Commission to working director-shareholder cannot be disallowed merely because assessee-company did not declare dividend

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ITAT DELHI

Coil Company (P.) Ltd. v. ACIT

IT Appeal Nos. 1389 (Delhi) of 2009

2648 (Delhi) of 2010 and 425 (Delhi) of 2011

[Assessment Years 2005-06 to 2007-08]

MAY 25, 2012

The plain reading of sec. 36(1)(ii) contemplates two situations. According to the first situation, any sum paid to an employee as a bonus or commission for services rendered would be allowed to the assessee. The second part exhibits the other condition that the deduction mentioned in the first situation could be allowed, if such sum would have not been payable to an employee as a profit or dividend meaning thereby if the amount of commission or bonus is receivable by an employee in the shape of profit/dividend then such commission paid to such employee would not be allowed as a deduction.

We have already noticed the shareholding pattern of the assessee. It is pertinent to observe that in the relevant year Sardar Sucha Singh was holding just 39.9% of the total shareholding and rest of the shares are being held by other individuals or by the company. Being a private limited company, controlled by the family members, a resolution approving the payment of commission to the working directors may not be very difficult task but whether this arrangement indicates that if this commission was not paid to the working director then it would be received in the shape of profit/dividend. If we look towards the shareholding pattern then only 39.9% of this commission paid would be paid to Shri Sucha Singh on the basis of the shares held by him. The other shareholders, namely, Harjinder Kaur, Paramjeet Singh who are holding 25% and 16% of the shares would get commission though the Board has not resolved for payment of any extra remuneration to these persons. It only suggests that commission was not paid to Shri Sucha Singh on the basis of the shares held by him, rather it is paid by keeping in view his services towards the company. Distribution of dividends is one component. It does not give the meaning that if an assessee failed to distribute the dividend, then payment of any commission would take the colour of dividend. The commission paid to Shri Sucha Singh is linked with the sales turnover of the assessee and to the performance of the directors. It has nothing to do with the shareholding pattern. Considering the authoritative pronouncement of the Hon’ble Delhi High Court in the cases referred by the learned counsel for the assessee, we allow the grounds of appeal raised by the assessee in assessment years 2005-06 and 2007-08. Consequently, we reject the ground No.1 raised by the revenue in assessment year 2006-07. The disallowance made by the Assessing Officer in respect of commission paid to Shri Sucha Singh in all the three years is held not to be justified. Such disallowance is deleted