ANAND DYES INDUSTRIES PVT. LTD. v. INCOME TAX OFFICER
[Citation -1985-LL-1219-5]

Citation 1985-LL-1219-5
Appellant Name ANAND DYES INDUSTRIES PVT. LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 19/12/1985
Assessment Year 1980-81, 1981-82
Judgment View Judgment
Keyword Tags break-up of expenditure • private limited company • voluntary contribution • extra shift allowance • guarantee commission • revenue authorities • business expediency • capital expenditure • sole selling agent • fair market value • agency commission • company law board • trade association • audited accounts • legal obligation • paid-up capital • public interest • customary bonus • sales promotion • incentive bonus • bank guarantee • body corporate • car expenses • personal use • tea estate • bonus act
Bot Summary: In the circumstances, the excess over 5 per cent is disallowed and the disallowance is worked out as under: Commission paid at 10 per cent ,361 Disallowed over 5 per cent 4,830 ,830 Commission paid at 10 per cent ,992 disallowed over 5 per cent ,496 ,496 ,326 Commission relating to past year as discussed above in para ,458 Total disallowable ,784 On appeal, the order passed by the ITO was confirmed on the basis us under: The matter was required to be considered in view of huge amounts paid to the Directors by way of remuneration, bank guarantee commission, sole selling agency commission, etc. 1979-80 in ITA No. 1418/Ahd/83 and 1467/Ahd/83 22nd Sept., 1985 from which highlighting certain aspects it was submitted that commission was paid to be Sole Selling Agents as per the permission obtained from the Company Law Board, under s. 294AA of the Company Act, 1956 and this was the tenth year when the commission was paid to the Sole Selling Agents. On the aspect of over all picture taken by the CIT(A), it was complained that remuneration was paid for working on behalf of the company, bank guarantee commission was paid for specific services and Sole Selling Agents Commission was paid for altogether different types of services and therefore, there was no substance in the picture taken by the CIT(A). In order to avoid diversion of funds, it is also considered necessary to provide that no individual, firm or body corporate who or which has a substantial interest in a company shall be appointed as a sole selling agent of that company unless such appointment has been previously approved by the Central Government. Then the Company Law Board takes into consideration not only the public interest, but also business need in respect of payment of commission to sole-selling agents and also service rendered by them and then approves the rates of commission. A decision taken by the body like Company Law Board cannot be rejected in absence of sufficiency of material and finding regarding inadequate services so as to disprove the date submitted to Company Law Board. Again, not extending the due recognition to the resolution passed by the Board of Private Limited Co. goes contrary to the provision of the Companies Act, 1956 in respect of the maintenance of Secretarial records like minute books where the resolution passed by the Directors at the meeting are required to be entered and signed at next meeting required to be held periodically as per the Company Act.


AHMEDABAD B BENCH ANAND DYES v. INCOME TAX OFFICER INDUSTRIES PVT. LTD. December 19, 1985 JUDGMENT Order P. J. GORADIA, A.M.: These appeals are directed against common order passed by CIT(A), Rajkot. common grounds taken are as follows: (i) Disallowing Rs. 22,326 being amount of commission paid to M/s Anand Dyes Corporation, Bombay under s. 40(A). (ii) Disallowing out of Car expenses Rs. 5,000 on ground of personal use by Directors. (iii) Disallowing Rs. 16,800 being amount of Bonus paid to Directors. (iv) Disallowing amount of Rs. 45,000 being amount of Bank guarantee commission paid to Directors. (v) Disallowing amount of Rs. 10,000 spent towards Public Welfare Scheme. (vi) Disallowing Rs. 3214 out of miscellaneous expenditure. (vii) Disallowing amount of Rs. 18,000 towards depreciation for second and third shifts. (viii) Disallowing Rs. 34,360 being incentive bonus paid to workers and staff. (ix) Disallowing amount of Rs. 17,458 being amount of commission paid to M/s Anand Dyes Corporation on ground that liability is of past year. (x) Disallowing amount of Rs. 4,400 being Bonus payment to employee Mr. Bhurabhai Desai. assessee is private limited company engaged in business of manufacturing dyes. It has only three shareholders, who themselves are directors of Company. company is in business for past more than 10 years. In respect of first ground regarding disallowance of selling commission paid to M/s Anand Dyes Corpn. Bombay, ITO observed as follows in para 4 of his orders: "In P & L A/c amount of Rs. 1,26,107 is debited as commission to sole selling agents. This includes amount of Rs. 17,458 pertaining to earlier year. bread up of this amount shows amount of Rs. 66,862 paid to M/s. Anand Dyes Corporation, Bombay, partnership firm in which director Smt. S. D. Oza has 50 per cent share and partners may be relatives. Last year, invoking provisions of s. 40A I held that there is no special reason for giving commission at 10 per cent to this partnership firm when commission paid to others vary between 2.5 per cent to 5 per cent and accordingly I had considered 5 per cent reasonable in case of this firm and disallowed excess over 5 per cent. Before last year this firm was being paid commission at 5 per cent. For this year besides point of commission paid in excess of 5 per cent there is another point regarding commission or Rs. 17,458 claimed as deduction in this year not relating to liability of earlier year. I called for assessee s explanation as to why this amount being liability of past year should not be disallowed. In response there to assessee submitted that it had received approval of Company Law Board only in relevant accounting year for payment to said partnership firm as sole selling agent commission @ 10 per cent. This contention of assessee cannot be accepted as liability for commission did not pertain to relevant accounting year. Secondly, in last year also company had paid commission of 10 per cent to this very firm and claimed it as deduction. Thirdly, it has been clarified in letter of approval by Company Law Board that approval does not constitute approval for purpose of any other law. In these circumstance, since this amount being liability of past year is disallowable on this score itself, I do not apply criterion of unreasonableness under s. 40A. This amount of Rs. 17,458 therefore, is disallowed. (b) Now, there are other items on which commission to said firm is paid at 10 per cent whereas to other selling agents, it is paid at 2 per cent to 5 per cent. It is obviously because this partnerships firm viz. M/s Anand Dyes Corpn. Bombay is partnership firm in which Directors are substantially interest. In accordance with provisions of s. 40A, expenditure which is excessive or unreasonable having regard to fair market value of service for which payment is made or legitimate needs of business, then, so much of expenditure as is so considered to be excessive or unreasonable shall not be allowed as deduction. section applies to payments made to firm or partner or member who has substantial interest in business of assessee. If assessee had paid same rate of commission to other selling agents also, question of disallowance in case of said partnership firm would not arise. But it is case where others are paid lesser rate of commission whereas this firm is paid at much higher rate, and therefore, question of reasonableness arises. In circumstances, excess over 5 per cent is disallowed and disallowance is worked out as under: Commission paid at 10 per cent ,361 Disallowed over 5 per cent (-) 4,830 ,830 Commission paid at 10 per cent ,992 disallowed over 5 per cent ,496 ,496 ,326 Commission relating to past year as discussed above in para (3) ,458 Total disallowable ,784 On appeal, order passed by ITO was confirmed on basis us under: (i) matter was required to be considered in view of huge amounts paid to Directors by way of remuneration, bank guarantee commission, sole selling agency commission, etc. (ii) ITO had not been provided with materials in order to consider that payment of commission was justified for services rendered by Sole selling agents. (iii) decision of Tribunal for asst. yr. 1979-80 could be different if facts regarding huge amount paid to Directors etc. and amount required to be considered as reasonable or excessive on basis of necessary details etc. were brought on record. ld. counsel appearing on behalf of assessee submitted that ground should be treated as covered by ITAT order in assessee s own case for asst. yr. 1979-80 in ITA No. 1418/Ahd/83 and 1467/Ahd/83 22nd Sept., 1985 from which highlighting certain aspects it was submitted that commission was paid to be Sole Selling Agents as per permission obtained from Company Law Board, under s. 294AA of Company Act, 1956 and this was tenth year when commission was paid to Sole Selling Agents. Again it was not correct to say that in past no commission at rate of 10 per cent was paid, but in fact if was so paid and for this necessary mention in order of ITAT for asst. yr. 1979-80 was brought to our notice. Commenting on findings given by CIT(A) in para 3 of his order, it was submitted that non-furnishing of details in respect of terms of contract, copy of agreement etc. were not asked for specifically by ITO, at least he, counsel, could not locate such request. Again, it could not be so because this was not first year of payment of commission. On aspect of over all picture taken by CIT(A), it was complained that remuneration was paid for working on behalf of company, bank guarantee commission was paid for specific services and Sole Selling Agents Commission was paid for altogether different types of services and therefore, there was no substance in picture taken by CIT(A). Besides, significance attached to perquisite obtained by Directors, it was stated that it was per Law and Revenue authorities should not have grievance on same because perquisites are taxed in hands of Directors. Again regarding omission according to CIT(A) in respect of certain fact regarding huge amounts paid to Directors etc. not having been brought to notice of Hon ble Members of Tribunal while deciding appeal for asst. yr. 1979-80, it was submitted that such observation was baseless because neither any misc. application was preferred by Revenue nor any reference was made and in fact all situations and circumstances were considered by Tribunal. On aspect regarding disallowance of liability for amount of Rs. 17,458 pertainig to earlier year as alleged and stated in ground No. 9 for asst. yr. 1980-81, it was submitted that same is covered by decision of Supreme Court in case of Non-such Tea Estate Ltd. vs. CIT 1975 CTR (SC) 20: (1975) 98 ITR 189 (SC). ld. Departmental Representative on other hand kly supported order passed by CIT(A) and submitted that no investigation was done since asst. yr. 1971-72 and only this year some investigation was made by ITO and stressed fact that company was owned by only these share-holders who themselves were Directors of company. approval by Company Law Board regarding payment of Sole Selling Agency commission did not mean that it was required to be followed by IT authorities because Company Law Board was concerned with public interest while IT authorities were concerned with allowability or expenditure incurred for purpose of business, whether excessive or unreasonable. Beside, whole of 10 per cent rate was not disallowed, but only excess over 5 per cent was considered for purpose of disallowance in absence of proper material for supporting excess payment. Again amount pertaining to earlier year also was properly disallowed as case was of renewal of permission. In our opinion, there is no reason to take view different from one we have taken for this very assessee in asst. yr. 1979-80. Probably IT authorities are not fully conversant with history behind insertion of s. 294AA of Companies Act, 1956 which was introduced by Companies (Amendment) Act of 1974. Clause (24) of Notes on Clause stated as under: "It has been noticed that sole selling agents are appointed in respect of goods, demand for which by consumers is substantially in excess of production or supply of such goods. It is felt that in such cases, goods will have easy market and services of sole selling agents may not be necessary to create market for same. This avoidable expenditure would result in unnecessary erosion of funds which could be usefully utilised for business of company. Hence to avoid diversion of funds it is considered necessary to provide that Central Government may, by notification, specify commodities in which selling agents shall not be appointed. In order to avoid diversion of funds, it is also considered necessary to provide that no individual, firm or body corporate who or which has substantial interest in company shall be appointed as sole selling agent of that company unless such appointment has been previously approved by Central Government. Further to provide check on appointment of sole selling agents and thus prevent unnecessary expenditure, it is proposed that such appointment in companies with paid-up capital of rupees fifty lakhs and above would require approval of shareholders by special resolution and also of Central Government. These provisions will apply also to sole buying or purchasing agents as it has been found that company managements misuse for personal gains their power in relation to purchase of raw materials and other goods." powers and functions of Central Government under this section have been delegated to Company Law Board by GSR 343(E), dt. 24th June, 1975. Central Government has also made Rules called Company (Appointment of Sole Selling Agents) Rules, 1975 as published in Gazette of India dt. 1st March, 1975, when package of Emergency measures were taken. Form of application for approval of Central Government to appointment of Sole Selling Agents by company prescribes plenty of information including factual data called for from applicant. In brief following information is required to be supplied. (i) Management structure including particulars of other directors (ii) Products manufactured together with details of production in past years. (iii) nature of organisation and structure and size of organisation of sole- selling agents to be utilised for conducting sales of company. (iv) Experience of sole-selling agents, reasons for their appointment, terms of remuneration and proposed agreement or arrangement indicating which or services are rendered by 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. (iv)(a) Details regarding commission earned in past and break-up of expenditure incurred by selling agents on salaries, travelling, rent, warehousing charges and many other. (v) There are also various other minutes details required to be given in respect of direct sales and otherwise, interest of sole selling agents of shares of Company, associate concerns of directors and their projected target of sales, reduction amount of commission if other agents are paid by way of commission, names of auditors, etc. (vi) Items 32 prescribed mention whether any portion of sole-selling agency commission has been disallowed by IT Department. From above it would be clear that IT authorities can independently consider allowability or otherwise as per s. 27/40A of Act. But then Company Law Board takes into consideration not only public interest, but also business need in respect of payment of commission to sole-selling agents and also service rendered by them and then approves rates of commission. Therefore, proceedings on basis that there is no material or remuneration paid is excessive is erroneous. Mention regarding amount disallowed in IT assessment would be to ensure co-ordination and also to invoke further enquiry before appointment and terms to be appalled form time to time. decision taken by body like Company Law Board cannot be rejected in absence of sufficiency of material and finding regarding inadequate services so as to disprove date submitted to Company Law Board. ITO has not enquired into data furnished to Company Law Board and made out case that in fact no services were rendered to justify increased remuneration. Revenue authorities have not even enquired with their counterpart in Sister-Ministry what were criteria for approving increased rates as alleged. Decisions taken by inter- Ministry Departments are required to be extended due weigthage. Suffice to say that authorities below have not known provisions of s. 294AA of Companies Act and Rules framed thereunder. learned counsel for Company was correct in stating that it is not only in this year that commission has been paid at rate of 10 per cent but there is mention on this factual aspect even in order of Tribunal for earlier year. We, therefore, do not see any reason to retain any part of disallowance made and therefore, delete same in both years. In respect of amount of Rs. 17,458 pertaining to earlier year disallowed in asst. yr. 1980-81, reliance placed by ld. counsel on decision in case of Non-such tea Estate Ltd. (supra) is correct and therefore, same cannot be disallowed. Coming to next ground regarding disallowance of bank guarantee commission, same was disallowed by ITO on basis assessee was requested to furnish details of assets of Directors, who had given guarantee to bank in order to procure loan for business of assessee-company. CIT(A) confirmed order on basis as follows: (i) It is not clear that Directors have given guarantee to bank and to what extent banks depended upon such guarantee. (ii) assessee- company had sufficient raw materials as well as finished goods. (iii) There was no necessity for Directors to give extra personal guarantee to Bank. (iv) company was silent and rather reluctant to furnish details in respect of considerations which made Directors to give additional guarantee. (v) Considering total amounts paid to Directors including remuneration etc., payments were superfluous. ld. counsel for assessee submitted that since asst. yr. 1971-72, guarantee commission was paid and in printed balance-sheet no figure appeared in column for previous year because of change in accounting year. It was not for assessee to prove to what extend banks depended upon Director s guarantee. It is common knowledge that in respect of private limited companies, banks do insist for personal guarantees of Directors and whether there was need or not cannot be matter for judgment by Revenue authorities. Regarding sufficiency of assets required so as to judge worth of directors, it was submitted that CIT(A) could not sit in chair of sanctioning authority for purpose of sanctioning loan and if various amounts are paid to Directors, there is no reason for Revenue authority to grudge because payments are made for services and with prior sanctions as per law. payments are made not only on account of necessity or business expediency but as per past practice and same is allowed from year to year. ld. Departmental Representative supporting order of CIT(A) stated that totality of remuneration and payments made to Directors were required to be considered. In our opinion, there is no jurisdiction to disallow amounts. From paper book, we find that assessee has been paying guarantee commission to Directors right from S. Y. 2026 i.e. asst. yr. 1971-72. It is admitted position that every year expenditure is allowed and rightly so on basis of risk undertaken by Directors. We do not see any reason to sustain addition and therefore, same is deleted. Coming to disallowance of bonus payment to Directors same is covered by decision of ITAT for asst. yr. 1979-80 and therefore, respectfully following same, we deleted addition made. Coming to disallowance in respect of contribution for drainage, para 8 of order passed by CIT(A) states as under: "The next objection is with regard to disallowance made by ITO of Rs. 6,000 being welfare expenditure during asst. yr. 1981-82 and such disallowance of Rs. 10,000 made during asst. yr. 1980-81. ITO has held that amount spent is not for purpose of business. Therefore, this expenditure have been disallowed. ld. counsel has objected that payment have been made to Junagarh Vikas Council for drainage of dirty water. This amount was paid to said concern for purpose of removal of dirty water and to repair drainage system. Thus, it is urged that amount has been spent towards working of factory. There, same is allowable. On perusal of facts of case, it may be seen that District Collector called meeting of various persons and urged to make voluntary contribution for drainout dirty water in city. payment made cannot be treated as expenditure for purpose of business as to qualify for deduction under s. 37 of Act. There is no nexus between expenditure and carrying on business of assessee-company. The expenditure incurred cannot be considered as incidental to be therefore has been rightly disallowed by ITO. In any case, contribution made by assessee towards drainage system has to be considered as capital expenditure because appellant is getting entire benefit for drainage system." ld. counsel for assessee submitted that considering nature of business of assessee proper discharge of effluents is obligation and for this purpose letter addressed by District Collector was brought to our notice to prove that there was nexus with business of assessee. necessary resolution passed in presence of District Collector was also brought to our notice. Reliance was placed on CIT vs. Navsciri Cotton & Silk Mills Ltd. (1981) 23 CTR (Guj) 292: (1982) 135 ITR 546 (Guj). expenditure could never be capital expenditure because no asset was acquired by assessee. learned Departmental Representative submitted that there was neither legal obligation nor any necessity because no letter was issued to assessee either by municipality or by concerned authority under any statute. Meeting called by District Collector was only voluntary and payment was also voluntary. In any case, enduring benefit was received by assessee and therefore, it was capital expenditure. We do no see any reason to retain allowance of expenditure incurred by assessee. Considering nature of business need of controlling environment and pollution steps taken by various concerned authorities like Pollution Central Board, trade association etc. we do not see any reason to consider same as not for purpose of business. Again, it is not necessary that for every allowance there must be demand by Statutory Board. Again, there is no question of holding expenditure as capital because asset if any, does not belong to assessee. decision of Supreme Court in case of Empire Jute Co. Ltd. vs. CIT reported in (1980) 17 CTR (SC) 113: (1980) 124 ITR 1 (SC) would support case of assessee. Again it is seen form orders of authorities below that inspite of holding same as capital expenditure, no depreciation is allowed by them as this would prove case of assessee that claim was not required to be considered from point of view of capital expenditure as asset did not belong to assessee-company. Coming to disallowance in respect of car expenses, following decision of Tribunal for asst. yr. 1979-80, we hold that same is required to be deleted and hence no disallowance is made. Coming to claim, in respect of misc. expenses, it was submitted by ld. counsel for assessee that he had instructions not to press disallowance of Rs. 12,155 for asst. yr. 1981-82. However, for asst. yr. 1980- 81, it was submitted that same was in connection with building of statute in memory of one of directors of company and he was founder director. statue was put up in factory premises and not at residence of directors. status was erected out of business expediency, as was desire of management and staff. ld. Departmental Representative supported order passed by CIT(A). Here also, in our opinion there is no reason to reject claim of assessee. expenditure is incurred and statute is placed in factory premises of assessee-company and same is allowable under s. 37 of Act. Such expenditure is in consonance with status and image of company apart form boosting morale of management. Disallowance for asst. yr. 1980-81 is deleted and for asst. yr. 1981-82 is confirmed. Coming to claim in respect of depreciation for extra shift allowance, it was submitted by learned counsel that same was allowed in past as also in further year because process in manufacturing of goods employed by assessee was continuous process and factory was running all through out. Because of some arithmetical mistake by office of charged accountant, there was some discrepancy in claim for extra shift allowance and therefore, ITO disallowed same. CIT(A) confirmed same on basis of absence of further details. If it was required same be sent back to ITO for purpose of verification and satisfaction and necessary direction regarding claim of assessee, be given. ld. Departmental Representative supported order passed by CIT(A). In our opinion, there is no need to send matter back to ITO. Considering nature of business in which assessee company is engaged and on going through audited accounts placed before us and considering statement made at bar, we accept claim of assessee in respect of depreciation for extra shifts allowance and direct ITO to allow same after verifying arithmetical accuracy. Other grounds in asst. yr. 1980-81 Coming to objection with retard to incentive bonus to workers, relevant paragraph of order passed by CIT is reproduced below: "The assessee has claimed incentive bonus of Rs. 44,360. ITO has given findings that as per provisions of Bonus Act, these bonus payments are excess and not allowable as per provisions of Bonus Act. Therefore, ITO has disallowed same in accordance with provisions of s. 36(1)(ii). learned counsel has stated that new scheme was drawn during year under consideration in order to increase production and hence agreement was made with employees members, resolution was passed that certain amount of incentive bonus would be given to workers if production reaches after certain level and hence it is stated that ITO should have considered these facts because of persons to whom incentive bonus have been paid and there is evidence to show that this agreements has been made in order to increase production." ld. counsel for assessee relied upon decisions in case of Bombay Kamgar AIR 1976 SC 1453, 1980 TAXMAN 43 (SC) case of Hukamchand Jute Mills Ltd. regarding customary bonus and 17 TAXMAN 19 (SC) in case of Vaidyanath Ayurvedbhuvan. ld. Departmental Representative supporting order of CIT(A) stated that s. 36 applied to productivity based profits and therefore, ceiling prescribed was mandatory. In our opinion there is no reason to disallow payment made on basis of productivity. resolution passed by Directors on 15th June, 1978 clearly brings out terms regarding incentive bonus payable to employees of company and resolution has binding force. It is pertinent to note that resolution was passed before beginning of accounting year and there is also proof regarding increased production. Such disallowance can only be looked upon as derogatory to spirite of Bonus Act because in fact it is philosophy of government to encourage productivity based distribution of profits since it will have similarity with reward on basis of workers participation in business of company. Sec. 31A of Bonus Act, 1965 specifically makes mentions in this regard. Again, not extending due recognition to resolution passed by Board of Private Limited Co. goes contrary to provision of Companies Act, 1956 in respect of maintenance of Secretarial records like minute books where resolution passed by Directors at meeting are required to be entered and signed at next meeting required to be held periodically as per Company Act. Payment not made in subsequent year on basis of productivity cannot be fatal to claim because if in earlier year because of huge profits management decides to remunerate workers on basis of workers participation, such system having not been followed in further year cannot be consideration for disallowance. It is admitted fact that payments to workers are genuine and enjoyed by workers themselves. Whether there is need for such payment for purpose of allowance under s. 37, cannot be matter of decision by revenue authorities because it is exclusive sphere of businessmen to consider properiet of expenditure and even if expenditure is unnecessary or incurred because of wrong decision by businessman as long as expenditure is wholly and exclusively for purpose of business, same cannot fall for disallowance. We, therefore, delete disallowance made in asst. yr. 1980-81. Coming to disallowance of Rs. 4,400 in respect of bonus paid to one of employees Shri Desai, it is submitted by ld. counsel that same falls outside Bonus Act similar of payment made to Directors. On basis of our order for asst. yr. 1979-80 and reasons for allowing bonus paid to Directors in that year as also in this year, we uphold claim of assessee and delete addition sustained. To extent as above, order of CIT(A) is modified and ITO is directed to pass appropriate orders in accordance with law. In result, appeal for asst. yr. 1980-81 is allowed in full and that for asst. yr. 1981-82 is allowed in part. *** ANAND DYES INDUSTRIES PVT. LTD. v. INCOME TAX OFFICER
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