Case summary, Income Tax

Remuneration paid to Director independent of shareholding cannot be considered dividend

The Delhi bench of ITAT has held in the case of DCIT vs BMR Business Solutions Pvt. Ltd. that the remuneration paid to the Director of a company commensurate with his experience which has no bearing on his shareholding, cannot be considered ‘dividend’ under the Income Tax Act.

Revenue’s Arguments:

The revenue argued that as per Section 36(1)(ii) of the Act, bonus or commission paid to an employee is not allowable as deduction, if it could have been paid as profit or dividend. The assessee company could have paid the amount as dividend instead of bonus since the payment was being made to director of the company who was also a shareholder.

Assessee’s Arguments:

Assessee submitted that bonus was a variable remuneration for professional services rendered and amount of bonus was decided by the Board prior to the commencement of the financial year.

Tribunal Holding:

The Tribunal held that the remuneration paid was commensurate with assessee’s experience and was not a factor of his shareholding. Moreover, discretion of the company either to pay or not to pay dividend could not be assumed. The AO had not brought any material on record to substantiate this allegation that the amount in question was actually payable as dividend.

Also Read: Capital Expenditure vs Revenue Expenditure

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