2012 (6) TMI 113 - HC - Income Tax

Commission paid to Directors - dis-allowance on ground that commission payment was unjustified since gross profit of the company declined, and directors were getting sufficient remuneration and there was no ground to pay commission - Held that - Assessing Officer cannot decide what the assessee should do and pay. Disallowances can be made u/s 40A(2), when warranted and required and when the conditions of the said section are satisfied. Commission paid to the Managing Director /Director was in accordance with the provisions of the Companies Act, 1956 - Decided in favor of assessee.

Summary

Issues:
Assessment of commission paid to directors for the assessment year 2004-05.

Analysis:
The appeal by the Revenue challenges the order passed by the Income Tax Appellate Tribunal concerning the commission paid to the directors of The India Thermit Corporation Ltd. The grounds of appeal mention a commission amount claimed as expenditure in the profit and loss account. However, it was revealed that a portion of the commission was added back as it was paid to foreign directors without tax deduction at source.

The Assessing Officer contended that the commission payment was unjustified due to a decrease in the company's gross profit and opined that the directors were adequately remunerated for their regular duties without the need for additional commission. This reasoning was deemed fallacious as the Assessing Officer cannot dictate the payment decisions of the assessee. The respondent-assessee had declared a total taxable profit for the assessment year, highlighting the historical modifications in director remuneration based on business needs, economic factors, and services rendered. The payment of commission to the Managing Director/Directors was in compliance with the Companies Act, 1956, and had been allowed in previous years.

The High Court upheld the findings of the CIT (Appeals) and the tribunal, concluding that the commission paid to the directors was legitimate and in accordance with legal provisions. The appeal was dismissed without costs.