2011 (12) TMI 591 - HC - Income Tax

Addition as commission and bonus to the directors - there was non-compliance and violation of the provisions of Section 36(1)(ii) - whether the respondent company was avoiding payment of dividend distribution tax @ 13.5% under Section 115O of the Act - Held that - The Managing Director and the two Directors of the respondent company were paid bonus and commission of ₹ 77,37,965/-. The aforesaid amount as per the provisions of the Act was treated as salary paid and TDS was deducted. As per the findings recorded by the tribunal, the said Directors have paid tax in the highest tax bracket. The tribunal has rightly noticed that dividend has to be paid to all shareholders equally as per the provisions of the Companies Act, 1956. The said position cannot be disputed by the Revenue. The respondent company is a closely held company and it is accepted that all shareholders are not directors in the respondent company. It may be also noted that the directors in question, were working directors and had contributed to the earnings/profit earned by the company respondent. A non-working director or a mere shareholder does not contribute and put in efforts or labour towards earning of profits. A shareholder merely makes an investment and contributes to the share capital. It is not the number of shareholders, but the principle which matters. The tribunal has further recorded that the respondent company has been paying commission/bonus to the directors for last 30 years. It is submitted by the Revenue that with regard to the assessment years 2002- 03, 2005-06 and 2007-08, the Revenue had raised objections and disallowed commission/bonus payments made. The tribunal has decided the issue in favour of the assessee in the aforesaid assessment years.

Summary

Issues:
1. Disallowance of commission and bonus under Section 36(1)(ii) of the Income Tax Act, 1961.
2. Dispute regarding payment of dividend distribution tax.
3. Appeal against the order of the Income Tax Appellate Tribunal (ITAT) for the assessment year 2006-07.
4. Treatment of bonus and commission paid to directors as salary.
5. Consistency of commission/bonus payments over the years.
6. Previous objections raised by Revenue and decisions in other assessment years.

Analysis:
1. The Assessing Officer disallowed the payment of &8377; 77,37,965/- as commission and bonus to the directors citing non-compliance with Section 36(1)(ii) of the Act. It was alleged that the company was avoiding dividend distribution tax under Section 115O of the Act. The Commissioner of Income Tax (Appeals) upheld this disallowance, which was later reversed by the tribunal.

2. The tribunal found that the respondent company had declared income, earned profits, and distributed dividends in accordance with the Companies Act, 1956. The directors receiving bonus and commission were actively involved in the company's operations and had contributed to its profits. The tribunal emphasized the principle that dividend should be distributed equally among all shareholders, noting that not all shareholders were directors actively involved in the company's management.

3. The tribunal highlighted the company's consistent practice of paying commission and bonus to directors for the past 30 years. The Revenue had previously raised objections and disallowed such payments in other assessment years, but the tribunal had ruled in favor of the assessee. A specific appeal related to the assessment year 2005-06 had been dismissed by the High Court, further supporting the consistency in the treatment of such payments.

4. Considering the facts and the principles involved, the High Court found no merit in the Revenue's appeal for the assessment year 2006-07. The appeal was dismissed without any order as to costs, affirming the tribunal's decision in favor of the respondent company regarding the treatment of commission and bonus paid to directors.

This detailed analysis of the judgment provides a comprehensive overview of the issues involved, the arguments presented, and the final decision rendered by the High Court.