2025 (5) TMI 1549 - AT - Income Tax

Addition u/s 36(1)(ii) - payment of commission made by the assessee company to its Director - as per AO assessee failed to prove that activities of the director such as meeting prospective customers participation in exhibitions market products of the company were not as the director of the company - CIT(A) deleted addition - HELD THAT - CIT(A) has not erred in facts and in law in following the decision of ITAT Ahmedabad in assessee s own case for A.Y. 2016-17 2024 (7) TMI 1481 - ITAT AHMEDABAD while allowing relief to the assessee on this issue. Therefore we find no infirmity in the order of Ld. CIT(A) so as to call for any interference. Appeal of the Department is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

• Whether the payment of commission amounting to Rs. 1,90,85,522/- made by the assessee company to its Director, Shri Girish L Chovatia, can be disallowed under Section 36(1)(ii) of the Income Tax Act on the ground that it was made with the sole intention of evading Dividend Distribution Tax (DDT).
• Whether the assessee has adequately demonstrated that the commission paid was for actual services rendered by the Director and not a disguised distribution of profits to avoid tax liability.
• The applicability and relevance of judicial precedents and earlier appellate orders, including the ITAT's decision in the assessee's own case for the immediately preceding assessment year 2016-17, concerning similar facts and issues.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Legitimacy of Commission Payment to Director and Its Disallowance Under Section 36(1)(ii) on Grounds of Tax Avoidance

Relevant Legal Framework and Precedents:

Section 36(1)(ii) of the Income Tax Act allows deduction of any sum paid to an employee or director by way of commission, subject to the condition that it is for services rendered. The Assessing Officer (AO) disallowed the commission payment on the premise that it was a device to evade Dividend Distribution Tax (DDT), which is levied on dividends but not on commission payments.

The assessee relied on several judicial pronouncements including:

• Loyal Motor Services Co. Ltd. [1946] (14 ITR 647) (Bombay)
• AMD Metaplat (P) Ltd. [2012] 20 taxmann.com 647 (Delhi)
• Controls & Switchgear Contractors Ltd. [2014] 47 taxmann.com 141 (Delhi)
• Other precedents such as M/s Nat Steel Equipment Pvt. Ltd. and M/s. Marks Shipping Pvt. Ltd. which establish that commission paid for actual services rendered cannot be disallowed merely on suspicion of tax avoidance.

Court's Interpretation and Reasoning:

The Ld. Commissioner of Income Tax (Appeals) (CIT(A)) and subsequently the Appellate Tribunal relied heavily on the ITAT's decision in the assessee's own case for the immediately preceding year (A.Y. 2016-17), where a similar disallowance was deleted. The Tribunal noted that:

• Shri Girish L Chovatia was one among thirty shareholders holding approximately 31.45% shares and one of six Directors in the company.
• Not all Directors were paid commission, indicating selective payment based on services rendered rather than a blanket distribution of profits.
• The commission paid was Rs. 1,90,85,522/- against a book profit of Rs. 6,68,25,463/-, approximating 7.83%, which was reasonable and not excessive.
• The Director declared his total income including commission and paid substantial tax, negating the claim that the payment was a tax avoidance device.

The AO failed to produce any concrete evidence that the commission was paid solely to avoid DDT. The Tribunal distinguished the AO's reliance on the Dalal and Broacha Stock Broking Pvt. Ltd. case, finding it factually inapplicable.

Key Evidence and Findings:

• Evidence of the Director's active role in the company's operations, including meetings with prospective customers, participation in exhibitions, and marketing of company products.
• Selective payment of commission to only one Director among six, suggesting payments were linked to actual services rather than profit distribution.
• Tax returns of the Director showing substantial income and tax payment on the commission amount.
• Book profits of the company and proportionate commission amount indicating reasonableness.

Application of Law to Facts:

The payment of commission was held to be an allowable business expenditure under Section 36(1)(ii) because it was supported by evidence of actual services rendered and was not a mere conduit for distributing profits to avoid DDT. The absence of any evidence from the AO to prove the contrary was critical.

Treatment of Competing Arguments:

The Department argued that the commission was a disguised dividend to evade DDT. However, the Tribunal and CIT(A) rejected this contention due to lack of evidence and reliance on judicial precedents supporting the legitimacy of commission payments for services rendered. The AO's reliance on a distinguishable precedent was also negated by the facts of the present case.

Conclusions:

The disallowance of Rs. 1,90,85,522/- under Section 36(1)(ii) was not sustainable. The payment constituted a genuine business expense for services rendered by the Director and was not a device for tax avoidance.

3. SIGNIFICANT HOLDINGS

The Tribunal, affirming the CIT(A)'s order, held:

"Based on the facts and judicial precedents, we hold that the commission paid to Shri Girish Chovatia is an allowable business expenditure under section 36(1)(ii). Therefore, the disallowance made by the AO and confirmed by the Ld.CIT(A) is deleted."

Core principles established include:

• Commission payments to directors are deductible under Section 36(1)(ii) if made for actual services rendered and not as a device to avoid Dividend Distribution Tax.
• The burden lies on the Assessing Officer to prove that such payments are disguised dividends or tax avoidance mechanisms.
• Evidence such as selective payment to directors, proportionate commission relative to book profits, and tax compliance by the recipient director are relevant factors in determining the genuineness of such payments.
• Earlier appellate decisions on identical issues in the assessee's own case are binding and must be followed unless distinguishable facts exist.

Ultimately, the Department's appeal was dismissed, upholding the deletion of the disallowance and confirming the commission payment as an allowable business expenditure.