Shaw Bros (Wine) Pvt. Ltd. v. Deputy Commissioner Of Income Tax .

This appeal filed by the assessee is directed against the order of Ld. CIT (Appeals) — 1, Kolkata dated 05.05.2015 and the solitary issue involved therein relates to the disallowance of Rs. 4,17,072/- made by the A.O. and confirmed by the Ld. CIT(A) on account of commission paid by the asssesee company to its directors.

2. The assessee in the present case is a company which is engaged in the business of trading of liquor. The return of income for the year under consideration was filed by it on 29.10.2005 declaring a total income of Rs. 52,82,270/-. As noticed by the A.O. during the course of assessment proceedings, deduction of Rs. 4,17,072/- was claimed by the assessee on account of commission paid to each of its eight Directors at the flat rate of Rs. 52,184/-. Although a copy of the Board Resolution authorising payment of such commission was filed by the assessee, the A.O. was of the view that the directors of the assessee company had not rendered any services to justify the payment of commission. He found that the basis of such commission paid by the assessee to its director was also not ascertainable. He also noted that the commission paid to the directors was increased by the assessee company during the year under consideration without performing any extra services for earning the profits of the business. He, therefore, disallowed entire commission of Rs. 4,17,072/- claimed by the assessee company.

3. The disallowance made by the A.O. on account of its claim for commission paid to the directors was challenged by the assessee in the appeal filed by the Ld. CIT(A). During the course of appellate proceedings before the Ld. CIT(A), it was submitted on behalf of the assessee company that there was no manager or executive to look after its business which was being managed for the last 20 years by its directors. It was also submitted that all the directors of the assessee company were working Directors and in addition to the fixed annual remuneration, commission @ 7.5% of net profit was paid to them for the year under consideration. It was also submitted that the remuneration and commission paid to the directors in total was less than Rs. 15,000/- p.m. per director which was quite fair and reasonable. The submissions made by the assessee were forwarded by the Ld. CIT(A) to the A.O. for his comments and when the remand report submitted by the A.O. giving his comments was confronted by the Ld. CIT(A) to the assessee, the later also filed its rejoinder. After taking into consideration this entire material available on record, the Ld. CIT(A) proceeded to confirm the disallowance made by the A.O. on account of assessee's claim for commission paid to Directors for the following reasons given in paragraph no 5.2 of his impugned order:

“The submissions of the appellant as well as the rejoinder to the remand report have been considered. It is seen that the issue is regarding disallowance of commission paid by the appellant to its 8 directors of Rs. 52,134/- aggregating to Rs. 4,17,072/-. The appellant's main contention is that the commission payment was customary payment to managerial personnel and even after payment of commission, the remuneration to the directors was less than Rs. 15,000/- per month and that the commission was being paid on the basis of Board Resolution. It is, however, seen that salary to 8 directors was being paid to whom this commission has also been paid. However, the appellant has not given satisfactory explanation regarding the basis of the sales commission payment, that too to all 8 Directors. Further substantial amount is being paid by the appellant to the Directors all of whom claimed to be working directors, however, the basis of commission or business requirement of commission on sales to all of them is not established. It is also not clear whether tax had been paid in respect of such amounts in the hands of the Directors. Therefore, the appellate contention in this regard cannot be accepted and the addition is confirmed.”

Aggrieved by the order of the Ld. CIT(A), the assessee has preferred this appeal before the Tribunal.

4. We have heard the arguments of both the sides and also perused the relevant material available on record. As submitted on behalf of the assessee company before the authorities below as well as before the Tribunal, there was no manager or executive to look after its business of liquor trading and the same was managed for the last 20 years by its 8 Directors which all were working Directors. For the services rendered by them in connection with the management of the business of the assessee company, remuneration was being paid to them which comprised of fixed annual remuneration and commission on net profit at specified rate. Such commission for the year under consideration was paid at 7.5% of the net profit to all the 8 Directors in equal proportion and after taking into consideration the said commission, the total monthly remuneration to each Director was less than Rs. 15,000/- which, in our opinion, was quite fair and reasonable keeping in view the nature of the assessee's business, the managerial services rendered by them as well as overall increase in the turnover of the assessee company. Having regard to all these facts of the case, the disallowance made by the A.O. on account of such commission and confirmed by the Ld. CIT(A) on the alleged ground that the commission was paid without rendering any services or the basis thereto was not ascertainable, in our opinion, is not sustainable and deleting the said disallowance, we allow this appeal of the assessee.

5. In the result, the appeal of the assessee is allowed.