PRAKASH CHEMICALS INTERNATIONAL PRIVATE LIMITED,VADODARA vs. ACIT,CENTRAL CIRCLE-3(PREVIOUSLY CIRCLE-2(1)(2)), VADODARA

ITA 2495/AHD/2025Status: DisposedITAT Chandigarh24 September 2026AY 2016-177 pages
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What were the facts?

The assessee, Prakash Chemicals International Private Limited, filed its return of income for Assessment Year 2016-17 declaring a total income of Rs. 9,33,77,620/-. The Assessing Officer (AO) noticed a commission payment of Rs. 96,98,425/- to Shri Manish K Shah, a Director. The AO disallowed this commission, holding it was paid in lieu of dividend and thus not deductible under Section 36(1)(ii) of the Income Tax Act. The AO also made other additions, completing the assessment at Rs. 10,37,86,220/-. The Commissioner of Income Tax (Appeals) partly allowed the assessee's appeal. The assessee is now in appeal before the Income Tax Appellate Tribunal (ITAT) against the CIT(A)'s order dated 16.10.2025.

What did the Tribunal hold?

The Tribunal held that the commission payment to the Managing Director was eligible for deduction. The Tribunal noted that the commission was paid for services rendered in managing various aspects of the business, including marketing, HR, export, and finance, as approved by the Board of Directors. The commission rate was increased to 10% of PBT in AY 2016-17 from 5% in earlier years, reflecting significant growth in turnover (30%) and net profit (60%) under the director's leadership. The Tribunal found that the commission was linked to performance, not shareholding, and that dividend was separately declared at 143%. Furthermore, the commission was treated as salary, TDS was deducted, and the director paid tax on it, indicating no revenue loss. The Tribunal relied on judicial precedents, including AMD Metplast Pvt. Ltd. and BMO Advisers P. Ltd., which allowed similar commission payments. The disallowance was deleted based on consistency of approach and the fact that similar payments in earlier years were accepted by the revenue.

What were the issues?

1. Whether the commission of Rs. 96,98,425/- paid to the director is eligible for deduction under Section 36(1)(ii) of the Income Tax Act, 1961, when it was paid wholly and exclusively for services rendered and formed part of his remuneration package, as argued by the assessee. The revenue contended that the commission was paid in lieu of dividend. 2. Whether the CIT(A) erred in confirming the disallowance, ignoring that the commission was paid as per employment terms, supported by a Board Resolution, treated as salary, with TDS deducted, and that dividend was separately declared, with commission not linked to shareholding but performance, as argued by the assessee. The revenue supported the lower authorities' order, arguing the growth was not solely due to the director and the commission was in lieu of dividend.

Which sections of the Income-tax Act were involved?

Section 36(1)(ii),Section 143(3)

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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD

Before: SHRI SANJAY GARG & SHRI NARENDRA PRASAD SINHA

For Appellant: Shri S N Soparkar, Sr. Advocate & Ms. Ukti Shah, AR
For Respondent: Shri Hrishikesh Hemant Patki, SR-DR
Hearing: 28.07.2026Pronounced: 24.09.2026

PER NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER:

This appeal is filed by the Assessee against the order of Commissioner of Income Tax (Appeals) -12, Ahmedabad [hereinafter referred to as “CIT(A)”] dated 16.10.2025 for the Assessment Year (A.Y.) 2016-17 in the proceeding u/s 143(3) of the Income Tax Act [hereinafter referred as “The Act”].

2.

The brief facts of the case are that the assessee had filed its return of income for A.Y. 2016-17 on 09.11.2016 declaring total income of Rs.9,33,77,620/-. The case was selected for complete scrutiny under Prakash Chemicals International Pvt Lt

The order continues below.

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