TDS u/s 192 deductible on commission paid to whole time director as it forms part of salary

Indofil Industries Limited Vs CIT (ITAT Mumbai)

ITAT Mumbai held that assessee is liable to deduct tax at source in respect of commission expenses payable to the whole time directors under section 192 of the Income Tax Act only, as the same shall form part of their salary payment only.

Facts- The assessee company is engaged in the business of manufacture and sale of chemical items. During the course of assessment proceedings, AO noticed that the assessee has booked commission expenses payable to its whole-time directors.

AO noticed that the assessee has not deducted tax at source from the said commission expenses under section 194H of the Income Tax Act 1961. He further noticed that the assessee had paid similar commission payments to the above said directors and the said payments have been disallowed under section 40(a)(ia) of the Income Tax Act 1961 for non-deduction of tax at source under section 194H of the Income Tax Act 1961. In absence of any explanation by the assessee before AO, it disallowed the said commission expense.

Before CIT(A), assessee contended that the commission expense is in the nature of salary paid to directors and hence TDS provisions of section 194H will no apply to these payments. Assessee has deducted TDS under section 192 of the Act treating the said payments as part of ‘salary’. However, CIT(A) upheld the disallowance made u/s 40(a)(ia) of the Act on the ground that the assessee has failed to deduct tax u/s 194J of the Act at the time of booking of commission expenses, even though the case of the AO was that the TDS is liable to be deducted on commission expenses u/s 194H of the Act.

Conclusion- Held that the assessee is liable to deduct tax at source in respect of commission expenses payable to the whole time directors u/s 192 only, as the same shall form part of their salary payment only. Further, the Ld CIT(A) has given a finding that the assessee has deducted tax at source on the commission expenses at the time of making payment in the succeeding year. The Tribunal in the earlier years has specifically held that the TDS is liable to be deducted u/s 192 of the Act only at the time of making payment and this view has since been upheld by the High Court. Accordingly, the disallowance made u/s 40(a)(ia) of the Act in all the three years in respect of commission expenses is liable to be deleted. We order accordingly.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

All the three appeals filed by the assessee are directed against the orders by Ld CIT(A)-26 and they relate to the assessment years 2014-15 to 2016-17. Since identical issues are urged in these appeals, they were heard together and are being disposed of by this common order, for the sake of convenience.

2. At the time of hearing, the Ld A.R did not press ground no.I relating to jurisdiction of Ld CIT(A) to pass impugned orders. The ground no. II is an off shoot to ground no.I. Accordingly, both the grounds are dismissed as not pressed. The remaining grounds relate to the disallowance made by the AO u/s 40(a)(i) of the Act.

3. The assessee company is engaged in the business of manufacture and sale of chemical items. During the course of assessment proceedings of these three years, the AO noticed that the assessee has booked commission expenses payable to its whole time directors as detailed below:-

The AO noticed that the assessee has not deducted tax at source from the above said commission expenses u/s 194H of the Act. He further noticed that the assessee had paid similar commission payments to the above said directors in AY 2009-10 to 2013-14 also and the said payments have been disallowed u/s 40(a)(ia) of the Act for non-deduction of tax at source u/s 194H of the Act. It appears that the assessee did not furnish any explanation before the AO in this regard and hence the AO disallowed the above said commission expenses in all the three years u/s 40(a)(ia) of the Act for non-deduction of tax at source u/s 194H of the Act.

4. Before ld CIT(A), the assessee contended that the commission expenses are in the nature of Salary paid to the directors and hence TDS provisions of sec. 194H of the Act will not apply to these payments. It was also submitted that identical disallowance made by the AO in AY 2009-10 to 2011-12 has been deleted by Ld CIT(A) and the appeals of the revenue for AY 2009-10 and 2010-11 have been dismissed by the ITAT. The appeal filed for AY 2011-12 has been restored to the file of Ld CIT(A).

5. The ld CIT(A) noticed that the assessee has deducted tax at source on commission payments u/s 192 of the Act treating the said payments as part of “salary”. He further noticed that the assessee has made provision for commission expenses as on 31.3.2014, 31.3.2015 and 31.3.2016, but the TDS was deducted in the succeeding years when the payment was actually made. He noticed that the provisions of sec.194J refer to the amounts payable as “commission” to a director of a company and as per the provisions of sec.194J of the Act, the TDS is liable to be deducted at the time of credit of such sum to the account of payee or at the payment of payment, whichever is earlier. The Ld CIT(A) further noticed that the Tribunal has observed in its order passed for AY 2009-10 that the provisions of sec.194J was expanded to cover commission payments which are in the nature of salary only w.e.f. 01.07.2012 and hence no disallowance u/s 40(a)(ia) of the Act was called for. Since the commission expenses have been booked after 1.7.2012, the Ld CIT(A) held that the decision rendered by the Tribunal in AY 2009-10 is not applicable to the years under consideration Accordingly, he upheld the disallowance made u/s 40(a)(ia) of the Act on the ground that the assessee has failed to deduct tax u/s 194J of the Act at the time of booking of commission expenses, even though the case of the AO was that the TDS is liable to be deducted on commission expenses u/s 194H of the Act.

6. We heard the parties on this issue and perused the record. We notice that the Ld CIT(A) has misread the common order dated 21.10.2016 passed by the Tribunal for AY 2009-10 and 2010-11 in ITA No.7408/Mum/2012 & others. A careful perusal of the order of the Tribunal would show that the commission payable to whole time directors has been held to be “Salary income” by the Tribunal liable to be deducted TDS u/s 192 of the Act. It has been further held that the TDS is liable to be deducted on the salary income u/s 192 of the Act, only at the time of making payment. The observations made by the Tribunal at page no.12, which was referred to by Ld CIT(A), relate to the payment of Rs.54.00 lakhs made to a director, who was not a whole time director. Such payment fell under the category of “Professional or technical services” liable to TDS u/s 194J of the Act. Hence the observations made by the Tribunal and the decision given on that issue are not related to the issue under consideration. Hence the Ld CIT(A) was not justified in referring to the provisions of sec.194J of the Act to the commission expenses payable to the whole time directors of the assessee company. Even otherwise, the provisions of sec.194J excludes from its ambit, the commission payments which are liable to TDS u/s 192 of the Act.

7. The impugned commission expenses have been made to the whole time directors and the assessee has deducted TDS on it u/s 192 of the Act, when the payments were actually made in the succeeding year. We noticed that an identical disallowance made in AY 2009-10 has been deleted by the ITAT and the order so passed by ITAT has since been upheld by Hon’ble High Court of Bombay, vide its order dated 16^th December, 2021 passed in Income tax Appeal No.2027 of 2017. The relevant observations made by Hon’ble jurisdictional High Court are extracted below:-

“2. The issue herein is regarding disallowance under Section 40(a) (ia) of the said Act for amount of Rs.1,08,00,000/-. The Assessing Officer had noted that Respondent had made a provision for commission for the Chairman and the Managing Director (CMD) of the Company for Rs.1,08,00,000/- at the year end but not deducted TDS under Section  194H of the said Act. The commission was paid to the CMD in the subsequent year, i.e., during the Assessment Year 2010-2011 after deducting TDS. According to Shri Sharma commission provision calls for disallowance under Section 40(a)(ia) in the impugned Assessment Year.

3. Before Commissioner of Income Tax (Appeals) (CIT (A)), respondent had contended that CMD was full time employee of the company and hence this payment was nothing but salary covered by TDS provision under Section 192 and under Section 194H of the said Act which deals with TDS on commission payments. As per Section 192 of the said Act, TDS is deductible from salary payment only at the time of payment and not at the time of making provision and therefore no disallowance is called for in the given circumstances. CIT (A) accepted the contentions of Respondent and allowed this ground of appeal.

4. Shri Sharma has contended that this payment being commission in nature is covered by Section 194H of the said Act and hence TDS was deductible at the time of making provision at the year end and as Respondent had failed to do so, the same called for disallowance under Section 40(A)(ia) of the said Act.

5. Shri Kapadia tendered copy of Form-16 of CMD which is taken on record and pointed out that Form-16 of the CMD for the Assessment Year 2010-2011 showed that commission was part of overall compensation/salary of the CMD and hence TDS in respect thereof is covered under Section 192 of the said Act.

6. Having considered the memo of appeal and the orders annexed thereto and after hearing Shri Sharma and Shri Kapadia, we find that the commission paid to the CMD has been shown as part of salary in Form-16 for Assessment Year 2010-2011. Total salary paid for the Financial Year 2009-2010 as it appears from the impugned order is Rs.1,72,15,959/-which includes commission for Rs.1,08,00,000/- paid by assessee in the Assessment Year in question.

7.  Section 192 of the said Act, unlike other TDS provisions require deduction of tax at source under the head “Salary only at the time of payment and not otherwise.” We also find that the quantum of accrual of expenses is not disputed by Revenue and Shri Sharma also stated the same. Since Shri Sharma had in fairness stated that the quantum or accrual of expenses is not disputed, there cannot be any perversity in the order passed by CIT(A) or by ITAT in concurring with the findings of CIT (A).

8. Commissioner of Income tax, Delhi, Ajmer, Rajasthan and Madhya Bharat vs. Nagri Mills Co. Ltd.1, this Court has observed as under:

“We have often wondered why the Income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes 1 33 ITR 681 rsk 5/6 501-ITXA-2027-17.doc as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953­54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of this character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other.”

9. In our view, the Tribunal has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, we do not think that questions as pressed any substantial question of law.”

8. Following the above said binding decision rendered by Hon’ble jurisdictional Bombay High Court, we hold that the assessee is liable to deduct tax at source in respect of commission expenses payable to the whole time directors u/s 192 only, as the same shall form part of their salary payment only. Further, the Ld CIT(A) has given a finding that the assessee has deducted tax at source on the commission expenses at the time of making payment in the succeeding year. The Tribunal in the earlier years has specifically held that the TDS is liable to be deducted u/s 192 of the Act only at the time of making payment and this view has since been upheld by the High Court. Accordingly, the disallowance made u/s 40(a)(ia) of the Act in all the three years in respect of commission expenses is liable to be deleted. We order accordingly.

9. In the result, all the three appeals filed by the assessee are allowed. Pronounced in the open court on 30.1.2023.