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2019 (4) TMI 560 - AT - Income TaxAddition u/s 36 (1) (ii) - Bonus paid to a Shareholder - HELD THAT - Section 10 (2) (x) of 1922 Act required that the payment of bonus commissions should be reasonable but there is no such requirement in Section 36 (1) (ii) of 1961 Act and hence, judgments noted by the AO are not applicable. Therefore, we decide the issue in favour of the assessee because this is not the case of the revenue that the amount in dispute paid by the assessee to its director as bonus was otherwise payable to the director as dividend and therefore, the provisions of section 36 (1) (ii) are not helping the revenue in the facts of the present case. See ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1 (1) , MANGALORE VERSUS MANDOVI MOTORS PVT. LTD. 2010 (11) TMI 960 - ITAT BANGALORE - Decided against revenue
Issues Involved:
1. Disallowance of ? 120,65,600/- being Bonus paid to a Shareholder under Section 36(1)(ii) of the Income Tax Act, 1961. Detailed Analysis: Issue 1: Disallowance of ? 120,65,600/- being Bonus paid to a Shareholder under Section 36(1)(ii) Background and Arguments: The appeal is directed against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] regarding the disallowance of ? 120,65,600/- paid as a bonus to a shareholder, Mr. Abhijeet Shah, who holds 34.62% of the shares and is also a director of the company. The Assessing Officer (AO) disallowed the bonus under Section 36(1)(ii) of the Income Tax Act, 1961, on the grounds that the bonus would otherwise have been payable as dividends. Assessee’s Submissions: The assessee argued that Mr. Abhijeet Shah, being a director and shareholder, dedicates his entire time to the company’s affairs and receives a salary for his services. The company also declared dividends out of the profits for the financial year 2013-14. The assessee relied on various judicial pronouncements, emphasizing that the bonus paid is part of the salary/remuneration and not in lieu of dividends. They cited cases such as CIT vs. Sesa Goa Ltd., AMD Metplast (P.) Ltd. v. DCIT, and CIT v. Career Launcher India Ltd., where courts have held that bonus payments to shareholder-employees are allowable deductions if they are for services rendered and not in lieu of dividends. Revenue’s Arguments: The revenue relied on the AO’s order, asserting that the bonus payment falls under the disallowance criteria of Section 36(1)(ii) as it could have been paid as dividends. Tribunal’s Findings: The tribunal considered the rival submissions and noted that the bonus was paid to Mr. Abhijeet Shah for his services as a director, not as dividends. They referred to the tribunal order in ACIT vs. Mandovi Motors (P) Ltd., which followed the judgment of the Hon’ble Bombay High Court in CIT vs. Sesa Goa Ltd. The tribunal emphasized that Section 36(1)(ii) disallows bonus payments only if such payments would otherwise be payable as profits or dividends. The tribunal highlighted that the judgments cited by the AO were based on the 1922 Act, which required the payment to be reasonable, a condition not present in Section 36(1)(ii) of the 1961 Act. Therefore, these judgments were not applicable to the current case. Conclusion: The tribunal concluded that the bonus paid to Mr. Abhijeet Shah was for services rendered and not in lieu of dividends. Hence, the disallowance under Section 36(1)(ii) was not justified. The tribunal allowed the appeal on this ground, directing the AO to delete the disallowance of ? 120,65,600/-. Judgment: The appeal filed by the assessee is partly allowed, with the specific ground regarding the disallowance of the bonus being decided in favor of the assessee. Order Pronouncement: The order was pronounced in the open court on the date mentioned on the caption page.
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