INCOME TAX ACT, 1961

Section 36(1)(ii) Section 40A(2)(b)

Business deduction under section 36(1)(ii) - Commission to directors - Qualifications and contribution in turnover of export orders increased -

During the assessment proceeding the AO observed that the assessee Company had paid commission expenses to directors which have been in excess of the market rates and disallowed the amount under section 36(1)(ii). The AO had considered that an amount of 15% increase is adequate and the remaining amount is held to be unreasonable and excessive and made addition under the provisions of section 40A(2)(b). For the assessment year 2010-11 the AO has also held that the assessee has tried to evade dividend distribution tax under section 115-O by the way of giving the commission which was far more excessive. Held: Provisions of section 198 and 309 of Companies Act were not applicable to the assessee company as the assessee being neither a public company nor a private company which is the subsidiary of a public company hence these were re not applicable and neither received any payment beyond the provisions of sub section 1(a) of section 309. As per the Board Resolution maximum commission of 27% over the turnover can be paid to the Directors whereas the total payments was only 1.25% of the value of the export orders achieved by them. AO had not brought anything on record nor gathered any evidence about the contribution of the Directors which goes contra to the payments they received. The AO has not brought any comparative cases to determine as to how the commission paid to the Directors was excessive. There is no doubt about the qualifications and contribution of the Directors for obtaining the orders and increasing the turnovers. The payment of commission has been the practice of the company for the past seven years. Directors were also paying tax at the maximum merchant rate so as the company hence no revenue leakage could also be found based on the tax payments. Even the dividend distribution tax in the hands of the company @ 12.5% and tax free in the hands of the recipient would not be give any credence to the alleged surreptious tax planning. Increase in personal expenses and comparing it with the increase in Directors remuneration cannot be accepted as a methodology to calculate the reasonable remuneration. Hence the addition made by the AO was deleted and hold that no interference was called for pertaining to the commission paid by the assessee to the Directors.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. :

INCOME TAX ACT, 1961

Section 14A Rules 8D

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