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2014 (8) TMI 989 - AT - Income TaxDisallowance of commission paid to Directors of the company - whether not an allowable expenditure within the meaning of section 36(1)(ii) as well as section 37(1)? - CIT(A) deleted the addition - Held that - As per the proposition laid down by the Jurisdictional High Court in the case of Metaplast P. Ltd. Vs. DCIT (Delhi) 2011 (12) TMI 320 - Delhi High Court Section 36(1)(ii) is not attracted if the payment of commission is part of salary paid by the company in terms of the appointment order which is approved at the Annual General Meeting. In the case of one hand the commission in question is paid as per the terms of appointment and has been approved at the Annual General Meeting of the company held on 15.09.2004. The Annual General Meeting approved the remuneration package of (1) Mr. H.L. Khushalani (2) Mr. Vivek Khushalani and (3) Mrs. Raksha Walia w.e.f. 01.04.2004.The approval was granted in accordance with the provisions of Sections 198 269 309 310 and Schedule XIII of the Companies Act 1956. Perusal of the resolution demonstrate that the commission in question is nothing but another form of salary which is paid for service rendered. Thus the order of the ld. CIT(A) has to be upheld. Also see CIT-1 Vs. Convertech Equipments Pvt. Ltd 2012 (12) TMI 451 - DELHI HIGH COURT - Decided against revenue.
Issues:
1. Allowability of commission paid to directors who are also shareholders of the company under Section 36(1)(ii) and Section 37(1) of the Income Tax Act, 1961 for A.Y. 2004-05 and A.Y. 2005-06. Analysis: 1. The Revenue challenged the deletion of the addition of commission paid to directors as an allowable expenditure under Section 36(1)(ii) and Section 37(1) of the Income Tax Act, 1961. 2. The Assessing Officer disallowed the commission paid to directors who were also shareholders of the company, considering it as a means to reduce net profits and avoid tax liability. The AO relied on Section 36(1)(ii) which allows deductions for sums paid as bonus or commission unless they would have been payable as profits or dividends. 3. The First Appellate Authority held that the commission paid to directors was part of their remuneration and not profits or dividends, thus allowing the deduction under Section 37(1) of the Act. The FA also emphasized that the AO failed to establish that the commission was payable as profits or dividends. 4. The ITAT upheld the FA's decision citing the case law of Metaplast P. Ltd. vs. DCIT, where it was established that if the commission is part of the salary as per the appointment order approved at the AGM, Section 36(1)(ii) is not attracted. The approval of remuneration for directors was in compliance with the Companies Act, and the commission was considered a form of salary for services rendered. 5. Referring to the decision in CIT-1 vs. Convertech Equipments Pvt. Ltd., the ITAT reiterated that if the commission is paid for actual services rendered, it does not fall under Section 36(1)(ii). The ITAT dismissed the reliance on the Special Bench decision of M/s Dalal Broacha Stock Broking Pvt. Ltd., as the jurisdictional High Court's decision was binding. 6. The objection regarding the unavailability of the Board resolution for A.Y. 2005-06 was dismissed as the resolution was produced during the proceedings. The ITAT upheld the FA's decision for both assessment years, concluding that the commission paid to directors was allowable under Section 37(1) of the Act. 7. Consequently, the ITAT dismissed the appeals filed by the Revenue, affirming the decision to allow the deduction of the commission paid to directors who were also shareholders of the company for both A.Y. 2004-05 and A.Y. 2005-06.
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