2022 (4) TMI 691 - HC - Income Tax

Disallowance u/s 40A(2) - Grant of bonus to the Directors (Relatives) - Non justifiable kind of services rendered to earn such a huge amount of bonus to a person specified under Section 40A(2)(b) - no business correlation in terms of business output or growth of business relating to the payment was shown by the Respondent/assessee - HELD THAT - This Court finds that the disallowances made for similar reasons for the Assessment Years 2013-14 and 2014-15 were directed to be deleted by the DRP as well as CIT(A) and the Appellant had accepted the said decisions. Undoubtedly, the principles of res-judicata and estoppel are not applicable in taxation matters. However, it has been held that a departure from a finding during the past years would result in a contradictory finding. This Court in AMD Metplast Pvt. Ltd. 2011 (12) TMI 320 - DELHI HIGH COURT as well as in CIT v. Career Launcher India Ltd. 2012 (4) TMI 440 - DELHI HIGH COURT has upheld grant of bonus by companies to its directors. Consequently, this Court is of the view that there is no bar on payment of bonus and the issue whether bonus is to be granted or not is essentially a question of fact. In the present case, none of the authorities below have opined that grant of bonus to the Directors would either endanger the existence of the corporate entity or was prohibited under The Payment of Bonus Act, 1965 or was not proportionate to the services rendered by the respondent-Director. In the previous assessment years similar payment of bonus to the respondent-Director has been upheld. Consequently, this Court is of the view that consistency of approach, uniformity and certainty must be maintained. Accordingly, this Court is in agreement with the Tribunal s decision that as no distinguishing feature had been brought to its notice, the direction to delete the disallowance in the previous Assessment Years must be followed. In view of the above, no substantial question of law arises for consideration

Summary

Issues:
Challenge to order dated 25th February, 2020 for Assessment Year 2015-16 regarding bonus payment under Section 40A(2)(b) of the Income Tax Act, 1961.

Analysis:
1. The Appellant challenged the order concerning the bonus payment made to a specified person under Section 40A(2)(b) of the Income Tax Act, 1961 for the Assessment Year 2015-16. The Appellant contended that the Respondent failed to justify the services rendered to earn such a substantial bonus, lacking a business correlation or growth output. The Appellant emphasized the distinction between a corporate entity and its directors, warning that excessive bonus payments to directors could jeopardize the corporate entity's survival. The Appellant argued that bonus payments are allowable only when linked to services rendered, as per Section 36(1)(ii) of the Act, criticizing the ITAT for overlooking the lack of findings on business output correlation or necessity of the bonus payments in previous assessment years.

2. The Court noted that similar disallowances for previous assessment years were deleted by the DRP and CIT(A), with the Appellant accepting those decisions. While acknowledging that principles of res judicata and estoppel do not apply in taxation matters, the Court cited precedents emphasizing consistency in findings across different assessment years to avoid contradictory outcomes. The Court referred to Commissioner of Income Tax vs. Sridev Enterprises and Commissioner of Income Tax vs. Excel Industries Ltd. to highlight the importance of maintaining uniformity in interpreting tax provisions across assessments.

3. The Court delved into the interpretation of Section 36(1)(ii), citing the Bombay High Court's ruling in Loyal Motor Service Company Limited v. Commissioner of Income Tax. The judgment elucidated that bonus payments must not be a substitute for dividends or profits to avoid tax evasion. The Court also referenced Kania J.'s interpretation of Section 10(2)(x) of the Income Tax Act, 1922, emphasizing that bonus payments should not diminish business profits artificially. The Court further referred to its previous decisions in AMD Metplast Pvt. Ltd. and CIT v. Career Launcher India Ltd., upholding companies' rights to grant bonuses to directors based on factual considerations.

4. Ultimately, the Court found no indication that the bonus payment to the Directors endangered the corporate entity's existence, violated The Payment of Bonus Act, 1965, or was disproportionate to the services rendered. Given the consistency in upholding similar bonus payments in previous years, the Court upheld the Tribunal's decision to delete the disallowance for the current assessment year. Consequently, the Court dismissed the appeal, stating no substantial question of law arose for consideration.