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2012 (7) TMI 788 - AT - Income TaxDisallowance u/s section 36(1)(ii) - bonus and commission payment to the Managing Director as payment in lieu of dividend - payment is for services rendered as per terms of appointment as Executive/Managing Director of the appellant company assessee contended that the bonus and commission paid to Managing Director was a regular business expenditure of the company and the assessee has been paying it regularly for the last 20 years Held that - In the case of AMD Metplast Pvt. Ltd. (2011 (12) TMI 320 (HC) ) it was held that the amount of commission and bonus paid to the Managing Director was an allowable business expenditure - facts for are same - Therefore, appeals filed by the assessee are allowed - decided in favour of the assessee.
Issues:
- Disallowance of bonus and commission payment to Managing Director under section 36(1)(ii) of the Income Tax Act, 1961. - Commercial expediency and reasonableness of the bonus and commission payments. - Interpretation of relevant legal provisions and precedents regarding the allowability of such payments. Issue 1: Disallowance of bonus and commission payment under section 36(1)(ii): The appellant, a private limited company, filed appeals against orders disallowing bonus and commission payments to its Managing Director for assessment years 2006-07, 2007-08, and 2008-09. The Assessing Officer disallowed the payments under section 36(1)(ii) of the Income Tax Act, 1961, stating that the amounts were diverted from profits otherwise payable as dividends. The CIT(A) upheld the disallowance, citing lack of commercial expediency and reasonableness in the payments. The appellant argued that the payments were part of the Managing Director's salary, supported by resolutions and past practices. The ITAT referred to precedents and legal provisions to analyze the allowability of such payments. Issue 2: Commercial expediency and reasonableness of bonus and commission payments: The appellant contended that the bonus and commission payments were regular business expenditures and justified by the Managing Director's services. The Assessing Officer and CIT(A) raised concerns about the lack of commercial expediency and reasonableness in the payments, emphasizing the substantial shareholding of the Managing Director. The appellant cited past practices and resolutions to support the payments' commercial nature. The ITAT considered the arguments and examined whether the payments were in line with business practices and the Director's services. Issue 3: Interpretation of legal provisions and precedents: The ITAT analyzed relevant legal provisions, including section 36(1)(ii) of the Income Tax Act, 1961, and precedents such as the AMD Metplast Ltd. case. The appellant relied on judicial decisions supporting the allowability of such payments as business expenditures. The ITAT referred to the judgment of the Hon'ble Delhi High Court in the AMD Metplast Ltd. case, which held that commission paid to a Managing Director for services rendered was an allowable business expenditure. Based on this interpretation and the similarities with the present case, the ITAT allowed the appeals in favor of the appellant for all three assessment years. In conclusion, the ITAT ruled in favor of the appellant, allowing the appeals and holding that the bonus and commission payments to the Managing Director were allowable business expenditures. The judgment highlighted the importance of commercial expediency, reasonableness, and legal interpretations in determining the tax treatment of such payments, aligning with relevant legal provisions and judicial precedents.
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