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2012 (5) TMI 217 - AT - Income TaxAvoidance of Dividend Distribution tax - commission paid to director - allegation of avoidance of DDT - Disallowance u/s 36(1)(ii) - whether commission is paid in lieu of dividend - held that - The AO s conclusion that the corpus for paying the dividend had reduced does not reflect the correct legal position with reference to section 36(1)(ii). Whenever any commission is paid to an employee it is bound to reduce the corpus available for distribution as dividend. But that ipso-facto cannot be the basis for holding that commission is in lieu of dividend. All the facts and circumstances of the case have to be taken into consideration for arriving at right conclusion. It cannot be disputed that the company as well as Ms. Renu Munjal were bracketed in the highest income tax slab and the only effect was on account of saving dividend distribution tax to the company which was very minimum keeping in view the overall profits of the company. This cannot be held to be device for reducing the overall tax effect in the case of company. It is not disputed that had the commission not being paid to Mrs. Renu Munjal, she would not have received dividend to the extent of Rs. 39 lacs because her holding was only .1%. The dividend would have been much less than the commission actually paid to Mrs. Renu Munjal. Thus, sum of Rs. 39 lacs, in any case, would not have been paid to Mrs. Renu Munjal as profits or dividend if it had not been paid as commission. Following the decision in the case of Loyal Motor Service Company Limited vs. CIT, decided in favor of assessee.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961. 2. Disallowance under Section 36(1)(ii) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A: The assessee had earned dividend income of Rs. 6,79,767/-, which was claimed as tax-free. The AO required the assessee to submit details of expenses incurred to earn this dividend. The assessee claimed that no cost was incurred. However, the AO disallowed Rs. 2,37,918/- as expenditure for earning the dividend, based on a ratio of dividend receipt to total receipts. The CIT(A) restricted this disallowance to Rs. 50,000/-. The Tribunal noted that Rule 8D was not applicable for the assessment year in question. The Tribunal, following the decision in Maxopp Investment Ltd. vs. CIT, consistently restored such matters to the AO for quantifying the expenditure on a reasonable basis. The Tribunal agreed with the DR that no rider could be put on the AO while deciding the issue. Consequently, the Tribunal restored the matter to the AO to quantify the expenditure incurred for earning the dividend on a reasonable basis. 2. Disallowance under Section 36(1)(ii): The assessee claimed expenses on account of commission to a director amounting to Rs. 39 lacs. The AO disallowed this claim under Section 36(1)(ii), stating that the commission was paid in lieu of distribution of profits as dividends, thereby avoiding dividend distribution tax. The CIT(A) upheld the AO's decision. The assessee argued that the commission was paid as remuneration for services rendered and was not otherwise payable as profit or dividend. The commission was part of the director's remuneration package, approved by the Board of Directors and shareholders. The assessee also pointed out that the director held only 0.1% of the shares, and the commission was paid in accordance with the terms of employment. The Tribunal noted that the AO did not dispute the services rendered by the director but concluded that the commission was paid in lieu of dividends, reducing the corpus available for distribution as dividends. The Tribunal emphasized that Section 36(1)(ii) mandates that if the commission was not paid, the amount would have been payable as dividends, creating an overriding condition for refusing the allowance. The Tribunal observed that the commission was part of the remuneration package, creating an overriding title in favor of the director. The Tribunal found that the declared profits were Rs. 42 crores, and dividends were paid to all shareholders, including the director. The Tribunal concluded that the commission paid to the director was not in lieu of dividends, as the director's shareholding was only 0.1%, and the commission amount exceeded the potential dividend. The Tribunal referred to the decision in CIT vs. M/s Bony Polymers Pvt. Ltd., where it was held that the commission paid was not in lieu of dividends. The Tribunal distinguished the present case from the decision in Dalal Broacha Stock Broking P. Ltd., where the commission was paid to directors who owned the entire capital of the company. The Tribunal concluded that the assessee's claim should be allowed, as the commission was not paid in lieu of dividends. The appeal was partly allowed for statistical purposes. Conclusion: The Tribunal restored the matter regarding the disallowance under Section 14A to the AO for quantification of expenditure on a reasonable basis. The Tribunal allowed the assessee's claim regarding the disallowance under Section 36(1)(ii), concluding that the commission paid was not in lieu of dividends. The appeal was partly allowed for statistical purposes.
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