Income Tax Appellate Tribunal - Chandigarh
Travelmatics Pvt. Ltd.,, Chandigarh vs Department Of Income Tax on 9 December, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCHES 'A' CHANDIGARH
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND
SHRI T.R. SOOD, ACCOUNTANT MEMBER
ITA No. 549/Chd/2010
Assessment Year: 2007-08
The AC IT, Vs. M/s Travelmatics Pvt. Ltd.
Circle 1(1) H.No. 152, Sector 9-B
Chandigarh Chandigarh
PAN No.AABCT3498D
(Appellant) (Respondent)
Appellant By : Dr.Amarveer Singh
Respondent By : Shri. Ashwani Kumar
Date of hearing : 11/11/2014
Date of Pronouncement : 09/12/2014
ORDER
PER T.R.SOOD, A.M.
The appeal filed by the Revenue is directed against the order dt 03/03/2010 of CIT(A), Chandigarh.
2. In this appeal the Revenue has raised the following amended grounds:-
1. The Ld. CIT(A) had erred in deletion the addition of Rs. 48 lacs on account of commission / brokerage towards sale proceeds paid to the directors of the assessee company as the directors were not the property dealers but somehow owner of the company.
2. The Ld. CIT(A) has erred in deleting the additions made by the Assessing Officer of Rs. 1,47,90,150/- in the Long Term Capital Gain declared by the assessee on account of adopting the value of Industrial Plot No. C-19, Industrial area, Phase-
1, Mohali at Rs. 138 Per sq. yard instead of Rs.600 Per sq. yard adopted by the assessee company on the basis of valuation report of the approved Registered valuer of the 2 Income Tax department. The Assessing Officer has relied upon the rate of plot allotted by PSIEC to various applicants in 1981. The assessee had declared the Long Term capital Gain in Rs. 1,54,78,000/-.
3. It is prayed that the order of the Ld. CIT(A) be cancelled and that of the assessing officer be restored.
3. After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that assessee has sold a property on which capital gain was determined. However, it was noticed that Assessee Company has paid huge amount to the Directors on such sales, therefore, assessee was asked to explain and justify the payment of commission which were claimed as transfer expenses. In response, it was submitted as under:-
1. The company has sold out a land and building during the current assessment year. The total consideration was 400 lacs which has been received and deposited in company's bank account.
The company was in the process to sell this property for the last many years and directors were putting their best efforts to have best deals for the company. It will not be out of place to mention that the sales amount which the company had got is more than the prevailing market price. The quantum of sale consideration may be verified from the concerned registering authority i.e. GAMADA. In view of this, the company had decided to award the directors for their exemplary work done by them with utmost care, diligence and skill which has resulted into good profit to the company. Accordingly, the commission has been paid to the directors after deduction of TDS as applicable. The director has considered this as their income and has paid income tax @ 30% on this payment. In view of this, there is no loss of tax to the revenue.
2. The company has considered Rs. 12,84,488/- as short term capital gain while computing the tax liability and has paid normal tax @ 30/- as applicable to the company. There are some error while filing the required columns in the returns however the tax 3 liability has been worked out correctly in the return itself which may please be verified.
3. The plot which has been sold out was acquired by the company before 01.04.1981 hence the fair market value as on 01.04.1981 has been adopted in accordance with section 55(2) (the copy of valuation done by the approved valuer is already enclosed for reference).
4. The transfer expenses amounting to Rs. 52,47,600/- has been deducted while computing the capital gain. The details of expenses are as under:-
a) Rs. 48,00,000/- as commission to directors.
b) Rs. 3,00,000/- to Inder Mohini towards professional
charges.
c) Rs. 1,47,600/- deposited with GMADA
4. The Assessing Officer did not find force in these submissions and observed that director of the company cannot be acting as propert y brokers because they being directors and owners of the company and, therefore, payment of commission were not justified. Thus, he disallowed the payment of commission of Rs. 48 lakhs.
5. On appeal, it was mainl y submitted that for selling propert y, commission / brokerage is required to be paid. Since the propert y dealers could not arrange for the sale of said propert y for a long time, therefore, Board of Directors of the company withdrew the offer from the propert y dealers and entrusted the job of finding of customers to the directors. The directors successfull y found a customer and were able to get much better price because of this fact the company decided to award the directors. In other words, directors were paid for their services.
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6. The Ld. CIT(A) found force in the submissions and decided the issue vide para 8, which is as under:-
"8. I have gone through the assessment records, the submissions of the Counsel and the attached annexures. In my view, the contention of the Counsel that commission was to be paid to persons who arranged the sale is correct. The person who arranges a sale and need not be a property dealer and the directors who are the employees of the Company are not barred from acting as brokers. In the circumstances, the directors of the Company who arranged the sale of property could definitely be paid commission. The commission received by them has been taxed as income in their personal returns. In view of the facts & circumstances explained. I am satisfied that the disallowance of commission paid to directors at Rs. 48 lacs while computing Long Term Capital Gain is not warranted and direct the Assessing Officer to allow further deduction of Rs. 48 lacs as transfer expenses. This ground of appellant is therefore allowed."
7. Before us Ld. DR submitted that directors were being paid normal salaries, therefore, they were dut y bound to do every thing for the company and there is no justification for paying extra commission for sale of propert y. Merel y passing of a resolution would not entitle them to received extra remuneration and in this regard he relied on the decision of Hon'ble Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd, v CIT 63 ITR 57. Further, companies mainl y owned by Shri Jagmohan Singh and his wife and other famil y relatives and therefore, resolution passed is onl y a self serving document and reliance cannot be placed on the same. In this regard he relied on the decision of Hon'ble Supreme Court in the case of CIT v Durga Prasad 82 ITR 540 . There is no evidence on record to show that extra effort has been made by the director in arranging the customers for the sale of propert y. He also submitted that normall y in case of propert y transaction, a brokerage of 1 or 2% is paid whereas in this case brokerage has been paid @ 12% which itself shows that it is a way of passing of money from the company to evade tax.
5He also submitted that it is settled law that income has to be assessed in the hands of correct persons and in this regard he referred to the decision of Hon'ble Supreme Court in the case of ITO v. Ch. Atchaiah [1996] 218 ITR 239 . Therefore, even if entries have been passed for the commission the income still belongs to the assessee company. While concluding his argument he submitted that payment of this commission is also in violation of the section 36(1)(ii) because had this commission not been paid, the extra profit would have been payable as dividend and in this regard he relied on the decision of Special Bench of Dalal Broacha Stock Broking (P.) Ltd. v. AC IT [2011] 131 ITD 36(Mum)(SB)
8. On the other hand, Ld. Counsel for the assessee submitted that assessee company wanted to sell the propert y but was not getting good customers, therefore, it was decided that the job may be entrusted to directors and in this regard a Resolution was passed, copy of which is available at pages 27 to 31 including the translated copy of the Resolution. During the Board meeting, it was decided to consider the payment of 10 to 15% of sale consideration as commission and commission was paid accordingl y. Therefore, commission has been paid for specific services and should be allowed as expenditure. He further submitted that directors have shown this commission in their return of income and paid tax on the same.
9. Ld. counsel further submitted that payment of commission was claimed u/s 48 as an expenditure incurred directly relating to transfer of the assets and therefore, section 36(1)(ii) is not applicable. When a particular remuneration has been paid for extra services then provisions of section 36(1)(ii) cannot be attracted and in this regard he relied on the decision in AMB Metplast P. Ltd v DCIT 341 ITR 563 (Delhi) and Commissioner of Income-tax Vs Career Launcher India Ltd. (Del) 358 ITR 179 6
10. We have considered the rival submissions carefull y and do not find any force in the submissions of Ld. Counsel for the assessee. From the list of share holders filed before us it becomes quite clear that it is a closel y held company. The total issued and paid up shares are 9000 out of which the following shares were held by the famil y of Shri Birinder Mohan Singh.
S.No Name of the holder No. of shares
1 Birinder Mohan Singh 4249
2 Birinder Mohan Singh (HUF) 404
3 Mrs Kiran B.M. Singh W/o Mr. B.M. 2300
Singh
4 Ms. Simran B.M. Singh 1401
D/o Mr. B.M. Singh
5 Jagmohan Singh ( HUF) 341
Karta of DR Jamiat Singh F/o B.M.
Singh
Total 8695
Thus out of total of 9000 shares, 8695 shares are held by the famil y of Shri Birinder Mohan Singh, which makes it clear that this family hold the shares to the extent of more than 96%. Now the commission has been paid of Rs. 24 lakhs each of Shri Birinder Mohan Singh or Mrs Kiran B.M. Singh w/o Birinder Mohan Singh i.e. husband and the wife both of whom are directors of the company. Being a substantial shareholder to the extent of more than 96%, it was very eas y to pass a resolution and appropriate funds of the company by the famil y members. Therefore, the Board resolution clearl y is a self serving document and cannot be relied on for making the claim for payment of commission.
11. It is further to be noted that Shri Birinder Mohan Singh was paid salary of Rs. 3 lakhs and Mrs. Kiran B.M. Singh w/o Birinder Mohan Singh was also paid remuneration of Rs. 2,40,000/-. It is settled position of law that directors 7 occupy the position of trust with respect to the company. Their position is of fiduciary nature which means they were supposed to do everything in their capacit y as director which could have been done by them with respect to the assets of the company which would include organizing successful sale of the propert y of the company if required without any further remuneration. Similar situation arose before the Hon'ble Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd, v CIT (supra)). In that case the assessee company was managed by the managing agents whose remuneration was an office allowance of Rs. 5,000 per month and 10% of the net profits of the company. Under article 118 of the articles of association of the company its directors were each entitled to a remuneration of Rs. 100 per month. At an extraordinary general meeting of its shareholders article 118 was amended to provide for the payment to the directors of a commission of 1% of the net profits of the company in addition to their monthl y remuneration and as a result the five directors of the company became entitled to a sum of Rs. 28,218 each for the calendar year 1948. The Tribunal found that the payment of the commission to the directors was for extra-commercial reasons on the grounds, (i) that they did not render any special service in that year; (ii) that the management of the company was done by the managing agents and very little was done by the directors; (iii) that the remuneration of Rs. 100 per month was not considered by the directors to be inadequate in earlier years; (iv) that the increase in the company's profits by about Rs. 30 lakhs was due to the control of cloth having been lifted and not to any special exertion of the directors; and disallowed the payment of the commission as it was not incurred wholly and exclusivel y for the purpose of its business.
12. On the above facts, the Hon'ble Supreme Court observed as under:-
"Held, on the facts, that the commission paid to the directors was not an expenditure incurred wholly and exclusively for 8 the purpose of the appellant's business under section 10(2)(xv) of the Indian Income-tax Act."
After making the above observation it was held that commission paid to the director was not an expenditure incurred wholl y and exclusivel y for the purpose of business In the present case since the directors were already in receipt of remuneration as monthl y salary, they were dut y bound to various acts on behalf of the company. In any case no evidence has been brought on record to show what extra effort they have made to sell the propert y. For selling of propert y, various advertisements are required to be placed in newspapers or some traveling was required to meet a particular person but no evidence of this kind is produced before Assessing Officer or C IT(A) or before us. Similarl y, passing the resolution would not help the case of the assessee. In any case merel y passing of the resolution as observed by the Hon'ble Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd, v C IT (supra) will not make the payment of commission as allowable business expenditure. We need to remember that it was very eas y for the director to pass resolution because of the majorit y share holdings to make the directors entitled for receipt of commission.
13. We also need to appreciate the contention of Ld. DR that commission has been paid @ 12% whereas the normal rates are 1 to 2% which itself shows that commission has been passed on just to save the tax in the hands of the assessee.
14. It was also contended that directors have already paid tax by reflecting this commission income at their own hands. In our opinion this contention has no merit because it is almost settled that treatment given in the hands of the recipients will not determine the allowabilit y of expenses in the hands of payee. The Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT 124 ITR 1 clearl y observed that "the fact that a certain payment constitutes income or 9 capital receipts in the hands of recipient is not material in determining whether the payments is Revenue or capital disbursement qua the payee." We may also note that assessee has further claimed a sum of Rs. 3 lakhs paid to Shri Inder Mohini towards professional charges though this expenditure has been allowed without any comment but if separate professional charges have been paid, then there is no justification for commission paid to the directors.
15. There was one more contention raised by the assessee that provisions of section 36(1)(ii) are not applicable because expenditure was claimed under the head 'capital gain' u/s 48. We do not find any force in this contention. Section 36(1)(ii) reads as under:-
"36. Other deductions.--(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28--
(i) .......
(ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission:
16. The above clearl y shows that any bonus or commission paid to an employee for services rendered if the same was payable as dividend are not allowable. From this it becomes clear under which head the expenditure has been claimed is not material but the mandate of the provision is that if such commission was payable as dividend to the such persons then such commission is not allowable. Had the assessee company not paid the commission, the amount would have remained with the company which could have ultimatel y be paid to the directors onl y by way of dividend. Therefore, in our opinion the decision of Special Bench in the case of Dalal Broacha Stock Broking (P.) Ltd. v. ACIT (supra) is squarel y applicable. The head note of that case reads as under:- 10
"Section 36(1)(ii) of the Income-tax Act, 1961-Bonus or commission - Assessment year 2006-07-Whether any expenditure on account of payment of commission to an employee will be allowable as deduction under provisions of section 36(1)(ii) irrespective of fact whether employee is a shareholder or not or whether commission has been paid for some extra services or for some services, subject to condition that payment is not in lieu of dividend - Held, yes- Whether however, in case extra services have been rendered for payment of commission, it will be one of relevant factors to consider while deciding whether case is covered by exception provided in section 36(1)(ii),i.e., whether payment of commission is in lieu of dividend-Held, yes-Whether word 'payable' used in section 36(1)(ii) means that dividend would have been declared by any reasonable management on facts and circumstances of case, considering profitability and other relevant factors and become payable to shareholders - Held, yes-Whether, therefore, after considering entirety of facts and circumstances of case, if a reasonable conclusion can be drawn that dividend was payable by assessee company and it instead of paying dividend had paid commission to its employee-shareholder, such payment of commission will be in lieu of dividend and claim of deduction will not be allowable under section 36(1)(ii)- Held, yes- Assessee-company was a share broker-During relevant assessment year, it had paid commission of tune of Rs. 40 lakhs each to three working directors who were only shareholders of company and owned entire share capital of Rs. 6.5 crores of company- Assessing Officer held that such payment of commission was in lieu of dividend and was not eligible for deduction under section 36(1)(ii)- Assessee claimed that payment of commission was not in lieu of profit or dividend as payment had been made to directors for hard work they had put in improving profits of company- However, facts revealed that steady rise in performance of company was due to improved market conditions and not because of any extra service rendered by directors as no evidence had been produced for rendering of extra services- Assessee had not given any convincing reason for not declaring dividend in spite of substantial profit-11
Moreover, no commission was paid to any employee other than three shareholder directors who were also family members-Whether, on facts, payment of commission of Rs. 1.20 crores to three working directors was in lieu of dividend and same was not allowable as deduction under section 36(1)(ii)- Held, yes
17. In the case before us, both the employees i.e Shri B.M Singh as well as his wife Mrs. Kiran B.M. Singh are directors who have already received the salary and if the amount of commission was not paid they would have become entitled to receive the dividend. The Ld. counsel had also relied on the decision of AMB Metplast P. Ltd v DCIT (supra) and Commissioner of Income-tax Vs Career Launcher India Ltd. (supra) for the proposition that in the circumstances of the case before us section 36(1)(ii) would not be attracted.
18. In the case of AMB Metplast P. Ltd v DCIT (supra), the directors were paid commission in terms of an agreement through which in addition to salary,1 % commission was required to be paid, therefore, it becomes clear that commission was payable as part of the directors salary as per the agreement entered into between the company and the directors whereas in the case before us, commission is paid by passing a Board resolution and is not part of the regular remuneration of the directors. Similar situation was there in the case of Commissioner of Income-tax Vs Career Launcher India Ltd. therefore, the ratio laid down in both these cases are not applicable. In view of the above discussions, we are of the opinion that Ld. C IT(A) has misdirected himself in allowing the relief by simpl y observing that there is no bar for any person to act as a propert y broker. He has totall y missed the fact that the persons who got commission were executive directors of the company who we already in receipt of the salary and were dut y bound to perform the functions which were assigned to them with the remuneration paid to them. Therefore, we set aside his order and restore that of Assessing Officer.
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19. Ground No.2: After hearing both the parties we find the plot situated in Industrial Area, Phase-I, Mohali which was sold during the year was purchased prior to 1981. The assessee filed a valuation report from the approved valuear for estimating the fair market value as on 1.4.1981. The valuer mentioned in the valuation report that present rate was Rs. 3000/- per square yard and thereafter he applied the cost inflation index in the reverse order and found value at Rs. 612/- per square yard. Thereafter, he adopted finall y rate of Rs. 600/- per square yard and fair market value as on 1.4.1981 was taken at Rs. 25.00,002/-. The Assessing Officer observed that method of reverse indexation was not appropriate method. He further observed that valuer has mentioned that current value of the plot of Rs. 3000/- by square yard but current year has not been mentioned. Further no evidence was enclosed or declared in the valuation report for assuming the value of Rs. 3000/- in the current year. Therefore, Assessing Officer asked the assessee to justify the valuation and in response it was submitted as under;-
"As earlier explained, the assessee sold the land which he acquired on 30.01.1969 i.e. before 01.04.1981. As per the provisions of section 55(2) of the Income Tax Act, the assessee has the option to adopt a fair market value of this land. Accordingly, he exercised this option and a fair market value has been assessed by the competent person. This fair market value has been considered as acquisition cost and further indexed under the provisions of the Income Tax Act to compute the capital gain liability.
Therefore, the assessee is fully justified in having chosen the fair market value instead of either book value or the prevailing govt price on 01.04.1981. Kindly permit us to mention the market value of any property at any time is always higher as compare to the rates adopted by the Govt. Authorities. It is evident from the present case also where the sales consideration of Rs. 400 lacs is much more than the prevailing govt. price. In view of this the meaning of fair market value U/s 55(2) should not be missed with govt reserve price as on 01.04.1981. The FMV as assessed by the competent valuer may please be adopted for capital gain liability."13
20. The Assessing Officer was not satisfied from the repl y and in order to find out the correct value of the property as on 1.4.1981 information was called from Punjab Small Industries and export Corporation Ltd (PSIEC). PS IEC informed the Assessing Officer that anotherplot in industrial area, Mohali was allotted at the rate of Rs. 46/- per square yard on 12.7.1981. In the light of this rate and observations of the approved valuer that the normal value is 2 -3 times higher then the government allotment rates, the Assessing Officer estimated the fair market value by multipl ying the amount of value as informed by PSIEC by three times i.e. 46 X 3 and adopted rate for 138/- per square yard as fair market value as on 1.4.1981 and allowed the indexation accordingl y.
21. On appeal, the submissions made before Assessing Officer were reiterated and reliance was placed on some case laws. It was further emphasized that valuation report was furnished which was issued by a registered valuer and therefore, same should be adopted. Further, since valuation was not refereed to DVO, therefore, there was no basis for rejection of the valuer report. The Ld. CIT(A) accepted these submissions and observed that since matter was not referred to DVO the valuation given by registered valuer should have been adopted.
22. Before us Ld. DR referred to the contents of the assessment order and submitted that Assessing Officer has rightl y rejected the method of reverse indexation. The Special Bench of the Tribunal in case of Hiralal Lokchandani v ITO 106 ITD 45 has clearl y held that reverse indexation method is not correct method for valuation. Similarl y, the Hon'ble Calcutta High Court in the case of Jagat Mohan Kapur v Wealth Tax Officer 211 ITR 721 has clearl y opined that cost inflation index relates onl y to forward figures in time but such cost inflation index could not be reversed in a manner so as shrinkage index i.e. for backward calculations. In any case the Assessing Officer has opined the valuation from a government agency which was responsible for allotting the plot 14 and the Assessing Officer has been more than reasonable to increase such valuation by three times.
23. On the other hand, Ld. counsel for the assessee reiterated the submissions made before the Assessing Officer and CIT(A) and submitted that valuation filed before the Assessing Officer was prepared by the registered valuer and could not be rejected lightl y. He also submitted that Hon'ble Gujarat High Court in the case of Shantadevi Gaekwad (deceased) Vs. DCIT 250 CTR (Guj) 421 has held that reverse indexation can be applied even in case of finding the fair market value of the earlier period.
24. We have considered the rival submissions carefull y and find that assessee has filed the valuation report from a registered valuer. However, the Assessing Officer correctl y pointed out the defect that no year was mentioned against the current year. Moreover, nowhere it was mentioned in the valuation report regarding valuation of Rs. 3000/- per square yard in the current year. Normall y in such a situation the matter should have been referred to the valuation cell but Assessing Officer has referred the mater to the PSIDC which is a government agency responsible for allotting the industrial plots in Mohali area where the plot of the assessee was also located. This agency has written a letter which has been extracted by Assessing Officer and reads as under:-
"PUNJAB SMALL INDUSTRIES & EXPORT CORPORATION LTD. UDYOG BHWAN, SECTOR 17, CHANDIGARH The Deputy Commissioner, Income Tax, Circle 1(1), Chandigarh Subject: - Calling for information u/s 133(6) of Income Tax Act 1961. Sir, 15 Kindly refer to you're your Memo No. DCIT/C1(1) 2009-10/9940 dated 28.10.2009 on the subject noted above.
In this context, it is informed that PSIEC had allotted Plot No. B-61, Phase VII, Mohali measuring 11,245 sq yards on 22.7.1981 to M/s Rine Machine Tools @ Rs. 46/- per sq. yds. A copy of allotment letter of Plot No. B-61 Phase VII, Focal Point, Mohali is sent herewith for information.
Yours faithfully, Sd/-
Estate Officer-IV Encl: as above."
25. The above clearl y shows that agency itself has allotted a plot of 11245 square yard on 22.7.1981 @ Rs. 46/- per square yard the value which was required to be found is on 1.4.1981 and the plot has been allotted by PSIEC on1 July 1981 and the period comes quite in proximit y to the date of 1.4.1981 and therefore, in our opinion the Assessing Officer could have applied this rate easil y. The Assessing Officer has been more than reasonable in further increasing this rate by three times to ascertain the market value, therefore, the valuation as adopted by Assessing Officer seems to be correct. We do not intend to go into the case laws because the judgments of two High Courts are contrar y to each other whereas the Assessing Officer has based his valuation on the basis of concrete comparable instance given by PSIEC. Therefore, we set aside the order of Ld. CIT(A) and restore that of Assessing Officer.
25. In the result, Revenue's appeal is allowed.
Order pronounced in the Open Court on 09.12.2014
Sd/- Sd/-
(BHAVNESH SAINI) (T.R. SOOD)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 9 t h December, 2014
RKK
Copy to: The Appellant, The Respondent, The CIT, The CIT(A), The DR 16