Commission paid to MD & working Directors is allowable expense

The Asst. Commissioner of Income Tax Vs. S.H. Kelkar & Co. Pvt. Ltd. (ITAT Mumbai)

The first issue in this appeal of Revenue is against the order of CIT(A) deleting the dis allowance made by AO of ₹ 84,00,000/- as commission paid to managing director and two his working director. For this Revenue has raised following ground No. 1: –

“1. “On the facts and circumstances of the case and in law, the Ld CIT(A) erred in deleting the dis allowance of Rs. 84,00,000/- made u/s 37(1)(iii) of the IT Act in respect of commission paid to Managing Director and Working Director?”

Briefly stated facts are that out of four directors of the assessee company, two are working directors, who were paid remuneration including salary and commission subject to overall limits prescribed under the Companies Act. The total remuneration included an amount of ₹ 84,00,000/- commission to these two directors. According to AO commission was paid to directors who were also shareholders in the company and hence, the commission was otherwise payable as dividend. Accordingly, the AO invoking the provisions of section 36(i)(ii) of the Act, disallowed the expenditure and also following the similar dis allowance made in preceding assessment years i.e. AY 2006-07 to 2011-12. Aggrieved, assessee preferred the appeal before CIT(A), who relying on the Tribunal decision for earlier years allowed the claim of the assessee vide Para 4.4 and 4.5 as under: –

“4.4 I have considered the contention of the AO as vel1 as of the AR of the appellant. It is dispute that the issue involved in the current ground is similar to the dis allowance ma& in the case of the appellant in the preceding years. The AO, in fact, has categorically stated in the Assessment Order as under:

“5.4 The submissions of the assessee have been duly considered but the same are not acceptable. In this case, the identical issue was involved for assessment year 2006-07, 2007-08, 2008-09 and 2009-10, wherein the payment of commission to directors was disallowed.”

In this regard, the appellant has submitted the order of the Hon ble Income-tax Appellate Tribunal “E” Bench, which vide order dated 07/11/2014 in ITA Nos. 7256 & 7257/Mum/2010 and 678/Mum/2012 for AYs 2006-07, 2007-08 and 2008-09 has dealt with the same issue of dis allowance of commission paid to the same directors.

The Hon’ble Tribunal has made the following observations on page 4 of the order:

“7. We have considered the rival submissions. A perusal of the impugned order of the Ld. CIT(A) reveals that the amount of salary plus commission paid to the directors has not been held to be excessive by the lower authorities. There is no denial of the fact that the amount paid was reasonable in comparison to the remuneration paid for the services in the market. There is no denial of the fact that the dividend of Rs. 3 crore was declared in the year under consideration. There seems merit in the contention of the ld. AR that the company has 29 shareholders and 4 directors whereas the commission was paid to two working directors only. So far the reliance of the Ld. D.R. on the special bench decision of the Tribunal in the case of “Dalal Broacha Stock Broking P. Ltd. v. Addl. CIT” (supra) is concerned, we find that the facts of the present case are quite distinguishable. In the said case there were only three shareholders who were directors of the company and no dividend was declared and there was no explanation as to why the dividend was not declared. Under such circumstances, we find force in the contention of the Ld. A.R. that company was justified in paying the commission to the working directors which was quite reasonable. The lower authorities have not noticed these facts while deciding the issue under consideration.

8. In view of our observations given above, the order of the lower authorities is set aside and the addition made on this ordered to be deleted.”

4.5 I find considerable force in the arguments put forth by the learned AR that the assessee company has got 29 shareholders and the 2 working directors are being commission since last more than 30 years whereas none of the other 27 shareholders and/or 2 other nonworking directors are paid anything. the AO never challenged the reason ability of expenses incurred by the appellant towards the remuneration of directors which included salary, commission and benefits such as PP etc. subject to all limit of 5% of the net profits computed under the provisions of the companies Act, 1956. The appellant further submitted that commission is nothing but a part of remuneration and hence, the same has to be judged from the angle of commercial expediency for the appellant. The appellant finally submitted that the nomenclature of Commission was provided to the remuneration since the same was done with a view to keep salary of the director’s variable and avoid fixed burden on the appellant company.

In view of the above, the addition made on this account is directed to be deleted because it is covered issue in favour of the appellant by its own order by Hon ble ITAT, Mumbai in AYs 2006-07, 2007-08 & 2008-09 and since AO has not placed any material on record as to the status of case in High Court. However, the relief is guaranteed subject to the outcome of Bombay High Court, if any.

Aggrieved, Revenue is in second appeal before us.