2014 (12) TMI 209 - AT - Income Tax

Disallowance u/s 40(a)(ia) TDS not deducted on commission paid to directors - Held that - The assessee has paid Commission to the 4 directors on which no TDS has been deducted for which the AO disallowed the same u/s.40(a)(ia) which has been upheld by the CIT(A) the contention of the assessee is accepted that the assessee has made payment to its employee directors not for selling any goods or articles but for managing the affairs of the assessee company - The amount is not paid for selling any particular goods/articles and therefore the amount paid by the assessee company to its directors does not come within the ambit of provisions of section 194H - Merely because the directors have shown the said commission income in their hands as income from other sources , it cannot be a ground to exclude the commission paid to the directors from the ambit of salary - the commission paid to the directors should be treated as salary in their hands and treated accordingly and the provisions of section 40(a)(ia) are not applicable. Relying upon Jahangir Biri Factory (P) Limited. Versus Deputy Commissioner Of Income-Tax 2009 (3) TMI 215 - ITAT CALCUTTA-C wherein it has been held that the commission paid to directors as per terms of employment for the work done in their capacity as whole time directors is to be treated as incentive in addition to salary etc. and did not come within the purview of commission and brokerage as defined in section 194H or fee for professional or technical services as defined in section 194J and therefore the same cannot be disallowed u/s.40(a)(ia) - one of the director Shri Mahendrapal Tank has claimed an expenditure against the receipt of commission - once the commission paid to the directors is held as part of salary income, the Director is not entitled to claim any expenditure from such salary income Decided partly in favour of assessee.

Summary

Issues:
Challenge to addition of disallowance u/s.40(a)(ia) of the I.T. Act.

Detailed Analysis:

Issue 1: Addition of Disallowance u/s.40(a)(ia) of the I.T. Act

Analysis:
The case involved a Private Limited Company engaged in steel re-rolling appealing against the addition of Rs. 18,75,000 on account of disallowance u/s.40(a)(ia) of the I.T. Act. The Assessing Officer disallowed the amount as TDS was not deducted from the commission paid to the company's directors. The company argued that the commission was part of the directors' salary as per section 17(1)(iv) and the resolution passed by the board. However, the CIT(A) upheld the disallowance stating that the commission was not part of the directors' salary based on their income tax returns and TDS deductions. The company appealed, emphasizing that the commission should be treated as salary income, not subject to section 40(a)(ia).

In its analysis, the tribunal noted the provisions of section 17(1)(iv) which include fees, commissions, etc., in the definition of salary. It also considered the definition of commission or brokerage under section 194H. The tribunal agreed with the company's argument that the payment to directors was for managing the company, not for buying or selling goods, thus not falling under section 194H. Citing precedents, the tribunal held that the commission paid to directors should be treated as salary income and not subject to disallowance u/s.40(a)(ia). The tribunal directed the Assessing Officer to rectify the claim of expenditure by one director against the commission income.

Ultimately, the tribunal partly allowed the appeal, ruling in favor of the company regarding the treatment of commission as salary income and not subject to disallowance under section 40(a)(ia).

This comprehensive analysis highlights the legal arguments, interpretations of relevant sections, and the tribunal's reasoning leading to the final decision in the case.

This detailed analysis provides a thorough understanding of the legal judgment, including the issues involved, arguments presented, relevant legal provisions, and the final decision reached by the tribunal.