Deduction under s 36(1)(ii)

Payment of commission to the working directors in lieu of dividend is not allowable as deduction under s 36(1)(ii) — as held by MumTrib in Dalal Broacha Stock Broking Pvt Ltd v Addl CIT — In favour of: The Revenue ; ITA No. 5792/MUM/2009 : Assessment Year: 2006–2007

Decided on: 22 June 2011

Section 36(1)(ii) applies to all employees including shareholder employees. However, the disallowability is restricted to only partners and shareholders as only in those cases, payment could be in lieu of profit or dividend.

As regards the rendering of services by the employees for payment of bonus/commission, the only requirement of s 36(1)(ii) is that some services should have been rendered. Adequacy of services is not a relevant consideration

The word “payable” in s 36(1)(ii) means that dividend would have been declared by any reasonable management, on the facts and circumstances of the case considering the profitability and other relevant factors and become payable to shareholders.

There being specific provision in s 36(1)(ii), any expenditure incurred on account of payment of bonus or commission to employee should be covered by the said section and not under s 37(1).