2014 (8) TMI 1091 - HC - Income Tax

Invoking provisions of Section 40A(2)(b)(ii) - payment made to Renu Munjal Director the assessee company - AO had invoked Section 36(1)(ii) of the Act on the ground that Renu Munjal was also a shareholder and therefore the commission payment should be disallowed as dividend could have been paid - Held that - Reasoning of the Assessing Officer has been rightly rejected by the Tribunal. It is also noticeable that tax on dividend payment payable by the respondent company was much less than the tax payable by the individual assessee on income under the head Salary . In case Renu Munjal had received dividend she would not have paid any tax on dividend. However she has paid tax on the commission earned. In these circumstances we are not inclined to interfere with the impugned order.

Summary

Issues involved: Condonation of delay in refiling the appeal; Interpretation of provisions of Income Tax Act; Disallowance of commission payment as dividend.

Condonation of delay in refiling the appeal:
The delay in refiling the appeal was attributed to computerization and court fee issues. The respondent's counsel did not object to condoning the delay of 490 days, and the reasons provided in the application were considered satisfactory. Consequently, the delay was condoned, and the application was disposed of.

Interpretation of provisions of Income Tax Act:
The Income Tax Appellate Tribunal found that the payment made to the Director of the assessee company was in accordance with the terms of employment, and the Assessing Officer did not question the reasonableness of the commission paid. The Assessing Officer's invocation of Section 36(1)(ii) of the Income Tax Act was based on the Director also being a shareholder, suggesting that dividend could have been paid instead of commission. However, this reasoning was rejected by the Tribunal, citing a decision in CIT Vs. Bony Polymers P. Ltd. The Tribunal's decision was upheld, emphasizing that the tax payable on dividend by the company was lower than the tax payable by the individual on salary income. The dismissal of the appeal was justified based on these findings.

Disallowance of commission payment as dividend:
The Assessing Officer's attempt to disallow the commission payment as dividend was deemed unfounded by the Tribunal, given the specific terms of employment and the tax implications. The Tribunal's decision was supported by the Supreme Court's dismissal of a Special Leave to Appeal against a similar case. The comparison of tax liabilities between dividend and commission income further reinforced the Tribunal's decision not to interfere with the order. Consequently, the appeal by the revenue was dismissed based on the detailed analysis and application of relevant provisions of the Income Tax Act.