TaxTMI 
TaxTMI 
2011 (6) TMI 251
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....of Rs. 1.20 crores to the three employee directors under provisions of section 36(1)(ii). The clause (ii) of sub section (1) of section 36 of the income tax Act, 1961 allows deduction of any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission. 2.1 The facts of case, in brief, are that the assessee company during the relevant year had paid commission to the tune of Rs. 40.00 lacs each to the three working directors. The three employee directors were the only shareholders of the company and owned the entire share capital of Rs. 6.5 crores of the company. The details of salary, commission and the share holding of the three directors were as under:- S.No. Name of director Nature of Payment Amount(Rs.) Share holding 1. Mr. P.K. M. Dalal Salary- 6,00,000 50% Commission- 40,00,000 2. Mr. Nilesh P. Dalal Salary 12,00,000 25% Commission 40,00,000 3. Mr.Vipul P. Dalal Salary 12,00,000 25% Commission 40,00,000 2.2 During the assessment proceedings, the Assessing Officer (AO) after examining the legal provision....
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.... to be excessive compared to market vale of services. Further the assessee had paid the same amount of commission for Assessment Years 2004-05 to 2006-07 when the profits had increased substantially in subsequent years which also showed that the assessee wanted to increase the net worth for improving the business. The assessee also pointed out that in Assessment Year 2004-05, 50% of the commission had been disallowed by the Assessing Officer under the provisions of section 40A(2)(b) holding the same as excessive but the same was deleted by the CIT(A). In Assessment Year 2005-06 the Assessing Officer had disallowed the claim under provisions of section 36(1)(ii) which was also not upheld in appeal. 2.4 The Assessing Officer, however, did not accept the contentions raised by the assessee. It was observed by him that in the profit & loss account of the relevant year, there was net profit of Rs. 15.55(before tax) crores after claiming deduction on account of commission of Rs. 1.20 crores, which had been carried forward in the balance sheet as reserve and surplus. The directors however did not declare any dividend and no reasons were given for not declaring the dividend. It was ....
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....e Income tax Act. The CIT(A) however rejected the additional ground also after observing that there being specific provision under section 36(1)(ii) regarding allowability of bonus or commission, the claim will be governed by the said section and not by the provisions of sec.37(1). 4. Before us, the ld. AR for the assessee argued that the intention of the legislature was always to make allowances for bonafide expenditure incurred on account of payment of bonus or commission. However, since the Hon'ble Madras High Court in case of R.E. Mahomed Kassim Rowther of R.E. Mahomed Kassim Rowther & Co. (2 ITC 482) had held that such expenditure calculated on the basis of profits was not allowable as profit could be computed only after deducting all expenditure. Thereafter section 10(2) of the Income tax Act, 1922 was amended and clause viii(a) was inserted in section 10(2) making provision for allowability of expenditure on account of bonus or commission. The said clause viii(a), was later renumbered as clause (x) of section 10(2) which corresponds to the present section 36(1)(ii) of the Income tax Act, 1961. It was also argued that section 36(1)(ii) was an enabling provision to al....
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...., could not be taken into account unless it was established that the assessee would have declared dividend. Therefore, there was hardly any difference in tax. In any case, it was submitted that the argument based on tax avoidance was irrelevant because legitimate and bonafide expenditure incurred for the purpose of business could not be disallowed on the ground that the assessee was saving in taxes. The ld. AR also referred to the following decisions of the Tribunal in support of the case of the assessee. i) 36 SOT 456 (Delhi) in case of ACIT vs. Bony Polymers (P) Ltd. dated 23.11.2009, ii) ITA No.4747/M/10 in the case of DCIT vs. M/s. Celsieus Refrigeration (P) Ltd. dated 31.12.2010, iii) ITA No.631/Bang/2010 in the case of ACIT vs. Mandavi Motors (P) Ltd. dated 12.11.2010 and iv) ITA No.4924 & 4925/Raj./09 in the case of M/s. Career launcher Pvt. Ltd. vs. ACIT dated 27.12.2010 4.2 It was also argued that there was no dispute regarding the rendering of services by the directors and the reasonableness of payment made to them. It was pointed out that in Assessment Year 2004-05, disallowance had been made by the Assessing Officer under section ....
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....A No.7194/M/08 deleted the addition holding that the provisions of sec.36(1)(ii) were not applicable and no appeal was filed by the department before the High Court. In Assessment Year 2007-08, the Assessing Officer had made disallowance in the assessment order dated 19.11.2009 u/s.143(3) but the addition was deleted by CIT(A) vide order dated 23.11.2010 following the decision of the Tribunal in Assessment Year 2004-05 and 2005-06 (supra) and in Assessment Year 2008-09, the Assessing Officer himself did not make any disallowance out of commission in the order dated 1.12.2010 passed u/s.143(3). Thus, the claim of commission had been allowed in the earlier years and subsequent years. It was argued that the principle of consistency demanded that no disallowance should be made in the assessment year under consideration. Reliance was placed on the judgment of Hon'ble Supreme Court in the case of Radha Saomi Satsang vs. CIT (193 ITR 321). 5. On the other hand the ld. DR strongly supported the orders of authorities below. It was argued that there being substantial profits and cumulative reserves and surplus, the decision of the directors who were the only share holders and were al....
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....n the subsequent years, the deduction in respect of commission to the same director employees had been allowed but the decision was based on the decision of the Tribunal. Since the issue has now been referred to the Special Bench which is a Larger Bench, the decision of the Special Bench shall be binding and the principle of consistency shall not be applicable in such cases. 6. In reply the ld. AR for the assessee submitted that the judgments relied upon by the ld.DR were distinguishable as in those cases, payment of bonus or commission had been made to employees and not to partner or shareholders. The case of the assessee was covered by the judgment of Hon'ble High Court of Bombay in the case of Loyal Motors Service Company. Ltd. vs. CIT (supra). 7. We have perused the records and considered the rival contentions carefully. The issue raised before us is regarding allowability of deduction on account of payment of commission of Rs. 1.20 crores to the three employee directors under section 36(1)(ii). There is no dispute that the three directors were share holder employees who held the entire share capital of the company and were also related(father and sons). There i....
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....as amended and a new proviso was inserted as the first proviso and the existing proviso with some modifications was substituted as second proviso w.e.f. Assessment Year 1976-77. The amended provisions w.e.f. 1976-77 read as under :- 36(i)(ii) any sum paid to employee as bonus or commission for services rendered where such sum would not have been payable to him as profits or dividend if it had not been paid a bonus or commission Provided that the deduction in respect of bonus paid to employee employed in factory or other establishment to which provisions of payment of Bonus Act (521 of 1965) apply, shall not exceed the amount of bonus payable under the Act. Provide further that the amount of bonus (not being bonus referred to in the first proviso ) or commission is reasonable with respect to: a) pay of the employee and conditions of his service. b) the profits of the business or profession for the year in question and c) the general practice in similar business or profession 7.3 The provisions of section 36(1)(ii) were again amended by the Direct Tax Laws (Amendment) Act, 1987 from Assessment Year 1988-89 and the two provisos were deleted. Thus, the ....
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.... context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves, etc., a part of it should in all fairness go to the employees..." 7.6 The ld. Authorised Representative for the assessee argued that provisions of section 36(1)(ii) are applicable only in the case of employees who are not share holders. His argument was that the provision is not applicable when the payment of commission is in lieu of dividend and since dividend is payable only in the case of share holders, the provisions will not be applicable in case of share holder employees. We are unable to accept such argument which can be relevant only when the payment of dividend to shareholders is compulsory. It is an undisputed fact that payment of dividend by a company is not compulsory and it is dependent upon the profitabilit....
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.... years. Of course, the circumstances that no additional services were rendered by the employee, would undoubtedly be of some relevance in determining the reasonableness of the amount of commission but it would have to be considered along with other circumstances." 7.8 Thus any expenditure on account of payment of bonus or commission to an employee for some services rendered will be an allowable deduction subject to the condition that the payment of bonus or commission should not be in lieu of dividend. This condition, as pointed out earlier, is relevant only in case of share holder employees as dividend is payable only in case of share holders. Further, reasonableness of the payment is no longer a requirement as per the amended provisions of section 36(1)(ii) applicable from Assessment Year 1988-89. The ld. AR for the assessee has argued that the expression "payable" used in section 36(1)(ii) meant that the shareholder should have right to receive the dividend. It was submitted that payment of dividend was discretionary to be decided by the management of the company and not compulsory. Therefore, it could not be said that the dividend was payable in case of the employee dir....
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....ds, the performance of the company had improved progressively and that it had been due to the extra efforts made by the directors. The Board, therefore, vide resolution dated 3.3.2003 allowed payment of commission to the directors @ 10% of profit before tax subject to a limit of Rs. 40.00 lacs per year in each case for extra services. It was pointed out that the turnover of the business increased from Rs. 10.51 crores in 2004-05 to Rs. 32.21 crores in Assessment Year 2008-09 and profit before tax after claiming deduction on account of commission, improved from Rs. 4.55 crores in Assessment Year 2004-05 to 22.42 crores in Assessment Year 2008-09. It has been submitted that payment of salary and commission was commensurate to market value of the services rendered by the director and therefore in such cases no disallowance could be made u/s.36(1)(ii). Comparison has been made to the payment of remuneration of Rs. 46,61,860/- to an employee of the assessee company namely Shri Milind Karmakar who was heading the research division. Reference has also been made to the case of M/s. Motilal Oswal Securities who was in the same business and in which case also commission aggregating to Rs. 7.....
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....t is further seen that the company has passed resolution that the Directors of the assessee company will be paid commission over and above the salary amount. In accordance with the resolution, the company has paid remuneration plus commission. It is further seen that the Directors of the company are assessed to tax and their taxable income is subject to payment of maximum marginal rate of tax which is 33% including surcharge. The company is liable to pay tax @ 35.75%; therefore, it cannot be said that the commission and remuneration aid to the Directors was on account of tax planning. 9.1 The findings of the ld CIT(A) have been reproduced somewhere above in this order. In our view, the findings of the ld CIT(A) does not suffer from any infirmity. The decision relied upon by the ld counsel of the assessee are also in favour of the assessee. Therefore, keeping in view of these facts and circumstances and in view of the detailed findings given by the ld CIT(A), we hold that the ld CIT(A) was justified in deleting the addition of Rs. 75 lacs on account of remuneration paid to the Directors. Accordingly, we confirm the findings of the ld CIT(A) on this issue." 7.12. The ....
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....here was stock market boom which had peaked in Assessment Year 2000-01 and the bubble had burst only towards the fag end of that year, which was the reason for exceptional performance in that year. The assessee is a share broker who gets commission on sale/purchase of shares by investors/traders. The income of the assessee is assured irrespective of the fact whether the investor/trader loses or gains in the transaction. The commission, will, however, depend upon the market conditions. In case of boom when the market is flooded with investors/traders, income will rise as volume increases but in case of slump when investors/traders desert the market, there will be fall in volume and income. After the Assessment Year 2000-01 when the stock market crashed, there was slump in the market for three years which resulted in sharp fall in both turnover and profit from Assessment Year 2001-02 to 2003-04. The turnover fell to 50% or even less and the profit declined more steeply. 7.14 Therefore, the only reasonable conclusion which can be drawn is that the payment of Rs. 1.05 crores shown as commission in Assessment Year 2000-01 when there was exceptional profit was nothing but dividen....
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....amount. It is also to be noted that commission has been paid only to the director employees and commission has been paid as 10% of profits subject to a limit of Rs. 40.00 lacs which also shows that the assessee company distributed part of the profits to the director employees who were the only shareholders. Therefore, on the facts and circumstances of the case as discussed above we have no hesitation in coming to the conclusion that dividend in case of the assessee company was payable and that the same has been paid in the garb of commission. 7.15 The comparison made by the assessee to the high remuneration of Rs. 46.61 lacs paid to a non share holder employee is not very relevant in our opinion. The three directors are the owners of the company. The owners of business if they are not technically qualified may have to engage highly qualified employees for doing specialized jobs and may have to pay high remuneration more than the salary payable to them for the services rendered. The stock market is a highly specialized field and requires adequate research to attract investors. The quality and reliability of research is back-bone of stock broking business. Therefore, obviou....
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....be possible to use a device. The present case involves a family business owned by the three directors who were not only shareholders but were also decision makers. They are also blood relations (father and sons). Therefore, they could easily show payment of dividend as commission and take the payment in such a manner that the same amount does not become payable as dividend though the total amount remains within the family. Therefore, in our view, the judgment cited above cannot be applied to a case where a device is adopted by closely held private companies to distribute dividend in the garb of commission in such a manner to take advantage of judgment in the case of Loyal Motor Service Company Ltd. (supra). We have already held earlier that, considering the facts and circumstances of the case, the commission payment in this case was in lieu of dividend and therefore, the claim cannot be allowed only on the ground that the payment taken by the directors is not in the share holding ratio. The device adopted by the assessee is obviously with the intention to avoid payment of full taxes. There is obvious tax avoidance. In case dividend is paid, the tax payable at the rate of 35....
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....herefore, it could not be disallowed in the present year. Reliance has been placed on the judgment of Hon'ble Supreme Court in the case of Radha Saomi Satsang (supra). No doubt, the revenue authorities are expected to adopt a consistent approach in allowing or disallowing a claim and if a claim has been allowed in an earlier year, any disallowance in subsequent year cannot be justified if factual and legal position remains the same. But in this case we note that the claim has been allowed in the earlier and subsequent year based on the decisions of divisional Bench of the Tribunal. The Bench which originally heard the appeal for this year had reservations regarding correctness of the decision of the divisional bench and accordingly matter was referred to a Larger Bench. The decision of the divisional Bench in earlier year cannot act as a binding precedent for the Special Bench which is a Larger Bench. Further in case the decision of the division Bench was to be followed, there was no need to refer the issue to a larger Bench. Therefore, in our view, on the facts of the case, the principle of consistency will be of no help and the argument raised has to be rejected. Even....