2018 (2) TMI 1885 - AT - Income Tax

Addition on account of bonus paid to one of its Director - addition u/s 36(1 )(ii) - AO noted that no dividend was distributed among the shareholders which included directors of the company - HELD THAT - We note that in assessment year 2007-08 no evidences were filed by the assessee in respect of the services rendered by the directors. In the year under consideration also no such evidences have been filed before the lower authorities or before us. Thus respectfully following the finding of the Tribunal (supra) we restore this issue to the file of the Assessing Officer for deciding afresh with the directions identical to what has been given by the Tribunal(supra). Accordingly the Ground No. 1 of the appeal is allowed for statistical purposes. Addition on account of out of pocket expenses incurred by the assessee - HELD THAT - AO has made the disallowance mainly on the issue that the assessee failed to discharge its onus that expenses were incurred wholly and exclusively for the purpose of business. Since the assessee has not furnished any evidence to support the claim that expenses were incurred wholly and exclusively for the purpose of business we feel it appropriate to restore the issue to the file of the AO for deciding afresh after providing adequate opportunity of being heard to the assessee. The assessee may produce all the documents to substantiate its claims to satisfy the conditions under section 37. Accordingly the ground of the appeal of the Revenue is allowed for statistical purposes.

Summary

Issues Involved:
1. Deletion of addition on account of bonus paid to a director under section 36(1)(ii).
2. Deletion of addition on account of expenses for services to clients under section 37.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Bonus Paid to a Director under Section 36(1)(ii):

The Revenue appealed against the deletion of an addition amounting to ?2,35,00,000/- for AY 2009-10 and ?1,97,43,000/- for AY 2010-11, which was on account of bonus paid to one of the Directors. The Assessing Officer (AO) argued that under section 36(1)(ii) of the Income-tax Act, bonus/commission paid to a director/employee is not allowable as a deduction if it could have been distributed as profit or dividend. The AO noted that no dividends were distributed among the shareholders, including the directors, suggesting that the company was avoiding dividend distribution tax by distributing dividends in the form of bonuses or commissions.

The Commissioner of Income-tax (Appeals) [CIT-(A)] allowed the appeal of the assessee, following the Tribunal's decision in the assessee’s own case for AY 2007-08. The Tribunal had restored the issue to the AO for fresh consideration. The Tribunal, in the current appeals, noted that the facts and circumstances were identical to AY 2007-08 and restored the matter back to the AO for re-verification, emphasizing that the onus is on the assessee to prove that services were rendered by the director. The Tribunal directed the AO to decide the issue afresh, providing the assessee an opportunity to present evidence.

2. Deletion of Addition on Account of Expenses for Services to Clients under Section 37:

For AY 2009-10, the Revenue contested the deletion of an addition amounting to ?65,42,902/- related to out-of-pocket expenses (OPE) incurred by the assessee. The AO disallowed these expenses, arguing that the assessee failed to prove that the expenses were incurred wholly and exclusively for business purposes as required under section 37 of the Act. The AO noted that the assessee did not raise bills corresponding to these expenses and thus did not fulfill the conditions of section 37.

The assessee contended that these expenses were related to salaries, rent, infrastructure costs, and other expenses like travel, conveyance, hotel stays, courier, and telephone, which were incurred in the course of carrying out services for clients. The CIT-(A) accepted the assessee's explanation and deleted the disallowance. The Tribunal, however, noted that no evidence was provided to support the claim that the expenses were incurred wholly and exclusively for business purposes. Therefore, the Tribunal restored the issue to the AO for fresh consideration, directing the AO to provide the assessee with an opportunity to substantiate its claims with appropriate evidence.

General Grounds:

The general grounds raised by the Revenue were dismissed as infructuous in both appeals.

Conclusion:

Both appeals of the Revenue were allowed partly for statistical purposes, with the issues being restored to the AO for fresh consideration. The Tribunal directed the AO to provide the assessee with adequate opportunities to present evidence to substantiate its claims. The decision was pronounced in the open court on 8th February 2018.