Payment of commission in lieu of dividend is Tax Avoidance

Dalal Broacha Stock Broking Pvt Ltd Vs. ACIT (ITAT Mumbai – Special Bench)- Provisions of section 36(1)(ii) will apply in case of all employees including share holder employees irrespective of the fact whether any extra services have been rendered or not. The issue whether payment of bonus or commission to an employee will be covered by the provisions of section 36(1)(ii) or section 37(1) is also settled by the judgment of Hon’ble Jurisdictional High Court in case of Subodh Chandra Poppatlal vs. CIT (24 ITR 586) in which the Hon’ble High Court while dealing with similar provisions of the old Act held that when an expenditure fell under section 10(2)(x) [which corresponds to section 36(1)(ii)], in the sense that it is an expenditure in the nature of bonus or commission paid to an employee for services rendered then its validity can only be determined by the tests laid down in section 10(2)(x) and not by the tests laid down in section 10(2)(xv) which corresponds to section 37(1). Respectively following the said judgment, we hold that the payment of commission to the three director employees had been rightly considered by the authorities below under the provisions of section 36(1)(ii) and that the provisions of section 37(1) will not be applicable in such cases.It was also held that that the payment of commission of Rs.1.20 crores to the three working directors was in lieu of dividend and the same is not allowable as deduction under section 36(1)(ii).