Out of this bunch of appeals, cross-appeals filed by the assessee and the Revenue are against the order of CIT(A)-II, Nashik, dated 11.09.2012 relating to assessment year 2009-10 against order passed under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’). Further, the assessee is in appeal against the order of CIT(A)-II, Nashik, dated 22.08.2013 relating to assessment year 2010-11 against order passed under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’)
2. All the three appeals relating to the same assessee were heard together and are being disposed of by this consolidated order for the sake of convenience.
3. The assessee in ITA No.2201/PN/2012 has raised the following grounds of appeal :-
1. On the facts and in law the ld. CIT(A) has erred in making addition / enhancing income of Rs. 1,00,00,000/-. (Rs.1 crores).
2. On the facts and in law the ld. CIT(A) has erred in not appreciating the fact that the commission of Rs. 1 crore was paid for the services rendered by directors / shareholders, which resulted into substantial increase in turnover and profit.
3. On the facts and in law the ld. CIT(A) has erred in not appreciating the fact that the provisions of section 36(1)(ii) are not applicable to the facts of the case of the appellant. Your appellant craves, leave to add, alter, delete above or any other ground/s of appeal.
4. The Revenue in ITA No. 2280/PN/2012 has raised the following grounds of appeal :-
1) On the facts and circumstances of the case, the CIT(A) has erred in deleting the addition of Rs. 74,66,434/- made on account of wrongly claimed as revenue expenditure.
2) On the facts and circumstances of the case, the CIT(A) has erred in not considering the fact that the expenditure on construction of Road and RCC Chambers was not yielding any extra income as admitted by the assessee itself before the Appellate Authority and as such it was not for business purpose and hence not allowable.
3) The appellant craves leave to amend, add, alter the above grounds, if felt necessary, later.
5. The assessee in ITA No.1767/PN/2013 has raised the following grounds of appeal :-
1. On the facts and in law the ld. CIT(A) has erred in making addition / enhancing income of Rs. 1,10,00,000/-. (Rs.1.10 crores).
2. On the facts and in law the ld. CIT(A) has erred in not appreciating the fact that the commission of Rs. 1.10 crore was paid for the services rendered by directors / shareholders, which resulted into substantial increase in turnover and profit.
3. On the facts and in law the ld. CIT(A) has erred in not appreciating the fact that the provisions of section 36(1)(ii) are not applicable to the facts of the case of the appellant.
Your appellant craves, leave to add, alter, delete above or any other ground/s of appeal.
6. The issue arising in the appeals filed by assessee both in assessment year 2009-10 and 2010-11 is against the disallowance of commission paid to the Directors / shareholders. The facts and issue are identical in both the appeals. However, reference is being to the facts and issue in ITA No.2201/PN/2012.
7. Briefly, in the facts of the present case, the assessee was a private limited company. The assessee furnished return of income declaring total income of Rs. 1,17,60,552/-. During the course of assessment proceedings, the Assessing Officer noted that the assessee was engaged in execution of lift irrigation scheme. The assessee had undertaken the work as a sub-contractor from M/s. Siddhartha Construction, proprietor Shri Sunil M. Kotecha, Jalgaon i.e. sister concern of the assessee, who had received the contract from SMP Ltd., Jalgaon. The assessee in this regard had raised bills for Rs. 10.49 crores, against which work was allotted to ICSA and GPT Pipe Industries Limited. The Assessing Officer further considered the contract receipts received by the assessee from M/s. Siddhartha Construction and the explanation filed by the assessee in this regard and disallowed certain expenditure. One of the additions made by the Assessing Officer was on account of work in progress. The Assessing Officer vide show cause notice, the WIP was worked out at Rs. 2,37,78,170/- whereas the assessee has shown increase in WIP at Rs. 1,56,20,936/- and total WIP at Rs. 1,63,11,736/ - (1,56,20,936/- + 6,90,800) and in this way there is a difference in WIP of Rs. 74,66,434/- (2,37,78,170 – 1,63,11,736) which has no connection with the revenue receipt of R.A. Bill 1 and R.A. Bill No.2 and therefore it was wrongly claimed as revenue expenditure. In view thereof, the revenue expenditure claimed to the extent of Rs. 74,66,434/- was disallowed and added to the income of the assessee.
8. The CIT(A) deleted certain additions made by the Assessing Officer on account of site office, motorable road, etc., against which Revenue is not in appeal. Further, the CIT(A) also deleted addition on account of underestimation of work in progress by calculating the work in progress at Rs. 2.37 crores as against work in progress shown by the assessee at Rs. 1.63 crores, resulting in addition of Rs. 74,66,434/-. Before the CIT(A), the contention of the assessee was that it was not clear as to how the Assessing Officer had made the aforesaid addition. In respect of expenditure of Rs. 36,02,535/-, the assessee claimed that the same was incurred on construction of road from Rigaon to site and the said expenditure in no way could form part of work in progress as the contractor was not entitled to any payment in respect of the construction of road. In respect of second expenditure on construction of RCC delivery chamber, the assessee claimed that the said construction had been lost due to the revised Board Conceptual Layout, which was finalized on 10.02.2009, hence the said expenditure of Rs. 45,55,000/- incurred on construction of RCC delivery chambers was claimed as revenue expenditure. The CIT(A) vide paras 7.5 and 7.6 allowed the claim of assessee, in view of terms of tender document, in which the assessee was required to make approach road and also the expenditure booked because of revised Board Conceptual Layout, under which the earlier delivery chambers constructed by the assessee were demolished.
9. The CIT(A) further vide para 13 noted that the assessee had paid commission of Rs. 1 crore to three directors, who had substantial shareholding, which as per the CIT(A) was disallowable under section 36(1)(ii) of the Act. The CIT(A) issued show cause notice under section 251 of the Act, since the Assessing Officer had not disallowed the said deduction claimed. The said show cause notice is reproduced under para 13 of the appellate order of CIT(A). In response to the same, the assessee furnished reply which is incorporated under para 13.1 at pages 33 to 36 of the appellate order. The CIT(A) observed that in addition to remuneration of Rs. 30 lakhs, commission of Rs. 1 crore was paid to three directors. The CIT(A) was of the view that where the assessee company had earned substantial profits to the tune of Rs. 93.48 lakhs, the same could have been distributed as dividend. The assessee’s contention that the commission was paid to the directors for their hard work and extra efforts for procuring the contract and its subsequent execution, as per the CIT(A) was not backed by any documentary evidence. The Board Resolution filed by the assessee as an evidence of extra service was rejected, since the Board was constituted by the director employees to whom the payment had been made. The CIT(A) further observed that the Assessing Officer had failed to bring on record any evidence that the payment of commission commensurated with the market value of services. He further observed that the Assessing Officer had not considered the provisions of section 36(1)(ii) of the Act at all. Hence, the contention of assessee that the Assessing Officer had verified the said transaction of commission payment to the directors, was held to be not tenable by the CIT(A). The CIT(A) then, traced the work of lift irrigation system and the connection of family members and was of the view that rise in turnover and profit was due to the fact that the sub-contract was awarded by M/s. Siddhrath Construction which is the proprietary concern of first cousin of Shri Sachin Kotecha, one of the main directors of the appellant company. The appellant company only executed the sub contract on behalf of the main contractor. On these facts and circumstances, the CIT(A) held that where the dividend was payable and the same had been paid in the garb of commission. Only Rs. 1,90,000/- was proposed as dividend available out of profit of Rs. 93.48 lakh available for appropriation after payment of commission of Rs. 1 crore. The CIT(A) held that there was no justification in the contention of the assessee that increase in turnover / profit was due to extra efforts of the directors. As per the CIT(A), the payment was made with an intention to avoid full payment of taxes, hence, the contention of the assessee that there was no tax effect as the taxes paid by the directors were at maximum tax rate, was held to be not tenable. Reliance in this regard was placed on the decision of Mumbai Special Bench of Tribunal in Dalal Broacha Stock Broking (P) Ltd. Vs. Addl.CIT (2011) 131 ITD 36 (Mum) (SB). In view thereof, the CIT(A) made an addition / enhancement of income by Rs. 1 crore.
10. The assessee is in appeal against the said enhancement of income by the CIT(A).
11. The learned Authorized Representative for the assessee pointed out that the assessee had paid commission of Rs. 1 crore to three directors in addition to the remuneration paid to them. The Assessing Officer had allowed the deduction on account of both remuneration and commission. However, the CIT(A) enhanced the income and disallowed commission paid to the directors. The learned Authorized Representative for the assessee fairly admitted that the commission was not paid in shareholding pattern, but was paid on account of services rendered by the directors of the assessee company. Our attention was drawn to page 34 para (3) of the appellate order, wherein the CIT(A) had noted that the assessee company’s income was Rs. 2.17 crores. It was further explained by him that the said directors were instrumental in getting irrigation contracts, which resulted in higher profits. Our attention was drawn to the qualifications of the said persons placed at page 52 of the Paper Book and further to the Resolution passed by the assessee company, which is placed at page 128 of the Paper Book. Further, the contention of the learned Authorized Representative for the assessee was that all the directors were tax payers and in view of the profits earned by the assessee company, the Resolution was passed on 30.03.2009 to pay the said commission. Generally, the Resolution to pay the commission is passed in March of close of the year. It was further explained by him that the commission was paid to three directors out of total of six directors. The learned Authorized Representative for the assessee further pointed out that the said commission paid by the assessee is duly allowable as deduction under section 36(1)(ii) of the Act. Our attention further was drawn to the provisions of section 40(b) of the Act, which talks of remuneration allowable to the extent of 60% to the partners and the remuneration paid by the assessee company to the directors was claimed to be less than 60%. Further, reliance was placed on the following decisions for the allowability of the claim of expenditure:-
(i) CIT Vs. Career Launcher India Ltd. (2013) 358 ITR 179 (Del)
(ii) AMD Metplast Pvt. Ltd. Vs. DCIT (2012) 341 ITR 563 (Del)
(iii) New Silk Route Advisors (P.) Ltd. Vs. DCIT (2015) 55 taxmann.com 540 (Mumbai – Trib)
(iv) K.L. Concast Pvt. Ltd. Vs. Addl.CIT (2013) 35 CCH 431 (Delhi – Trib)
12. The learned Authorized Representative for the assessee further pointed out that the CIT(A) had denied the said deduction as there was no evidence of extra services. He further pointed out that because of the efforts of three directors, the assessee company got contract of Rs. 70 crores, which was not only received by the assessee but was implemented during the year. Further, the directors are qualified. He further pointed out that in case the entity was registered firm, then expenses of commission would have to be allowed, just because dividend tax was payable can the yardstick be changed. The learned Authorized Representative for the assessee further pointed out that apart from the provisions of section 36(1)(ii) of the Ac, the provisions of section 40A(2) of the Act were much more rigorous i.e. the related party transaction. Reference was made to the decision of Hon’ble Bombay High Court in CIT. Vs. Indo Saudi Services (Travel) Private Limited (2009) 310 ITR 306 (Bom) for the proposition that if the payee has been paid, then there is no tax avoidance and hence, there was no disallowance under section 40A(2)(b) of the Act.
13. The learned Departmental Representative for the Revenue in reply, pointed out that the commission was paid to the directors, who were substantial shareholders. The benefits were only to three directors and in the absence of documents to prove that extra services have been rendered by the directors, there was no merit in the claim. Further, the plea of the assessee that the payment of commission was revenue neutral was not valid for allowing the claim of the assessee. The learned Departmental Representative for the Revenue further pointed out that there was no such terms of employment and in any case, the decision to pay the commission was at the fag end of the year.
14. The learned Authorized Representative for the assessee in rejoinder pointed out that the evidence of services rendered by the said directors is imminent as both the Assessing Officer and the CIT(A) have allowed the salary and the commission was paid at the end of the year.
15. We have heard the rival contentions and perused the record. The assessee is a private limited company and is engaged in the business of execution of contract work of lift irrigation scheme. The assessee undertook the said work as sub-contractor of the principal contractor. During the year under consideration, the assessee was awarded sub-contract of Kurha- Vadhoda Lift Irrigation Scheme at Muktainagar Taluka, Dist. Jalgaon. The work consisted of rising main, online pump house, pumping machinery with electrical works, delivery chamber, etc. The assessee in the statement of facts filed before the CIT(A) had explained the nature of contracts to be the work of Lift Irrigation projects primarily involves lifting the flood water from rivers during the monsoon, using mechanical means like pumps, transporting the water by M.S. pipes and subsequently filling an earthen dam / reservoir at required elevation. Thereafter, the water stored in the dam is utilized during the balance year to irrigate the neighboring fields using gravity, etc. as per the terms and conditions of tender work. Such projects are usually situated at river banks and majority of the pipe line passes through fields which are inaccessible by any major or arterial Roads. The assessee also explained that since project road was not available at site, it had to first set up project road and other basic infrastructure amenities in such inhospitable terrain, at site, where actual work had to be executed. The expenditure was necessitated and imperative for carrying on of the business in order to facilitate smooth and efficient movement of men and machinery / equipment. For the year under consideration, the turnover of the assessee company was Rs. 10.62 crores. The assessee had declared profit of Rs. 1,17,60,552/- and had debited commission to directors at Rs. 1 crore against the same. The claim of the assessee before the CIT(A), who had issued enhancement notice to the assessee during the course of appellate proceedings, was that the turnover and the above mentioned profit was possible only because of the efforts of the directors. The assessee claims that it had received sub-contract from SMP Ltd., Jalgaon and had allotted work to M/s. Siddhartha Construction, who in turn was the principal contractor of Tapi Irrigation Development Corporation (TIDC). The tender documents were issued by TIDC to the principal contractor and the work had to be executed by the assessee in view of the said sub-contract undertaken by it and in view thereof, the terms of contract had to be complied with by the assessee on behalf of the contractor. The assessee had not appointed any managerial person for managing the business, but on the other hand, the business was managed by the directors of the company. The directors of the assessee company belonged to Kotecha group, who had been awarded the contract work by TIDC and in order to execute the work, extra efforts were put in by the directors of the assessee company at the site and in view of these extra efforts of the directors, there were enhanced profits for the year under consideration.
16. The assessee had claimed expenditure of Rs. 1 crore on account of commission paid to three main directors. The assessee has filed the details of directors’ remuneration and commission paid for the year under consideration, under which out of six directors, three directors i.e. Shri Prakash K. Kotecha, Shri Sachin Prakash Kotecha and Shri Rahul Prakash Kotecha were paid commission of Rs. 40 lakhs, Rs. 35 lakhs and Rs. 25 lakhs, respectively. The other three directors were not paid any commission. The claim of the assessee before us was that the said three directors had put in extra efforts to obtain the sub-contract and further to execute it during the year, which resulted in higher profits and hence, the decision by the directors of the assessee company to pay commission to the said persons. The assessee has placed on record the Agreement executed for award of sub-contract by M/s. Siddharth Construction to Arihantam InfraProjects Pvt. Ltd. at pages 74 to 105 of the Paper Book. As per the said contract, the designing, planning and execution of online pump house for Stage II, rising main along with all appurtenances, valves, etc., pumping machinery with electrical works for Stage II and delivery chamber for Stage II and subsequent commissioning of the above mentioned items of Kurha Vadoda Upsa Sinchan Yojana, Tal. Muktainagar, Dist. Jalgaon , had to be executed by the assessee. The obligations of the contractor and the subcontractor are provided in the said Agreement. Admittedly, the assessee has carried on the aforesaid sub-contract work during the year under consideration. The income arising from the said work contract has been offered to tax by the assessee. In view of the awarding and earning of contract of Rs. 70 crores, the efforts of the three directors was acknowledged by the five directors of the assessee company, who were present in the meeting of Board of Directors as on 30.03.2009. It was acknowledged that as the contract of Rs. 70 crores had been earned because of sincere efforts of the directors, since the company was a new one and hence, it was decided that the commission @ 10% of the sales would be paid to the three directors. The qualifications of Shri Sachin Prakash Kotecha is B.E (Polymers) and MBA in Finance, whereas qualification of Shri Rahul Prakash Kotecha was B.E. (Mechanical) and MBA in Marketing. Both of them were engaged in the execution of all the work and also management of the project. Another director Shri Prakash K. Kotecha was in-charge of accounts, banking and taxation. The commission paid to the three directors was as follows:-
| Directors Name |
Commission |
Prakash K. Kotecha |
Rs.40,00,000 |
Sachin Prakash Kotecha |
Rs.35,00,000 |
Rahul Prakash Kotecha |
Rs.25,00,000 |
17. The assessee in the written submissions filed before the CIT(A) has also filed detailed break-up of monthly sales / receipts totaling Rs. 10,49,59,698/- for February, 2009 and March, 2009, against which the assessee had shown the said income. The project was awarded during the year and by the close of the year almost 65-70% was completed. The year under appeal was the second year of operation, but the directors of the assessee company were in similar line of business for the past 5-15 years. The assessee claimed that the personal reputation / goodwill and business standing of the concerned directors helped the company in getting the projects. In the totality of the above said facts and circumstances, the issue arising before us is whether the assessee company is entitled to the claim of deduction of Rs. 1 crore paid as commission to the directors.
18. Under the provisions of section 36(1)(ii) of the Act, it is provided that the bonus or commission paid would be allowed as deduction without any restriction subject to the provisions of section 43B of the Act, wherein it is provided that the said amount would be allowed as deduction in the year of payment. There is another restriction to the said allowability of deduction that in case unreasonably excessive payments are made to relatives or connected persons, the same could be disallowed under the provisions of section 40A(2) of the Act. It may be put on record that the CIT(A) had disallowed the claim of the assessee on the premise that where dividend was to be paid out of the profits of the assessee company, the payment of commission to the directors was hit by the provisions of section 36(1)(ii) of the Act. The CIT(A) has not held the payment made to the directors to be excessive in view of the provisions of section 40A(2) of the Act, which is a safeguard for controlling the payment to relatives or connected persons. Under the amended provisions of section 36(1)(ii) of the Act, there is no restriction on the quantum of payment. However, the spirit of section that where the expenditure has been incurred in connection with carrying on of the business, the same is allowed as deduction, the commercial exigency is to be viewed in the light of the requirement of business and the actual services rendered by the persons concerned. Looking at the nature of sub-contract executed by the assessee which is in specialized field, it cannot be held that the same was carried out without the efforts of concerned directors. In any case, the businessman is the best person to decide its affairs and expenditure cannot be disallowed on any surmises. We find merit in the plea of the learned Authorized Representative for the assessee that in case the concerned entity was a partnership concern, under the provisions of section 40(b) of the Act, 60% of the profits of business could be allowed as remuneration to the partners of the said entity. The assessee has furnished the details of directors’ remuneration and commission paid to the directors and the total of the same does not exceeds 60% of the profits. Merely because the assessee is a private limited company and had agreed to pay the commission to the directors by passing Resolution in this regard before the close of year, the same cannot be brushed aside and the said expenditure was disallowed in the hands of assessee on mere surmises. On the other hand, remuneration paid to the same directors was allowed by the Assessing Officer and not disturbed by the CIT(A), which in turn establishes that the directors were working directors. We find no merit in the observations of CIT(A) in this regard. The assessee out of total profits of Rs. 93.48 lakhs available for appropriation, proposed dividend amounting to Rs. 1.90 lakhs only and the taxes on distributed profits were Rs. 0.30 lakhs. In view thereof, we hold that where the directors had given services and in recognition thereof, there was proposal to pay commission to the said directors, then the same could not be questioned merely on the basis of speculation by the Revenue that the same was to avoid payment of dividend tax. The assessee was entitled to claim of deduction of Rs. 1 crore under section 36(1)(ii) of the Act. For the above proposition, we find support from the ratio laid down by the Hon’ble Delhi High Court in Chryscapital Investment Advisors (India) Pvt. Ltd. Vs. DCIT (2015) 93 CCH 29 (Del), wherein similar issue arose in respect of payment of commission and its allowability as deduction under section 36(1)(ii) of the Act and its denial on the premise that the same was paid to the shareholders in view of dividend with the objective of avoiding taxes. The Hon’ble Delhi High Court held as under:-
“43. The final question that arises for this Court's determination in the present appeal is the assessee's claim for deduction under Section 36(1)(ii) of the Act in respect of the bonus paid by it to its two shareholders – Ashish Dhawan and Kunal Shroff. The lower authorities denied such claim, holding that the bonus was paid to the shareholders in lieu of dividend with the objective of avoiding tax. Such inference was drawn from two facts: a) the bonus paid was in proportion of their shareholding in the assessee company, i.e. 2:1; and b) no dividend had been declared by the assessee. However, a perusal of an excerpt from the DRP's order dated 21.09.2012 quoted by the AO in his order dated 19.10.2012 contradicts both these facts: a) bonus was not paid in the ratio of 2:1 and b) the assessee had declared interim dividend of Rs. 5,47,47,000/-. Further, the bonuses paid to the two shareholder directors in the preceding two financial years were in the ratio of 60-65%: 40-35%, even though their shareholding was 1:1. The balance sheet of the assessee placed on record also indicates that the two shareholders also hold directorial positions in the assessee. Therefore, the assessee's contention that the bonus was paid to the shareholders in their managerial capacity, like in the case of other managers, cannot be questioned merely on the basis of a speculation by the revenue that such payment was to avoid tax. In such circumstances, the deduction under Section 36(1)(ii) in respect of payment of bonus to the two shareholder directors is allowed. The assessee has relied upon a number of judicial pronouncements to support its contention. However, we do not consider it necessary to discuss those decisions for ruling in its favour. Therefore, this question is answered in favour of the assessee.
19. The learned Authorized Representative for the assessee has placed reliance on series of decisions. The Hon’ble Delhi High Court in AMD Metplast Pvt. Ltd. Vs. DCIT (supra) has laid down the ratio that where commission was paid as part and parcel of salary and TDS was deducted and where the director was liable to pay tax on both the salary and component in the commission, no disallowance was warranted under section 36(1)(ii) of the Act on the surmise that the dividend had to be paid to the shareholders in terms of the Companies Act. The Hon’ble High Court further held that dividend is a return on investment and not salary or part thereof. Herein, the consideration in the form of commission which was paid to Ashok Gupta was for services rendered by him as per the terms of appointment as a Managing Director.
20. Similar proposition has been laid down by the Hon’ble Delhi High Court in CIT Vs. Convertech Equipments Pvt. Ltd. (2012) 83 CCH 101 (Del), wherein if the commission was found to be paid for services rendered by the director, then the same cannot be said to be distribution of dividend or profits in the guise of commission. Where commission was paid as a form of remuneration for actual services rendered, the dividend was a return on investment and was to be paid to all the shareholders equally. It was thus, held that if the commission was paid for actual services rendered, provisions of section 36(1)(ii) of the Act would not apply.
21. Another aspect to be kept in mind while allowing the claim of the assessee is that where the commission has been paid to the directors and the taxes have been paid by the said directors on its income, then no disallowance is warranted in the hands of the assessee company. The Hon’ble Bombay High Court in CIT. Vs. Indo Saudi Services (Travel) Private Limited (supra) have laid down the proposition that where the payee has been paid incentive commission, then there is no tax avoidance and hence, no disallowance under section 40A(2)(b) of the Act. Applying the same simili to the facts of the present case, the assessee company had paid the commission to the directors, who in turn had declared the same in their individual return of income, on which taxes have been paid and applying the simili laid down by the Hon’ble Bombay High Court in such circumstances, no disallowance was warranted in the hands of payer as there was no attempt to avoid tax.
22. The CIT(A) while disallowing the claim of assessee had found support from the ratio laid down by the Mumbai Special Bench of Tribunal in Dalal Broacha Stock Broking (P) Ltd. Vs. Addl.CIT (supra). The Delhi Bench of Tribunal in K.L. Concast Pvt. Ltd. Vs. Addl.CIT (supra) while deciding the issue of commission paid to the managing director and its allowability under section 36(1)(ii) of the Act, observed that where the commission was treated as part and parcel of salary by the assessee company as well as the managing director and tax deduction was made under section 192 of the Act treating the commission as part of salary, then the disallowance of commission paid to managing director was not justified by applying the provisions of section 36(1)(ii) of the Act. Reliance in this regard was placed on the ratio laid down by the jurisdictional High Court in AMD Metplast Pvt. Ltd. Vs. DCIT (supra). In view thereof, the reliance placed upon by the Revenue on ratio laid down by the Mumbai Special Bench of Tribunal in Dalal Broacha Stock Broking (P) Ltd. Vs. Addl.CIT (supra) was held to be not correct, in view of the decision of Hon’ble High Court, which was binding on all the subordinate Courts and Tribunals working within the jurisdiction of such High Court. The decision of Mumbai Special Bench of Tribunal is not binding, in view of the ratio laid down by the Hon’ble Delhi High Court in series of decisions as referred to by us in the paras hereinabove and consequently, we find no merit in the reliance placed upon by the CIT(A).
23. In the totality of the above said facts and circumstances, we hold that the assessee is entitled to the claim of deduction on account of commission paid to the directors for the services rendered by them at Rs. 1 crore. Accordingly, we direct so. The grounds of appeal raised by the assessee are thus, allowed. 24. The facts and issue raised in ITA No.1767/PN/2013 are identical to the facts and issues in ITA No.2201/PN/2012 and following the same parity of reasoning, we hold that the assessee is entitled to the claim of deduction on account of commission of Rs. 1.10 crores.
25. Now, coming to the appeal filed by the Revenue in ITA No.2280/PN/2012.
26. The only issue raised in the said appeal is against the deletion of addition of Rs. 74,66,434/-.
27. Briefly, in the facts of the issue raised by the Revenue, the assessee had claimed deduction on account of expenditure incurred on construction of road and RCC chambers at Rs. 74,66,434/- i.e. the construction of road at Rs. 36,02,535/- and construction of RCC chambers at Rs. 45,55,000/-. The Assessing Officer made an addition of Rs. 74,66,434/- on account of alleged under estimation of work in progress by calculating work in progress at Rs. 2.37 crores as against work in progress shown by the assessee at Rs. 1.63 crores. The Assessing Officer made the said addition as per his observations in para 6.8 (VIII) at page 15 of the assessment order.
28. Before the CIT(A), the contention of the assessee was that from the assessment order, it could not be inferred as to on what account, the Assessing Officer had made the addition. The explanation of the assessee before the CIT(A) is incorporated under paras 7.2 to 7.4 at pages 22 to 25 of the appellate order. The CIT(A) vide paras 7.5 and 7.6 deleted the aforesaid addition, against which the Revenue is in appeal.
29. The contention of the learned Departmental Representative for the Revenue before us was that the aforesaid amount was disallowed by the Assessing Officer as the same was not added to the work in progress. The amount was picked up from RA Bill.
30. The learned Authorized Representative for the assessee pointed out that the Assessing Officer had allowed the deduction on account of other roads constructed by the assessee except the road from Rigaon to site. Our attention was drawn to the details furnished at page 98 of the Paper Book. It was further clarified by the learned Authorized Representative for the assessee that the said road would not be the asset of the assessee company after the project was completed. In respect of second expenditure on RCC chambers, the learned Authorized Representative for the assessee explained that the same were constructed but because of the review of the project and later recommendations, the said RCC chambers were demolished, for which necessary details were filed by the assessee.
31. We have heard the rival contentions and perused the record. The issue arising before us is in relation to the expenditure incurred on construction of road from Rigaon to site at Rs. 36,02,535/- and expenditure on RCC chambers of Rs. 45,50,000/-. The Assessing Officer had re-computed the work in progress of the assessee by including the aforesaid amounts as part of work in progress. However, the claim of the assessee was that the said expenditure was allowable as revenue expenditure and could not be included in the work in progress. The CIT(A) vide paras 7.5 and 7.6 observed as under:-
“7.5 I have carefully considered the facts of the case and rival contentions. On perusal of the same it has been noticed that the A.O. has made the addition on account of difference in WIP worked out by him by treating the expenditure of Rs. 36,02,535/- on construction of road from Rigaon to site as work in progress and by treating RCC chamber expenditure of Rs. 45,55,000/- as expenditure forming part of WIP. It has been held in the preceding paragraph that the construction of site road is not capital expenditure and the same is allowable as revenue expenditure. The A.O. has held that the site road from Rigaon is to be included in W.I.P. In this regard the appellant has pointed out that the contractee is not required to pay any consideration towards site road and hence the said expenditure cannot form the part of W.I.P. This contention of the appellant is supported by tender document. In view of the above facts, I am of the considered view that the A.O. is not justified in making the addition of Rs. 36,02,535/- by holding that the site road is to be included in WIP. The addition of Rs. 36,02,535/- is therefore, deleted.
7.6 As regards the expenditure on RCC chambers, it has been noticed that the appellant has incurred the expenditure of Rs. 45,55,000/- and paid the same to the sub-contractor M/s.SMPL, who carried out the said work. As per the standard practice all the irrigation projects are to be approved by Central Design Organization, Nashik i.e. CDO, Nashik. The CDO has reviewed the irrigation projects and recommended latest surge protection devices, which needed to be imported from abroad. As per the recommendation of the,CDO, Nashik the revised Board Conceptual Layout (BCL) was finalized on 10/2/2009 with deletion of delivery chambers and on later date, the appellant was informed about the revised BCL. In support of the above claim the appellant has filed copy of Boards Conceptual Design, with relevant letters and enclosures. In view of the above facts the contention of the appellant that the expenditure incurred by the appellant on RCC Chambers is lost and cannot be included in WIP as at 31/3/2009 is found to be correct and hence accepted. The addition of Rs. 44,55,000/- is therefore, deleted.”
32. The learned Departmental Representative for the Revenue has failed to controvert the findings of CIT(A) and in the totality of the above said facts and circumstances, we find no merit in the grounds of appeal raised by the Revenue and the same are dismissed.
33. In the result, appeals of the assessee are allowed and appeal of the Revenue is dismissed.