COMMISSIONER OF INCOME TAX-III vs. M/S SPIROTECH HEAT EXCHANGERS PVT LTD

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ITA - 341 / 2013HC Delhi19 July 20131 pages
For Petitioner: SANJEEV RAJPAL
AI SummaryDismissed

What did the High Court hold?

The Delhi High Court dismissed the appeal in limine. The Court relied on its previous decision in AMD Metplast Private Limited versus DCIT, (2012) 341 ITR 563 (Del.), and Commissioner of Income Tax-I versus CTI Shipbrokers Private Limited (ITA No. 672/2012 decided on 7th December, 2012). The Court found that the commission paid to the Managing Director/Director (Operations) was for services rendered and performed by them, as per the terms of their employment and a resolution passed by the Board of Directors. Therefore, it could not be considered as dividend or bonus and was not hit by Section 36(1)(ii) of the Income Tax Act, 1961. The ratio decidendi is that payments made for genuine services rendered by directors, even if they are shareholders, are deductible business expenses and not subject to disallowance under Section 36(1)(ii) if they are not in the nature of dividend or bonus.

What were the facts?

The appeal concerns Assessment Year 2008-09 and has been filed by the Commissioner of Income Tax-III (Revenue) against M/s Spirotech Heat Exchangers Pvt Ltd (assessee). The dispute pertains to commission paid by the assessee to its Managing Director/Director (Operations). The Revenue contended that this payment was covered under Section 36(1)(ii) of the Income Tax Act, 1961. The assessee had 12 shareholders, and the payment was made pursuant to a Board of Directors' resolution for services rendered as per employment terms, not as dividend or bonus.

What were the issues?

1. Whether the commission paid by the assessee to its Managing Director/Director (Operations) is covered under Section 36(1)(ii) of the Income Tax Act, 1961, and thus disallowable as an expenditure. The Revenue argued that the payment, despite being for services rendered and approved by the Board, falls within the ambit of Section 36(1)(ii). The assessee contended that the payment was for actual services performed by the directors and was in accordance with their terms of employment, and therefore, it could not be construed as dividend or bonus, nor was it hit by Section 36(1)(ii).

Which sections of the Income-tax Act were involved?

Section 36(1)(ii)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF DELHI AT NEW DELHI . ITA 341/2013 . COMMISSIONER OF INCOME TAX-III . ..... Appellant . Through Mr. Sanjeev Rajpal, Sr. Standing Counsel. . . . versus . . . M/S SPIROTECH HEAT EXCHANGERS PVT LTD . ..... Respondent . Through Nemo. . . . CORAM: . HON'BLE MR. JUSTICE SANJIV KHANNA . HON'BLE MR. JUSTICE SANJEEV SACHDEVA . . . O R D E R . 19.07.2013 . . . This appeal, which relates to Assessment Year 2008-09, has to be dismissed in view of the decision of the Delhi High Court in AMD Metplast Private Limited versus DCIT, (2012) 341 ITR 563 (Del.). The respondent, M/s Spirotech Heat Exchangers Private Limited had paid commission to the Managing Director/Director (Operations). The contention of the Revenue is that the said amount is hit and covered under Section 36(1)(ii) of the Income Tax Act, 1961. The respondent-assessee had 12 shareholders and payment has been made to the Managing Director/Director (Operations) in terms of resolution passed by the Board of Directors. The payment made is for the work done and performed by them. The commission paid was for services rendered and as per terms of employment. This cannot and could not have been paid as dividend or bonus. Similar view has been taken by the Delhi High Court in Commissioner of Income Tax-I versus CTI Shipbrokers Private Limited (ITA No. 672/2012 decided on 7th December, 2012). The appeal is dismissed in limine. . . . . . SANJIV KHANNA, J. . . . . . . . SANJEEV SACHDEVA, J. . JULY 19, 2013 . VKR/NA . $ 21. .

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