2009 (11) TMI 658 - AT - Income Tax

Payment to Directors of the company as commission - amount paid for extra-commercial purpose - Disallowance of expenditure within the meaning of section 36(1)( ii ) as well as section 37(1) - HELD THAT - All the facts show that commission payment has been accepted by revenue itself for the purpose of the business of the assessee-company and, thus, there was no question of disallowance of the commission in the year under appeal. It is cardinal principle of law that while judging the commercial expediency of an expense, the matter needs to be looked into from the point of view of the assessee and not from the point of view of revenue only. We do not agree with this. Section 36(1)( ii ) provides that commission will not be allowed as deduction if, had it not been paid so, it would be paid as profits or dividend. There is no basis or material or evidence brought on record by AO to support this contention that the commission would have been paid as dividend to the shareholders. Companies Act, 1956 contains the limitations and restriction in the matter of payment of dividend and such discretion of the company either to pay or not to pay dividend cannot be assumed. AO cannot presume that had this commission not been paid, this would have necessarily been paid as dividend to the shareholders. There is no basis for this assumption. It cannot be ignored that the assessee-company had substantial profits out of which dividend could be declared if assessee-company so wanted. Thus, there is no basis for applicability of section 36(1)( ii ). CBDT Circular No. 551 relied upon by ld. AR clearly states that after amendment of 1989, fact of commission payment alone is essential and its excessiveness can be seen under section 40A(2) only. We find that applicability of section 40A(2) is not the case of Assessing Officer. Even otherwise, commission paid to the directors was part of remuneration of the directors as Supreme Court has held in the case of Gestetner Duplicators (P.) Ltd. 1978 (12) TMI 1 - SUPREME COURT that commission paid as fixed percentage of turnover is nothing but assessable as salary. Thus, section 36(1)( ii ) has got no application. Contention of the assessee is also duly supported in the case of Shahjada Nand Sons 1977 (4) TMI 4 - SUPREME COURT in which held that commission paid to the employees is allowable and there is no need for any contractual obligation or extra services performed by the assessee. Commission payment to the whole-time working directors of the assessee-company disallowed by AO was rightly deleted by CIT(A) and, accordingly, we do not find any infirmity in the order of CIT(A). We, therefore, confirm the order of the CIT(A). Appeal filed by the revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition of Rs. 30 lakhs paid to Directors as commission.
2. Applicability of section 36(1)(ii) and section 37(1) of the Income-tax Act, 1961.
3. Justification of the commission payment to Directors.
4. Commercial expediency and tax avoidance.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 30 Lakhs Paid to Directors as Commission:
The revenue appealed against the order of the Commissioner of Income-tax (Appeals) [CIT(A)] which deleted the addition of Rs. 30 lakhs paid to two Directors as commission. The Assessing Officer (AO) had disallowed this commission, viewing it as payment for extra-commercial purposes and not laid out wholly and exclusively for business purposes.

2. Applicability of Section 36(1)(ii) and Section 37(1) of the Income-tax Act, 1961:
The AO argued that the commission was not an allowable expenditure under sections 36(1)(ii) and 37(1). However, CIT(A) found no evidence supporting the AO's claim that the commission would have been paid as profits or dividends to shareholders, thus rejecting the applicability of section 36(1)(ii). The CIT(A) also noted that the disallowance would result in double taxation, which is not permissible by law.

3. Justification of the Commission Payment to Directors:
The assessee justified the commission payment, stating that the Directors were whole-time working directors and were paid commission at the rate of 0.5% of the turnover. The CIT(A) observed that the sales of the company had increased by 20%, and the income earned by the Directors was taxed at the maximum marginal rate, indicating no tax avoidance motive. The CIT(A) also noted that similar commission payments in previous years were allowed by the revenue.

4. Commercial Expediency and Tax Avoidance:
The CIT(A) and the Tribunal emphasized that the commercial expediency of an expense should be judged from the assessee's perspective, not the revenue's. The Tribunal referenced several case laws supporting the principle that the business's judgment on commercial expediency should be respected unless there is clear evidence to the contrary. The Tribunal concluded that the commission payments were commercially expedient and not for extra-commercial purposes.

Conclusion:
The Tribunal confirmed the CIT(A)'s order, finding no infirmity in the deletion of the Rs. 30 lakhs commission disallowance. The appeal filed by the revenue was dismissed, upholding that the commission paid to the Directors was justified, commercially expedient, and did not violate sections 36(1)(ii) or 37(1) of the Income-tax Act.