2014 (10) TMI 998 - AT - Income Tax

Addition u/s 43B r.w.s. 36(1)(ii) V/s allowable business expenditure u/s 37 - good work reward - assessee has not submitted evidence to show that actual payment has been made before filing the return of income as bonus - whether good work reward constitutes bonus within the meaning of the section 36(1)(ii)? - assessee is engaged in providing recruitment consultancy - HELD THAT - As decided in SHRIRAM PISTONS AND RINGS LTD. VERSUS COMMISSIONER OF INCOME-TAX 2008 (4) TMI 273 - DELHI HIGH COURT such expenditure paid for good work reward is allowable as business expenditure u/s 37 (1) of the Ac. These payments were not of the type contemplated by the Payment of Bonus Act. It was held that it was an ex gratia payment or some sort of reward given to an employee for the good work done by him and would therefore, fall within the category of expenditure incurred for the purpose of business expediency and for improving the working of the assessee. Therefore, it would not fall within the meaning of section 36(1)(ii) of the Act but would fall within the ambit of section 37 of the Act. - decided in favour of assessee.

Summary

Issues:
- Disallowance of expenditure under section 43B of the Income Tax Act, 1961
- Interpretation of section 36(1)(ii) regarding bonus/incentives
- Applicability of the decision in the case of Shriram Pistons & Rings Ltd. vs. CIT

Analysis:

Issue 1: Disallowance of expenditure under section 43B
The assessee's appeal was against the order of CIT (Appeals) regarding the disallowance of an expenditure under section 43B. The Assessing Officer added an amount under section 43B for non-submission of evidence regarding payment before filing the return of income. The CIT (A) upheld the addition, stating that any expenditure on commission to an employee is deductible under section 36(1)(ii) if not in lieu of dividend. The company had not made profits, so the amount was not in lieu of profits or dividend, falling under section 36(1)(ii). The ITAT Delhi allowed the appeal, citing precedents and holding that the expenditure was allowable under section 37(1) as business expenditure.

Issue 2: Interpretation of section 36(1)(ii) regarding bonus/incentives
The assessee contended that the performance incentive paid to employees was not covered under section 36(1)(ii) as it was not dependent on profits. The ITAT Delhi referred to the decision in the case of Shriram Pistons & Rings Ltd. vs. CIT, where it was clarified that "good work reward" given to employees did not fall under the categories of bonus defined for section 36(1)(ii). It was held that such rewards were allowable as business expenditure under section 37(1) and not under section 36(1)(ii).

Issue 3: Applicability of the decision in the case of Shriram Pistons & Rings Ltd. vs. CIT
The decision in the case of Shriram Pistons & Rings Ltd. vs. CIT was crucial in determining the treatment of performance incentives as business expenditure under section 37(1) rather than as bonus under section 36(1)(ii). The ITAT Delhi relied on this precedent to allow the assessee's appeal, emphasizing that such expenditures were not linked to profits and were therefore not covered under section 36(1)(ii).

In conclusion, the ITAT Delhi allowed the assessee's appeal, holding that the performance incentives were allowable as business expenditure under section 37(1) based on the interpretation of relevant sections and precedents. The judgment clarified the distinction between bonus and other types of incentives, providing a favorable outcome for the assessee based on legal interpretations and precedents.