Facts of the Case

The respondent-assessee, a private limited company, filed its return declaring substantial income for AY 2009–10. During assessment under Section 143(3), the Assessing Officer made a disallowance of ₹6.64 crore under Section 36(1)(ii) on account of commission/incentive paid to its director, Mr. Anshuman Magazine, who was also a shareholder.

The Revenue contended that such payment was in lieu of dividend and intended to avoid dividend distribution tax. The CIT(A) upheld the disallowance, holding that the commission was not for genuine business purposes and lacked necessary approvals.

However, the ITAT allowed the assessee’s appeal, relying on consistency with earlier and subsequent assessment years where similar payments were allowed.

Issues Involved

  1. Whether commission paid to a shareholder-director can be disallowed under Section 36(1)(ii) as disguised dividend.
  2. Whether such payment constitutes genuine business expenditure.
  3. Whether the principle of consistency applies when similar claims were accepted in earlier and subsequent years.
  4. Whether absence or delay in approval invalidates such remuneration.

Petitioner’s Arguments (Revenue)

  • The ITAT erred in reversing the findings of CIT(A).
  • The commission paid was not for business purposes but to avoid dividend distribution tax.
  • The Tribunal failed to consider that facts differed from earlier years where dividends were declared.
  • The disallowance under Section 36(1)(ii) was justified as the payment was excessive and not genuine.

Respondent’s Arguments (Assessee)

  • Similar commission payments were allowed in earlier and subsequent assessment years.
  • The principle of consistency must be followed.
  • The payment was genuine and part of business expenditure.
  • Approval from competent authority, even if obtained later, relates back to the relevant assessment year.
  • The income was already taxed in the hands of the director.

Court’s Findings / Order

  • The High Court upheld the ITAT’s decision in favour of the assessee.
  • It held that:
    • The principle of consistency was correctly applied since similar payments were accepted in other years.
    • No material was produced to show that the expenditure was not for business purposes.
    • The reasoning for disallowance under Section 36(1)(ii) had been consistently rejected in earlier years.
    • No substantial question of law arose for consideration.

Important Clarifications

  • Commission to a director-shareholder is not automatically treated as dividend.
  • If such expenditure is consistently allowed and taxed appropriately, disallowance may not be justified.
  • Principle of consistency plays a crucial role in tax assessments.
  • Approval obtained subsequently can relate back to the relevant year.
  • Burden lies on Revenue to prove lack of business purpose.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2020:DHC:1065-DB/SVN13022020ITA962020_160957.pdf

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