Commission paid to whole time working directors of company is allowable expenditure
Having regard to the provisions of the Companies Act, the remuneration can be paid to the directors by way of commission also.
CASE LAW DETAILS
Decided by:, ITAT, DELHI BENCH `A’ , In The case of: ACIT v. Bony Polymers (P.) Ltd., Appeal No.:, ITA No. 867/Del/2008, Decided on: November 27, 2009
RELEVANT PARAGRAPH
4. We have carefully considered the rival submissions and perused the material on record. We have also gone through the orders of the authorities below as we!! as the decisions relied upon by the learned AR before us. We have also gone through the written synopsis and paper book filed and relied on by the assessee. We noted that there are two whole-time working directors namely Mr. Raj Bhaiia a]id Mrs. Kavita Bhatia with the assessee company who were paid remuneration. Apart from (he fixed remuneration, remuneration was also paid in the form of commission on turnover (5) 0.5%. The total amount so paid is Rs. 30 lacs. This remuneration including commission, was approved in the general meeting of the shareholders as is clear from the resolution placed in the paper book. We also perused the relevant provision of the Companies Act and noted that under the said Act the remuneration can he paid to the directors by way of commission also. We find that the pleading made by the assessee (Paper book pages 1,2,6,7 and 68) be lore the authorities below was that remuneration including commission in question was paid to the whole time working directors and sales of the assessee company have increased by 20%. This feci has not been denied by the revenue. We further find from the finding as reproduced in the preceding paragraph of the C1T(A) that the said directors have paid tax on such commission income at the maximum marginal rate and thus no tax avoidance motive could be attached from this payment of commission. The assessee has returned income even after paying the commission to the whole time working directors to die tune of Rs. 22682259/- . Income returned by Mr. Raj Kumar Bhatia was Rs. 6877967/- and by Mrs. Kavita Bhatia was Rs. 7815380/- after including the commission income of Rs. 15 lacs each. We also noted that the commission, though at the lesser amount, has been paid to the director in the earlier vears also as is clear from the chart of commission placed in the paper book page 31 and it was allowed as a deduction in the assessment of the assessee company. On specific query from the bench, Ld. AR pointed out that the commission based as percentage of turnover has been paid to boils the directors in A.Y, 2004-05 also which has been allowed in assessment of the assessee company. All these facts show that commission payment has been accepted by Revenue it self for the purpose of the business of the assessee company and thus there was no question of disallowance of the commission in the year under appeal. It is cardinal principle of law that while judging the commercial expediency of an expense, the matter needs to be looked in to from the point of view of the assessee and not from me point of view of revenue only. This was so held by supreme court in the decisions oi CJT vs. Walchand & Co. P^k Lid: 65 ITR 381 and IK. Women Manufacturers vs. 017172 ITR 612. Revenue has raised in its grounds oi appeal that the expense m question was hit by section 36 (l)(ii) also. We do not agree with this. Section 36(3 )(ii) provides that commission will not be allowed as deduction if, had it not been paid so, it would be paid as profits or dividend. There is no basis or material or evidence brought on record by AG to support this contention that the commission would have been paid as dividend to the shareholders. Companies Act 1956 contains the limitations and restriction in the matter of payment of dividend and such discretion of the company either to pay or not to pay dividend can not be assumed. A() can not presume that had this commission not been paid, this would have necessarily been paid as dividend to the share holders. There is no basis for this assumption. It can not be ignored that the assessee company had substantial profits out of winch dividend could be declared if assessee company so wanted. Thus, there is no basis for applicability of section 36(1 )(ii). CBDT circular no. 551 relied upon by Ld. AR clearly states that after amendment of 1989, fact of commission payment alone is essential and its excess tvencss can be seen u/s 40 A(2) only. We-find that applicability of section 40 A (2) is not the case of AG. liven other wise, commission paid to the directors was part of remuneration of the directors as Supreme Court has held in the case reported at Gestetner Duplicators (P.) Ltd. v. CIT [1979] 117 ITR 1 that commission paid as fixed percentage of turnover is nothing but assessable as salary. Thus, section 36(l)(ii) has got no application. Further the contention of the assessee is also duly supported by the decision of Supreme Court in the case of Shahjada Nand & Sons v. CIT [1997] 108 ITR 358 in which the apex court held that commission paid to the employees is allowable and there is no need for any contractual obligation or extra services performed by the assesses We therefore are of the opinion that the commission payment of Rs. 30 lacs to the whole time working directors of the assessee company disallowed by AG was rightly deleted by CIT (A) and accordingly, we do not find any infirmity in the order of CIT (A), We, therefore confirm the order of the CIT(A).
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