2011 (12) TMI 320 - HC - Income Tax

Whether the Tribunal is right in holding that commission of Rs.25,00,000 paid to Mr. Ashok Gupta, managing director of the assessee, cannot be allowed as a deduction in view of section 36(1)(ii) of the Income-tax Act, 1961, and the said amount can be only allowed under section 36(1)(ii) if dividend of Rs. 25,00,000 could not have been paid to Mr. Ashok Gupta - Ashok Gupta is the managing director and in terms of the board resolution is entitled to receive commission for services rendered to the company - . Ashok Gupta was liable to pay tax on both the salary component and the commission. Payment of dividend is made in terms of the Companies Act, 1956 - Decided in favor of the assessee

Summary

Issues:
1. Interpretation of section 36(1)(ii) of the Income-tax Act, 1961 regarding the deduction of commission paid to a managing director.
2. Whether commission paid to the managing director can be considered as an allowable expense under section 36(1)(ii) if dividend could not have been paid to him.

Analysis:

Issue 1:
The case involved a dispute over the deduction of commission paid to the managing director of the appellant company under section 36(1)(ii) of the Income-tax Act, 1961. The Assessing Officer disallowed an amount of Rs. 41,20,000 paid to the managing director, citing a violation of the Act. However, the Commissioner of Income-tax (Appeals) deleted this addition, stating that the commission paid was for services rendered and allowable. The Tribunal, on appeal by the Revenue, held that the commission paid could not be allowed as an expense under section 36(1)(ii) unless dividend to the extent of the commission was not payable to the managing director. The Tribunal directed the computation of dividend payable and disallowance under section 36(1)(ii), allowing the difference as a deduction under section 37(1) of the Act.

Issue 2:
The second issue revolved around whether commission paid to the managing director could be considered as an allowable expense under section 36(1)(ii) if dividend could not have been paid to him. The Tribunal observed that the payment of commission should only be allowed if any balance amount was left after paying dividends. The Tribunal directed the computation of dividend payable as per the Companies Act and disallowed the commission to the extent of the profit that would have been payable as dividend. The Tribunal allowed the difference between the commission paid and the dividend payable as a deduction under section 37(1) of the Act, subject to fulfilling the requirements of the said section.

In conclusion, the High Court answered the substantial question of law in the negative and in favor of the assessee, allowing the appeal. The Court emphasized that the commission paid to the managing director was for services rendered as per the terms of employment, and dividend payment was a separate matter under the Companies Act. The Court held that the commission was a part of the managing director's salary and was subject to tax, while dividend was a return on investment for all shareholders equally.