2012 (7) TMI 99 - AT - Income Tax

Salary versus Commission - Treating the commission paid by the assessee as salary by CIT(A) even though it was reflected as commission in his books of account - Revenue contested that CIT ignored the provisions of section 194H r.w.s 40(a)(ia) - the assessee firm was engaged in the trading of mobile and fixed phone connections on commission basis - Held that - The payment of salary is in line with the specific condition contained in the appointment letter. That being so, the AO obviously erred in observing that the stand taken by the assessee was a mere after-thought so as to avoid taxability. The employees of the assessee firm were given training with the probation period of six months. Thereafter, the employee was to activate the connections sold by the assessee. The payment was as per the activated connections. Section 17 (1)(iv) provides for salary to include, inter alia, any commission in view of or in addition to any salary. The payment in the present case being on the basis of the activated connections, was a part of salary - as the payments in question are covered within the definition of salary in terms of section 17 it cannot be hit by the provisions of section 194 H - against revenue.

Summary

Issues:
1. Whether commission paid by the assessee should be treated as salary.
2. Whether provisions of section 194 H and section 40(a)(ia) of the Act are applicable in this case.

Detailed Analysis:
Issue 1:
The Department appealed against the order of the ld. CIT(A) for the assessment year 2006-07, arguing that the commission paid by the assessee should not be treated as salary, as contended by the CIT(A). The assessee firm was involved in trading mobile and fixed phone connections on a commission basis. The AO disallowed commission expenses of Rs. 10,33,985/- without tax deduction under section 40(a)(ia) of the Act, stating that the commission was actually paid to sales agents, who were considered employees. However, the ld. CIT(A) deleted the addition/disallowance, leading to the Department's appeal.

Issue 2:
The Department challenged the CIT(A)'s decision, claiming that the provisions of section 194 H of the Act should apply, and the commission payment should not be treated as salary. The Department argued that the commission payment was reflected as such in the books of account, and section 194 H should be considered. On the other hand, the assessee's counsel argued that the payment was made to employees based on activated connections, as per the appointment letters, and should not be considered as commission. The counsel also cited a relevant decision of the Special Bench of the Tribunal.

Judgment:
The Tribunal analyzed the facts and determined that the payment made to employees was in accordance with the specific conditions mentioned in the appointment letters, based on the activation of connections. The Tribunal found that the payments were part of the employees' salary, as per section 17(1)(iv) of the Act, and not subject to section 194 H. The Tribunal upheld the CIT(A)'s decision, concluding that the payments fell within the definition of "salary" and dismissed the Department's appeal, deeming it without merit. The appeal filed by the Department was ultimately dismissed by the Tribunal.