2012 (12) TMI 451 - HC - Income Tax

Payment of commission to the directors - applicability of Section 36(1)(ii) - reassessment u/s 148 / 148 - held that - The fact of payment of commission to the directors and the fact that they were major shareholders were already on record and the assessing officer gathered these facts only from the perusal of the assessment record. The Tribunal has accordingly held that the reopening of the assessment made after four years from the end of the relevant assessment year, where the original assessment was framed under section 143(3), was invalid. It has not been pointed out before us on behalf of the revenue that these findings of fact are erroneous or were contrary to the material on record. - Decided in favor of assessee.

Summary

Issues:
1. Disallowance of commission paid to directors under Section 36(1)(ii) of the Income Tax Act, 1961.
2. Validity of reopening the assessment under section 147 of the Income Tax Act, 1961.

Analysis:

Issue 1: Disallowance of Commission Paid to Directors
The assessing officer disallowed the commission paid to two directors who were also major shareholders of the company, under Section 36(1)(ii) of the Income Tax Act, 1961. The CIT (Appeals) set aside the disallowance for the assessment year 2002-03 and held the reopening of the assessment for 2003-04 was without jurisdiction. The Tribunal upheld the appeal for 2002-03, stating that the disallowance was not justified. For 2003-04, the Tribunal found that the reassessment was without jurisdiction as the assessee had fully disclosed all material facts, and the assessing officer failed to establish any non-disclosure leading to escaped assessment. The High Court agreed with the Tribunal's findings, stating no substantial question of law arose regarding the disallowance under Section 36(1)(ii) for 2002-03.

Issue 2: Validity of Reopening Assessment
The Tribunal found that the assessee had provided full and true particulars during the original assessment under section 143(3) for the assessment year 2003-04. As the reassessment was initiated more than four years after the end of the relevant assessment year and no failure to disclose material facts was established, the Tribunal deemed the reopening of the assessment invalid. The High Court concurred with the Tribunal's decision, stating that no substantial question of law arose from the order regarding the validity of reassessment for 2003-04. As the Tribunal did not address the merits of the disallowance under Section 36(1)(ii) for this year due to the invalidity of the reassessment, the second question of law was not considered.

In conclusion, the High Court dismissed the appeals and pending applications, upholding the Tribunal's decisions regarding the disallowance of commission paid to directors and the validity of the reassessment for the respective assessment years. The Court's decision was supported by previous judgments emphasizing that commission paid for actual services rendered by directors does not fall under the purview of Section 36(1)(ii) if it is in accordance with the terms of their appointment and not a distribution of profits or dividends.