2024 (4) TMI 931 - AT - Income Tax

Disallowance of bonus paid to directors u/s 36(1)(ii) - assessee paid a bonus in addition to the remuneration to two of its directors - it is the plea of the assessee that both the directors are promoter directors of the company having a diploma in electronic engineering with 35 years of experience in the IT Industry and that both the directors are actively involved in the day-to-day affairs of the company and a bonus of Rs. 96 lakh each was paid for the services rendered by them and also because during the year under consideration, total turnover and sales turnover increased by 44% and 55%, respectively, as compared to the preceding year HELD THAT - As directors had declared a salary of Rs. 60 lakh and a bonus of Rs. 35 lakh received by them. Thus, it is not a case wherein the bonus was received by the directors only in one year. Accordingly, we are of the considered view that the decision of the Special Bench of the Tribunal in Dalal Broacha Stock Broking (P.) Ltd. 2011 (6) TMI 251 - ITAT, MUMBAI has been rendered in its own set of facts, which are completely different from the facts of the present case. Further from the financial statement of the assessee, we find that the turnover from the sale of products increased from Rs. 39.77 crore in the assessment year 2014-15 to Rs. 61.61 crore in the assessment year 2015-16. The aforesaid facts also distinguish the present case from the facts in Dalal Broacha Stock Broking (P.) Ltd. (supra), as in that case, it was noted by the Special Bench that the steady rise in performance was due to improved market conditions as the taxpayer was a stockbroker who was getting commission on sale/purchase of shares by the investor/traders. However, in the line of business of the assessee, wherein it is engaged in dealing in computers, networking solutions, and providing maintenance and facility management services, it cannot be denied that without the dedicated efforts turnover from sales and services cannot increase. Thus, aforesaid factors also support the case of the assessee that the bonus was a reward for the work of the promoter directors, who were actively involved in the day-to-day affairs of the company, in addition to the salary paid to them. Accordingly, in view of the aforesaid facts and circumstances, we are of the considered view that the assessee is entitled to claim deduction u/s 36(1)(ii) of the Act in respect of payment of bonus to its directors. Therefore, the impugned disallowance u/s 36(1)(ii) of the Act is deleted. As a result, ground no.1 raised in assessee s appeal is allowed.

Summary

Issues Involved:
1. Disallowance of bonus paid to directors u/s 36(1)(ii).
2. Non-compliance with CBDT instructions regarding scope of scrutiny assessment.
3. Initiation of penalty u/s 271(1)(c) and charging interest u/s 234A, 234B, 234C, and 234D.
4. Denial of physical hearing through video conferencing by learned CIT(A).

Summary:

Issue 1: Disallowance of Bonus Paid to Directors u/s 36(1)(ii)
The assessee challenged the disallowance of Rs. 1,92,00,000/- paid as a bonus to two directors, arguing that the directors had already paid taxes on the bonus, thus disallowance would result in double taxation. The AO disallowed the bonus, reasoning that it should have been paid as dividends, thus treating the bonus as a "colourable device" to avoid tax. However, the Tribunal found that the bonus was paid for services rendered and was not in lieu of dividends, citing the jurisdictional High Court's decision in Loyal Motors Service Co Ltd. The Tribunal concluded that the assessee is entitled to claim the deduction u/s 36(1)(ii) and deleted the disallowance.

Issue 2: Non-Compliance with CBDT Instructions on Scope of Scrutiny Assessment
The assessee claimed that the AO wrongly converted a limited scrutiny into a full scrutiny without appropriate approval, exceeding the scope of limited scrutiny. The Tribunal, in light of the relief granted under Issue 1, left this issue open as per the submission of the learned AR.

Issue 3: Initiation of Penalty u/s 271(1)(c) and Charging Interest u/s 234A, 234B, 234C, and 234D
The Tribunal noted that the levy of penalty u/s 271(1)(c) is premature and the charging of interest u/s 234B and 234C is consequential. Therefore, no separate adjudication was needed for this issue.

Issue 4: Denial of Physical Hearing through Video Conferencing by Learned CIT(A)
Given the Tribunal's findings in respect of Issue 1, this issue was rendered academic.

Conclusion:
The appeal by the assessee was allowed, with the Tribunal deleting the disallowance of the bonus paid to directors and leaving other issues either open or as academic.