2014 (8) TMI 989 - AT - Income Tax

ITAT allows deduction of director commissions as part of remuneration under Income Tax Act

ACIT, Circle-3 (1), New Delhi Versus M/s Botil Oil Tools (India) Pvt. Ltd.

ACIT, Circle-3 (1), New Delhi Versus M/s Botil Oil Tools (India) Pvt. Ltd. - [2014] 36 ITR (Trib) 119 (ITAT [Del]) Issues:1. Allowability of commission paid to directors who are also shareholders of the company under Section 36(1)(ii) and Section 37(1) of the Income Tax Act, 1961 for A.Y. 2004-05 and A.Y. 2005-06.Analysis:1. The Revenue challenged the deletion of the addition of commission paid to directors as an allowable expenditure under Section 36(1)(ii) and Section 37(1) of the Income Tax Act, 1961.2. The Assessing Officer disallowed the commission paid to directors who were also shareholders of the company, considering it as a means to reduce net profits and avoid tax liability. The AO relied on Section 36(1)(ii) which allows deductions for sums paid as bonus or commission unless they would have been payable as profits or dividends.3. The First Appellate Authority held that the commission paid to directors was part of their remuneration and not profits or dividends, thus allowing the deduction under Section 37(1) of the Act. The FA also emphasized that the AO failed to establish that the commission was payable as profits or dividends.4. The ITAT upheld the FA's decision citing the case law of Metaplast P. Ltd. vs. DCIT, where it was established that if the commission is part of the salary as per the appointment order approved at the AGM, Section 36(1)(ii) is not attracted. The approval of remuneration for directors was in compliance with the Companies Act, and the commission was considered a form of salary for services rendered.5. Referring to the decision in CIT-1 vs. Convertech Equipments Pvt. Ltd., the ITAT reiterated that if the commission is paid for actual services rendered, it does not fall under Section 36(1)(ii). The ITAT dismissed the reliance on the Special Bench decision of M/s Dalal Broacha Stock Broking Pvt. Ltd., as the jurisdictional High Court's decision was binding.6. The objection regarding the unavailability of the Board resolution for A.Y. 2005-06 was dismissed as the resolution was produced during the proceedings. The ITAT upheld the FA's decision for both assessment years, concluding that the commission paid to directors was allowable under Section 37(1) of the Act.7. Consequently, the ITAT dismissed the appeals filed by the Revenue, affirming the decision to allow the deduction of the commission paid to directors who were also shareholders of the company for both A.Y. 2004-05 and A.Y. 2005-06.