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Income Tax Appellate Tribunal, DELHI BENCH “C”: NEW DELHI
Before: SHRI C. M. Garg & SHRI M. Balaganesh
O R D E R PER M. BALAGANESH, A. M.: 1. The appeal in AY 2009-10, arises out of the order of the ld CIT(A)-18, New Delhi dated 16.05.2017 [hereinafter referred to as ld CIT(A) in short] in Appeal 242/16-17 dated 09.02.2015 passed u/s 143(3) Income-tax Act, 1961 (hereinafter referred to as ‘the Act’).
The assessee has raised the following grounds of appeal:- “1. The learned CIT (A) has erred in confirming the disallowance of Rs32,74,998 working Directors commission on profits, despite it being permitted by the Companies Act and held as allowable by appellate authorities in other years on the basis decisions by the jurisdictional High Court
2. The learned CIT (A) has erred in not dealing / giving directions in his order for correct determination of tax due after Page | 1
Gujral Design Plus Overseas Pvt. Ltd granting Proper credits for prepaid taxes and for adjusting refunds which were purported to be given but not actually given 3 That the above grounds are independent and without prejudice to each other.”
The only issue to be decided in this appeal is as to whether the ld CIT(A) was justified in confirming the disallowances to Director’s commission of profits amounting to Rs. 32,47,750/- in the facts and circumstances of the instant case.
We have heard the rival submissions and perused the material available on record. The assessee filed its return of income for AY 2009-10 on 26.09.2009 showing income of Rs. 3,18,29,604/-. The assessment was originally completed u/s 143(3) of the Income Tax Act, 1961 on 07.12.2011 accepting the returned income. Further, this assessment was sought to be revised by the ld PCIT by invoking revisionary jurisdiction u/s 263 of the Act. Pursuant to the order passed u/s 263 of the Act, the ld AO passed the giving effect order u/s 143(3) read with section 263 of the Act on 09.02.2015 (i.e. present proceeding before us). In the said order, the ld AO observed that the assessee had paid a sum of Rs. 32,74,750/- as commission to the Managing Director of the assessee company. This was stated to be paid out of profits of the assessee company. The ld AO invoked the provisions of section 36(1)(ii) of the Act stated that this commission was paid in lieu of distribution of profits in the form of the dividend to the share holders. Accordingly, this commission would not be allowed as deduction. This action of the ld AO was upheld by the ld CIT(A).
At the outset, we find that commission was paid to Mr. Feroz who is working as Director of the assessee company. The details of two share holders of the assessee company at the relevant point of time are as under:- Page | 2
Gujral Design Plus Overseas Pvt. Ltd i. Mr. Feroz :5% ii. Mohit : 95%
We find at page 17 of the paper book containing extract of the minutes of annual general meeting of the assessee company held on 27.09.2008, wherein, while adopting the annual accounts of the assessee company for the year ended on 31.03.2008, the shareholders of the assessee company had approved the following remuneration to Mr. Feroz:-
i. Salary Rs.40,000/- per month ii. Commission on profit 7.5%
We find that the ld CIT(A) had wrongly held in his order that both Mr. Feroz and Mr. Sumit are holding 50% of shareholding each in the assessee company. This is factually incorrect as is evident from the shareholding pattern stated hereinabove. It is not in dispute that this commission of Rs. 32,74,750/- was paid by the assessee company to its director Mr. Feroz as percentage of profit before tax. This has been duly approved by the share holders in their general meeting held on 27.09.2008. Based on profits for the year ended 31.03.2009, Mr. Feroz was paid commission of Rs. 32,74,750/-. We find that the assessee company had claimed the commission expenses on accrual basis as deduction in the AY 2009-10. Since, the commission got crystalised in absolute figures based on final determination of profits after the end of the previous year relevant to AY 2009-10, the commission was actually paid to the Director only in AY 2010-11. Accordingly, the said commission of Rs. 32,74,750/- was duly offered to tax by Mr. Feroz in his income tax return filed for AY 2010-11 by treating as income from salary. The ld AR also placed evidence on record to prove the commission paid was offered to tax on receipt basis by Mr Feroz even in subsequent years. He also made
Gujral Design Plus Overseas Pvt. Ltd statement from the Bar that no such disallowances of commission was even intended to be made u/s 36(1)(ii) of the Act in subsequent years by the revenue.
At the outset, we find that the provisions of section 36(1)(ii) of the Act per se could not be made applicable. Provision of section 36(1)(ii) of the Act states whether any sum paid to an employee as bonus or commission for services rendered, whether such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission. In other words, if the said commission payment is not made, then the very same sum would be available for distribution to him as profits or dividend. In the instant case, as stated earlier, Mr. Feroz is only holding 5% shares in the assessee company and remaining 95% held by Mr. Mohit. Hence, the decision to declare dividend should be taken with the consent of Mr. Mohit and it is not left to the prerogative of the assessee alone who happens to be minority share holder in the assessee company. Hence, in the facts and circumstances of the instant case, the payment of commission to the Director could not have been paid to him as profit or dividend. Hence, the provision of section 36(1)(ii) of the Act are not applicable at all. Further, we also find Hon’ble Jurisdictional High Court in the case of Control & Switchgear Contractor Ltd Vs. DCIT 358 ITR 179 had held commission paid to Directors is eligible in the hands of the assessee company and they would not be hit by the provision of section 36(1)(ii) of the Act.
The Hon'ble Jurisdictional High Court in the case of AMD Metplast Pte Ltd Vs. DCIT 20 taxmann.com 647 had held that the commission paid to Managing Director for services rendered by him as per terms of payment is eligible as deduction u/s 36(1)(ii) of the Act. In view of the aforesaid observations and respectfully following the judicial precedent relied upon herein above, we direct the ld AO
Gujral Design Plus Overseas Pvt. Ltd to delete the disallowance of commission made in the instant case. Accordingly, ground No. 1 raised by the assessee is allowed.
Ground No. 2 of the assessee is with regard to seeking appropriate credit for pre paid taxes and adjustment of refund that are due to the assessee. This requires factual verification and hence, the ld AO is directed to decide the same in accordance with law. Accordingly, ground No. 2 of the assessee is allowed for statistical purposes.
Ground Nos. 3 and 4 raised by the assessee are general in nature and does not require any specific adjudication.
In the result, appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 05/09/2023.