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2014 (6) TMI 46 - HC - Income TaxDisallowance of commission paid to directors u/s 36(1)(ii) of the Act - Personal guarantee furnished to bank for facilitating loan – Rejection of application u/s 254(2) of the Act – Rectification of order – Held that:- The act of the Directors in providing their personal guarantees and undertaking the attendant risks is clearly beyond the scope of their services as employees of the assessee - the transactions is for which commissions were paid by the assessee to its Directors are real - the Directors have provided their personal guarantee have acted beyond the call of duty as employees of the assessee - the assessee in its commercial wisdom has agreed to pay a commission for the furnishing of such guarantees cannot be flawed - it is assessee’s discretion as to which expenditure is necessary and to what extent - it is not within the jurisdiction of the AO to impose his views with regard to the necessity or the quantum of the expenditure undertaken by an assessee. The Directors would not be entitled to receive the amount paid to them as commission, as dividends because even if it is assumed that nonpayment of commission would add to the kitty of distributable profits the same would have to be distributed pro-rata to all the shareholders and not selectively to the Directors - Dividend is paid by a company as distribution of profits to its shareholders in the ratio of their shareholding in the company - the Directors were not the only shareholders of the company – thus, in the event the Commission had not been paid by the assessee it could not have been distributed to them as dividends - Relying upon AMD Metplast P. Ltd. Versus Deputy Commissioner of Income-tax [2011 (12) TMI 320 - Delhi High Court] - the Tribunal erred in holding that the payments of commission to the Directors fell within the exclusionary limb of Section of 36(1)(ii) of the Act – thus, the order is rectified to the limited extent that it upholds the disallowance of expense paid as commission to the Directors – the disallowance and the additions made is set aside – Decided partly in favour of Assessee.
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