TMI Blog2011 (12) TMI 320X X X X Extracts X X X X X X X X Extracts X X X X ..... in terms of the Companies Act, 1956 - Decided in favor of the assessee - 650 of 2011 - - - Dated:- 16-12-2011 - SANJIV KHANNA, EASWAR R. V., JJ. JUDGMENT 1. M/s. AMD Metplast Private Limited has filed the present appeal under section 260A of the Income-tax Act, 1961 (Act, for short) impugning the order dated August 31, 2010, passed by the Income-tax Appellate Tribunal ("the Tribunal", for short). The appeal pertains to the assessment year 2005-06. 2. After hearing learned counsel for the parties, the following substantial question of law is framed : "Whether the Tribunal is right in holding that commission of Rs.25,00,000 paid to Mr. Ashok Gupta, managing director of the assessee, cannot be allowed as a deduction in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31, 2002. Thereafter, by a resolution passed by the board of directors dated June 18, 2002, it was agreed that Ashok Gupta, managing director would be paid commission of 1 per cent. of the sales subject to a ceiling of Rs. 25,00,000. It was further noticed that the appel- lant had claimed that Ashok Gupta and H. S. Gupta, were paid Rs.7,20,000 and Rs. 9,00,000 as salary respectively. 6. The Commissioner of Income-tax (Appeals) held that this amount of Rs.9,00,000 paid to Mr. H. S. Gupta and Rs. 7,20,000 paid to Ashok Gupta apparently appears to be salary. He directed the Assessing Officer to verify the said contention from records and if the same was paid as salary, then delete the said disallowance. This direction was given as an appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "9. . . We, therefore, hold that the assessee would not be entitled for deduction on account of commission under section 36(1)(ii) of the Act to the extent of profit which would have been payable to him as dividend. We, therefore, set aside the order of the learned Commis- sioner of Income-tax (Appeals) and restore the matter to the file of the Commissioner of Income-tax (Appeals) with the directions to compute the dividend payable as per Companies Act and disallow the same under section 36(1)(ii). However, the difference between the commission paid at Rs. 25 lakhs an amount of dividend payable to the assessee will be allowable as deduction under section 37(1) of the Act subject to fulfilment of the requirements of section 37(1) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areholder employees was by reference to their salaries and not to their stakes in the company. A tabulated result is set out in the application for this reference and is printed on page 12 of the record. It is there shown that of the thirteen shareholders employees six employees got less bonus than they would have got as dividends if the sum of Rs. 4,130 had been distributed by way of additional dividends. Five of them got more bonus than such dividends and in the case of two of them the figure works out the same. That is an accident in the sense that the bonus payments being referential to their wages and the dividends being referential to their shares have no relation to each other. Now, the answer to the question referred to us depends o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are construing a taxation statute and the subject is entitled to have such a statute strictly construed in his favour. In my opinion in placing a strict construction on this sub- section, the sum excepted under the expression 'such sum' must be the same sum as is described by the expression 'any sum paid as bonus or commission', and that an equivalent sum even in the two cases where by accident the bonus and the prospective dividend are the same, is not included in that construction. If that is the construction which is to be placed upon this sub-section, then the answer to the question is, that the whole of the sum of Rs. 4,130 paid as bonus to the share- holder employees is allowable as deduction under the provisions of section 10(2)(x) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estigated and disallowed. An illustration will perhaps make the position clear. Five persons in a firm realizing that the profits of the year were Rs.50,000 and they had an equal share in the profits of the business decide that instead of receiving Rs. 10,000 each as the share of profits each of them will be paid Rs. 10,000 as bonus or commission. In such a case the firm, when sought to be assessed, may contend that Rs.10,000 were paid as bonus. The contention will be clearly rejected. But the safeguards do not end there. The firm will have to prove to the satisfaction of the taxing authority that the five partners were emplo- yees, in the first instance. Secondly, that the bonus was a reasonable amount having regard to the pay of the emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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