Deductibility of director commission and treatment of contract-related infrastructure costs were resolved in favour of the assessee.

Commission paid to working directors for services actually rendered was held deductible under section 36(1)(ii), as the payment was supported by company resolutions, linked to contract execution, and not shown to be excessive or a disguised dividend distribution. Expenditure on a site road required for contract performance was not part of work in progress, and RCC chamber costs were not to be added back where the project layout changed and the structures became unusable. The assessee's appeal was allowed and the Revenue's appeal was dismissed.

---

---

Issues: (i) Whether commission paid to directors shareholders was allowable as deduction under section 36(1)(ii) of the Income-tax Act, 1961; (ii) Whether expenditure on construction of site road and RCC chambers was rightly treated as work in progress and added back.

Issue (i): Whether commission paid to directors shareholders was allowable as deduction under section 36(1)(ii) of the Income-tax Act, 1961.

Analysis: The commission was paid to working directors in recognition of services connected with obtaining and executing the sub-contract, and the remuneration together with commission was supported by the company resolution and the nature of the business. The disallowance was based on the assumption that the payment was meant to avoid dividend distribution, but the record showed that the directors had rendered services and had paid tax on the amounts received. The payment was not shown to be excessive or hit by any independent restriction on facts found by the Authority.

Conclusion: The commission was allowable as deduction and the disallowance was unsustainable.

Issue (ii): Whether expenditure on construction of site road and RCC chambers was rightly treated as work in progress and added back.

Analysis: The site road was required for execution of the contract and was not a recoverable item from the contractee, so it did not form part of work in progress. The RCC chambers were constructed under the earlier layout but were later rendered unusable after revision of the project design, and the supporting material accepted by the first appellate authority showed that the expenditure had to be treated as revenue expenditure and not as closing work in progress. The Revenue did not dislodge these findings.

Conclusion: The deletion of the addition on these items was justified.

Final Conclusion: The assessee succeeded on the commission issue and the Revenue failed on the work-in-progress issue, resulting in allowance of the assessee's appeals and dismissal of the Revenue's appeal.

Ratio Decidendi: Commission paid to working directors for services actually rendered is deductible under section 36(1)(ii), and expenditure incurred on necessary contract-related infrastructure or on assets rendered unusable by a revised project layout cannot be mechanically treated as work in progress.

---