2015 (4) TMI 1318 - AT - Income Tax

Disallowance u/s.36(1) (ii) being commission paid to the Managing Director of the assessee company - HELD THAT - As decided in TRUE VALUE HOMES (INDIA) PVT. LTD. 2013 (3) TMI 858 - ITAT CHENNAI CIT(Appeals) concluded that section 36(1)(ii) is not applicable to the payment made by the assessee to its managing director. CIT(Appeals) further, relying on the decision of Gestener Duplicators(P) Ltd. 1978 (12) TMI 1 - SUPREME COURT held that the commission paid to Shri Ravichandran, the managing director of the assessee-company, is part of the salary. The only thing is that the commission has been paid on the basis of the turnover; but still the payment was in the nature of salary for services rendered by Shri Ravichandran. CIT(Appeals) also held that there is no force in the argument of the AO that no marketing efforts are necessary to sell the flats constructed by the assessee, as the assessee-company enjoys a very famous brand-name. CIT(Appeals) concluded that this finding is without any basis. As observed that even famous companies having valuable brand-names have to incur huge expenditure for marketing and there is no reason to hold that the assessee would get business without any marketing efforts. Disallowance made by the AO was not justified and accordingly deleted the addition - Decided in favour of assessee.

Summary

Issues involved:
Disallowance under section 36(1)(ii) for commission paid to managing director.

Analysis:
The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-III, Chennai, regarding the disallowance under section 36(1)(ii) for commission paid to the managing director of the assessee company. The Revenue contended that the disallowance was erroneously deleted by the CIT(A). The Tribunal referred to a previous order in the assessee's own case where it was held that the sum paid to an employee as bonus or commission for services rendered would not be allowed as a deduction if such payment would not have been payable to him as profits or dividend. The Tribunal analyzed the three limbs of section 36(1)(ii), emphasizing that the sum paid must be to an employee, in the nature of bonus or commission, and otherwise payable as profit or dividend to the recipient.

The CIT(A) had found that the managing director of the assessee company was not an employee but a permanent director holding a significant share in the company. The Tribunal concurred with the CIT(A) that the managing director was not an employee under various labor welfare Acts. It was established that the managing director was not entitled to profits or dividends of the company, thus the deduction under section 36(1)(ii) was not applicable to the payment made to him. The CIT(A) also relied on a Supreme Court decision to determine that the commission paid to the managing director was part of his salary for services rendered, even though it was based on turnover. The Tribunal upheld the CIT(A)'s decision and dismissed the appeal of the Revenue, affirming that the disallowance made by the Assessing Officer was not justified.

In conclusion, the Tribunal dismissed the appeal filed by the Revenue, upholding the decision of the CIT(A) to delete the disallowance of the commission paid to the managing director. The order was pronounced on April 8, 2015, in Chennai.