Whether brokerage can be paid to Directors of the assessee-company in case of sale of its property and same is deductible as transfer expenses from capital gains arising out of such transfer - NO: ITAT

THE issue before the Bench is - Whether brokerage can be paid to Directors of the assessee-company in case of sale of its property and the same is deductible as transfer expenses from the capital gains arising out of such transfer. NO is the verdict.

Facts of the case

During assessment proceedings the AO 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, which were claimed as transfer expenses. The AO observed that director of the company cannot be acting as property 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.

On appeal, it was mainly submitted that for selling property, commission / brokerage is required to be paid. Since the property dealers could not arrange for the sale of said property for a long time, therefore, Board of Directors of the company withdrew the offer from the property dealers and entrusted the job of finding of customers to the Directors. The Directors successfully 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.

The CIT(A) found force in the submissions of the assessee and allowed their appeal.

On appeal by the Revenue, the Tribunal held that,

++ from the list of shareholders, it becomes quite clear that it is a closely held company. The total issued and paid up shares are 9000 out of which 8695 shares are held by the family 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 easy to pass a resolution and appropriate funds of the company by the family members. Therefore, the Board resolution clearly is a self serving document and cannot be relied on for making the claim for payment of commission;

++ 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 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 capacity 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 property of the company if required without any further remuneration;

++ In the present case since the Directors were already in receipt of remuneration as monthly salary, they were duty 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 property. For selling of property, 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 AO or CIT(A) or before ITAT. Similarly, passing the resolution would not help the case of the assessee. In any case merely passing of the resolution will not make the payment of commission as allowable business expenditure. It was very easy for the director to pass resolution because of the majority share holdings to make the directors entitled for receipt of commission;

++ further, the 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;

++ It was also contended that directors have already paid tax by reflecting this commission income at their own hands. This contention has no merit because it is almost settled that treatment given in the hands of the recipients will not determine the allowability of expenses in the hands of payee. The Supreme Court in the case of Empire Jute Co. Ltd. v. CIT (2002-TIOL-238-SC-IT-LB) clearly observed that "the fact that a certain payment constitutes income or capital receipts in the hands of recipient is not material in determining whether the payments is Revenue or capital disbursement qua the payee."

++ 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;

++ 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. There is no force in this contention;

++ the provision of Section 36(1)(ii) clearly 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 ultimately be paid to the directors only by way of dividend;

++ in the instant case, 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. CIT(A) has misdirected himself in allowing the relief by simply observing that there is no bar for any person to act as a property broker. He has totally 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 duty bound to perform the functions which were assigned to them with the remuneration paid to them. Therefore, his order was set aside and restored that of AO.