Case Law Details
The Tribunal observed that the commission paid was disallowed by invoking provisions under Section 36(1)(ii) and not by invoking Section 40A(2)(b)(ii) of the Act. This implies that the AO had not disputed the services rendered by Renu Munjal but he was of the opinion that dividend had been paid in the garb of commission because it actually reduced the corpus available for distribution as dividend. Section 36(1 )(ii) of the Act had been incorporated to check, inter-alia, private companies from avoiding tax by distributing their profits to their members (showing them to be their employees) by way of commission and not by way of dividend. The AO was not correct in holding that the corpus for paying the dividend had reduced as it does not reflect the correct legal position with reference to section 36(1 )(ii) of the Act.
Whenever any commission is paid to an employee it is bound to reduce the corpus available for distribution as dividend. But that ipso-facto cannot be the basis for holding that commission is in lieu of dividend. The taxpayer had declared profits of INR 420 million and dividend had also been paid to all the shareholders including Renu Munjal. The taxpayer as well as Renu Munjal was bracketed in the highest income tax slab and the only effect was on account of saving dividend distribution tax to the taxpayer which was very minimum keeping in view the overall profits of the company. Therefore, this cannot be held to be device for reducing the overall tax effect in the case of taxpayer.
Since the shareholding of Renu Munjal was 1 percent only, the dividend would have been much less than the commission actually paid to Renu Munjal. Therefore, sum of Rs. 39 Lakh, in any case, would not have been paid to Renu Munjal as profits or dividend if it had not been paid as commission. The decision in the case of Dalal Broacha Stock Broking P. Ltd was not applicable as in that case, taxpayer Company, had paid commission of Rs. 40 Lakh each to the three working directors who owned the entire capital of the company. However, in the taxpayer’s case Renu Munjal held only 1 percent of the share capital and, therefore, Rs. 39 Lakh could not be payable as dividend. Accordingly, the Tribunal held that the commission paid to the director was allowed under Section 36(1 )(ii) of the Act.
INCOME TAX APPELLATE TRIBUNAL ,DELHI
ITA No. 4329/Del/2010 – Assessment Year: 2005-06
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