2021 (8) TMI 942 - AT - Income Tax

Addition u/s 36(1)(ii) - payment of incentive to the Chairman and Managing director - CMD having substantive share holding - AO proceeded to disallow the same u/s. 36(1)(ii) on the premises that the same is distribution of dividend in the guise of incentive - HELD THAT - As observed that other shareholders-cum-directors have not been paid any dividend/incentive during the year. Dividend is usually a return on the investment made by a person. However, in the present case, the incentive has been paid to Shri Rustom Joshi only for the services rendered by him and not a return on the investment made by him. If it was a dividend which was paid in the name of incentive, similar payments would have been made to the other shareholders of the company. However, this is not the case. The allegation of Ld. AO that there was violation of the provisions of The Companies Act, is not supported by any concrete material on record. The allegation of Ld. AO that dividend was being paid in the guise of incentive, has no legs to stand since the assessee has substantiate the fact that incentive was paid only against services rendered by Shri Rustom Joshi. Therefore, the additions have rightly been deleted. - Decided in favour of assessee.

Summary

Issues:
Appeal against deletion of addition u/s. 36(1)(ii) of ?250 Lacs made by AO for AY 2016-17.

Detailed Analysis:

Assessment Proceedings:
During assessment, AO disallowed ?250 Lacs paid as director incentive to Shri Rustom Joshi under Sec. 36(1)(ii) due to his shareholding. Assessee explained the incentive was for his long-standing service without remuneration, approved by Board and shareholders. AO alleged discrepancies in resolution and that the payment was a device to benefit a major shareholder. Assessee argued the incentive was for vital services, not paid to other directors, and denied allegations. AO disallowed the payment, adding it to income.

Appellate Proceedings:
CIT(A) deleted the addition, noting the incentive was for services rendered by Shri Rustom Joshi, not as dividend, and was approved by independent members. CIT(A) referenced relevant case laws and found no violation of Companies Act. He held the incentive was justified and not hit by Sec. 36(1)(ii). The appeal was allowed, and the addition was deleted.

Findings & Adjudication:
The Tribunal observed no dividends or incentives were paid to other directors, indicating the payment to Shri Rustom Joshi was for services, not as a return on investment. The allegation of dividend payment in guise of incentive lacked evidence, as the payment was justified for services rendered. The Tribunal upheld the deletion of the addition, dismissing the appeal.

In conclusion, the Tribunal upheld the CIT(A)'s decision to delete the addition under Sec. 36(1)(ii), emphasizing the payment to Shri Rustom Joshi was for services rendered, not as a dividend. The Tribunal found no violation of the Companies Act and dismissed the appeal, affirming the deletion of the addition.