Dr. Reddy Lab. Ltd. The said agent had registered sale of Rs. 8.57 Crore which was second highest sales affected by them among the other agents. Besides this in this case also there was a term of payment of 40 to 45 days from the date of Invoice in respect of above party which was also shorter period as compared to other parties. Therefore, agent Arpit Plastic Pvt. Ltd. Has been paid second higher rate of commission for making efforts in collecting sales roceed within such shorter period and registering a handsome sale. Looking to the services rendered by the above parties, higher rate of commission was paid to them. TDS hasbeen deducted on the commission payment and the recipients have shown the same as their income. Thus the assessee has proved beyond doubt the services were rendered and commission was paid. While comparing the rates with the other parties, the Ld. AO has not considered the fact that commission to these other parties were paid on fix amount basis and not on the rate applying on sales registered through these persons. Therefore, the basis of comparison by the Id. AO itself was not correct. The scope of inquiry under the provision of section 40A(2) is with reference to fair market value of the services rendered or goods supplied. In the absence of an enquiry, as contemplated by the provisions of section 40A(2), no disallowance can be made. The onus is on the Assessing Officer to bring the material on record to prove that the payment made by the assessee is excessive or unreasonable having regard to the fair market value of the services rendered or goods supplied. The ld. Authorized Representative further contended that the Id. AO. concentrated on the quantum of payment involved in order to make out a case for excessive or unreasonable payment,without reference to the nature of work involved. The Id. AO has not given emphasis on the nature and scope
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of the work and the services rendered. In fact, section 40A(2) itself makes it apparent that regard must be had to the 'fair market value' of the services, as well as to the 'legitimate needs of the business'. The assessee has proved that these two criteria are satisfied and hence no disallowance was warranted. The ld. Authorized Representative further relied on the decision in the case of Hive Communication (P.) Ltd. v. CIT [2011) 201 Taxman 99/12 taxmann.com 287, in which the Hon'ble Delhi High Court observed that the question whether the expenditure was excessive or unreasonable in a given case had to be examined, keeping in mind the actual services for which payment was made, and that, in the process, the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to the assessee from such services was also to be kept in mind. The Hon'ble High Court also cited reference to the decision of the Calcutta High Court in the case of CIT v. Edward Keventer (P.) Ltd. [1972] 86 ITR 370, later affirmed by the Supreme Court in CIT v. EdwardKeventer P.) Ltd. [1978] 115 ITR 149. The ld. Authorized Representative further drew our attention to the following judgments :-
(i) CIT v. Dhanrajgirji Raja Narsingirji (1973) 91 ITR 544 (SC)
(ii) Hemraj Nebhomal Sons v. CIT (2005) 278 ITR 345 (MP)
(iii) CIT vs. Indo Saudi Services (Travel) Pvt. Ltd. 310 ITR 306 (BOM)
(iv) CIT v. V.S. Dempo & Co. (Pp.) Ltd. [2011J 196 Taxman 193 (Bom.) The ld. Authorized Representative concluded the arguments contending that the assessee has incurred bona fide expenses and it is not at all advice to reduce tax liability and submitted that the commission has in fact been paid to various agents for the services rendered by them in registering the sales and prayed that the addition of Rs.
23,23,241/- may be deleted.
13. We have heard the rival contentions of both the parties. We have gone through the orders of the authorities below and case laws cited. We found that in this case the Id. AO has not given emphasis on the nature and scope of the work and the services rendered. Section 40A(2) itself makes it apparent that regard must be had to the 'fair market value' of the services, as well as to the 'legitimate needs of the business'. These two criteria are satisfied and hence no disallowance is warranted. We observed that in the case of
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Hive Communication (P.) Ltd. v. CIT [2011) 201 Taxman 99/12 taxmann.com 287, the Hon'ble Delhi High Court observed that the question whether the expenditure was excessive or unreasonable in a given case had to be examined, keeping in mind the actual services for hich payment was made, and that, in the process, the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to the assessee from such services was also to be kept in mind. The Hon'ble High Court also cited reference to the decision of the Calcutta High Court in the case of CIT v. Edward Keventer (P.) Ltd. [1972] 86 ITR 370, later affirmed bythe Supreme Court in CIT v. Edward Keventer (P.) Ltd. [1978] 115 ITR 149. We find that in this case, the Hon'ble Court had held that (i) the legitimate business needs of a company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman, (ii) it is not for the Assessing Officer to dictate what the business need of the company should be and he is only to judge the legitimacy of the business needs from the angle of a prudent businessman, and (iii) the benefit derived or accruing to the company must also be considered from the angle of a prudent businessman. The Hon'ble Court also observed that 'the term 'benefit' to a company in relation to its business has a very wide connotation and may not necessarily be capable of being accurately measured in terms of pound, shillings and pence in all cases. Both these aspects have to be considered judiciously, dispassionately without any bias of any kind from the view point of a reasonable and honest person in business. On the facts of the case, the High Court held that the Tribunal was not correct in law in upholding the disallowance of Rs. 13.20 lakhs out of the remuneration paid by the assessee to'SP' by invoking the provisions of section 40A(2) of the Act. Accordingly, the High Court deleted the addition made, and allowed the appeal. We, therefore, uphold the action of the ld. CIT(A) in deleting the addition amounting to Rs. 23,23,241/-. Our interference is not called for. This ground of the Revenue also fails.
The Tribunal has taken into account the position of two Directors and they were certain keypersons keeping in view Sec.40(2) of the Income Tax Act and has arrived
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arrived at a conclusion that the Insurance Policy could not have been rejected in the manner and method it has been rejected and he has upheld the view taken by the CIT(A).
This Court is of the considered opinion that the findings of fact arrived at by the Income Tax Appellate Tribunal are purely findings of facts and no substantial question of law arises in the present case. In absence of any substantial question of law, the question of interference by this court in the peculiar facts and circumstances of the case, does not arise.
The appeal is accordingly dismissed.
(S. C. SHARMA) (RAJEEV KUMAR DUBEY)
JUDGE JUDGE
KR