TMI Blog2014 (6) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... ee - 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el/2010. By the said order dated 20.04.2012, the Tribunal had rejected the petitioner s appeal against the orders passed by the CIT (Appeals), affirming the disallowance of commission paid (by the petitioner) to its Managing Director and another Director (hereinafter referred to as the Directors ). 2. The petitioner s grievance is that the Assessing Officer has disallowed the commission paid by it to its Directors in consideration of the personal guarantees furnished by them to a bank for facilitating the loan provided to the petitioner. The petitioner s contention that the said commission is allowable as an expenditure having been incurred wholly and exclusively for the business of the company, was rejected by the Assessing Officer by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an employee was allowable as deduction, provided the same would not have been payable as profits or dividends had such commission not been paid. The Assessing Officer further concluded that in the event such commission had not been paid by the petitioner, it would have been distributable as dividends. The Assessing Officer further observed that by paying commission to the Directors, the assessee was avoiding 15% dividend distribution tax under Section 115O of the Act. 3.4 The assessee preferred an appeal before CIT (Appeals) challenging the Assessment, which was unsuccessful. The decision of CIT (Appeals) was also challenged by way of an appeal to the Tribunal. The Tribunal rejected the contention of the assessee and confirmed the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as passed by the assessee for paying the guarantee commissions to the Directors. It is also not in dispute that the Directors provided the personal guarantees and stood as surety for the financial assistance availed of by the assessee. The contention that personal guarantees of the Directors were insisted upon by the State Bank of India and were necessary for availing of the facilities, is also not contested. In view of the aforesaid factual background we find that the issues that needs to be addressed is whether the Directors have rendered any service to the assessee and whether by virtue of Section 36(1)(ii) of the Act such payments of commission are liable to be disallowed. 6. The Directors to whom the commission had been paid are, ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volving payment of commissions to the Directors are unreal or not genuine. 7. The next aspect that has to be considered is whether payment of such commissions are liable to be disallowed as an expense by virtue of Section 36(1)(ii) of the Act. At this stage it is necessary to refer the Section 36(1)(ii) of the Act, which reads as under:- any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commissioner. 8. It is also apparent from the reading of the aforesaid provision that bonus or commission paid to an employee is expressly allowed as deduction. The only exception is where the bonus or commission pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered by him as per terms of appointment as a managing director. 10. Thus, in our view, the Tribunal and the Income Tax Authorities below 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. 11. In view of the above, the writ petition is allowed and the impugned order dated 31.10.2013 is set aside. We direct that the order dated 20.04.2012 passed by the Tribunal in ITA No. 1642/Del/2010 be rectified to the limited extent that it upholds the disallowance of expense of Rs.48,75,000/-, paid as commission to the Directors. The said disallowance and the additions made on this count are set aside. The impugned matter is remitted to the Tribunal to pass c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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