Issues in Corporate Taxation. - jb nagar cpe study circle of wirc of icai

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Facts & Background • The assessee is in the business of share trading; • The assessee paid commission to its employee-directors who were also its only shareholders; • AO’s contentions • Payment of commission was in lieu of dividend and used as tax avoidance tool & not eligible for deduction u/s. 36(1)(ii) • Disallowed commission under Section 36(1)(ii) of the Act Legal Provision • Section 36(1)(ii) (Other deductions) provides that – “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 commission” August, 2011 CA Sanjeev Lalan, Singrodia Goyal & Co. Presentation at JB Nagar CPE Study Circle 18
Arguments Assessee’s arguments Department’s arguments Insignificant difference in tax rate (excluding DDT rate) applicable to assessee (35.75%) and to directors (33%) – No intention to evade tax DDT liability Dividend was not declared since assessee wanted to improve its net worth to attract No evidence to support this argument Directors related to each other – Decision foreign investor; not to declare dividend in spite of substantial earnings is not reasonable Section 36(1)(ii) applies only to commission paid to non-shareholders employees - Legitimate and bona fide expenditure incurred wholly and exclusively for purpose of business cannot be disallowed - Commission allowable u/s 37 It applies to commission paid to all employees (shareholders or not) Section 36(1)(ii) being specific provision for allowance of commission – Section 37(1) not applicable August, 2011 CA Sanjeev Lalan, Singrodia Goyal & Co. Presentation at JB Nagar CPE Study Circle 19
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Issues in Corporate Taxation. - jb nagar cpe study circle of wirc of icai

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