ITAT Delhi allowed the commission paid to shareholder-directors under section 36(1)(ii)

 

The Revenue filed an appeal before the Hon’ble Income Tax Appellate Tribunal (ITAT), New Delhi, against the order of the Ld. Commissioner of Income Tax (Appeals) [CIT(A)], challenging the allowability of commission paid by the assessee-company to its Directors.

The commission was paid for services rendered towards promoting and enhancing sales, under an employment agreement ratified by a Board Resolution. Notably, similar commission payments had been accepted in earlier assessments under section 143(3) for AYs 2009-10 and 2010-11 based on the same agreement.

The Assessing Officer (AO), during the scrutiny assessment, noted from the tax audit report that the assessee had paid commission aggregating to ₹1,92,80,954/- to its Directors. Relying on section 36(1)(ii) of the Income-tax Act, 1961, the AO disallowed the entire amount, reasoning that the Directors were also shareholders and the company had accumulated profits. The AO treated the commission as a disguised distribution of dividends and, therefore, not a deductible expenditure.

The assessee contended that the commission was linked to turnover and formed part of the Directors’ contractual remuneration. It was duly approved by the Board and supported by a written agreement dated 1st December 2006 outlining specific roles and responsibilities. The assessee emphasized consistency in treatment across prior assessments and placed reliance on judicial precedents, particularly AMD Metplast Pvt. Ltd. v. DCIT (341 ITR 563) and CIT v. Career Launcher India Ltd. (250 CTR 240), both decided by the Hon’ble Delhi High Court. Accepting the submissions, the Ld. CIT(A) allowed the deduction.

Findings of the Hon’ble Tribunal:

The Hon’ble Tribunal upheld the Ld. CIT(A)’s findings, observing that the commission was performance-based, contractually obligated, and previously accepted by the Department. It held that section 36(1)(ii) does not preclude such payments merely because the recipient is also a shareholder, especially when commercial justification and due process are evident. The Revenue’s appeal was accordingly dismissed.

This ruling affirms that commission payments to shareholder-directors are allowable under the Act when backed by valid contracts, Board approval, and commercial rationale. The decision has ongoing relevance in similar disputes involving closely held companies.

Deputy Commissioner of Income Tax, Circle-1(1), New Delhi v. M/s. Abro Technologies Pvt. Ltd.
[2020] 118 taxmann.com 65 (Delhi – ITAT)

The copy of the order is as under:

1582883379-ITA No.4687-Del-2016 (Abro Technologies Pvt. ltd