2022 (4) TMI 693 - HC - Income Tax

Disallowance u/s 36(1)(ii) of bonus paid to Directors - As per AO bonus was paid to avoid payment of dividend distribution tax - HELD THAT - In the present case, there is not even an iota of word that the amount paid is commission for services rendered or bonus. There are only two directors in the company. The entire amount has been paid to both of them. It is not the case of the appellant that there has been any term of employment nor is there any case that any special services has been rendered by these two directors. On the similar analogy, the judgment in Career Launcher Ltd. 2012 (4) TMI 440 - DELHI HIGH COURT is also distinguishable wherein as concluded that as long as the bonus or commission is paid to the directors for services rendered and as part of their term of employment, it has to be allowed. There is no substantial question of law in the present cases. The assessing officer and CIT (A) have given a concurrent finding that the assessee has paid the bonus in lieu of the dividend and therefore, the above sum is disallowed under Section 36 (1) (ii) of Act. The ITAT also after considering the findings of the assessing officer and the CIT (A) had inter alia held that the payment of bonus or commission is not allowable as deduction under Section 36 (1) (ii) of the Act in the hands of the assessing company. In the absence of any substantial question of law, the appeals are liable to be dismissed. Hence, the present appeals along with the pending applications are dismissed.

Summary

Issues Involved:
1. Disallowance of bonus payments to directors under Section 36(1)(ii) of the Income Tax Act.
2. Consistency in the treatment of bonus payments in previous assessment years.
3. Double taxation on the same amount paid as bonus.
4. Interpretation of Section 36(1)(ii) of the Income Tax Act.
5. Whether the bonus payments were in lieu of dividends.

Issue-wise Detailed Analysis:

1. Disallowance of Bonus Payments to Directors under Section 36(1)(ii) of the Income Tax Act:
The appellant, a private limited company, paid substantial bonuses to its two directors, which were disallowed by the Assessing Officer under Section 36(1)(ii) of the Income Tax Act. The Assessing Officer's view was that these bonuses were paid to avoid dividend distribution tax. The Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) upheld this disallowance, agreeing that the bonuses would have otherwise been paid as dividends.

2. Consistency in the Treatment of Bonus Payments in Previous Assessment Years:
The appellant argued that similar bonus payments had been allowed as deductible business expenses in previous assessment years without any disallowance. The appellant's counsel emphasized the need for consistency in the revenue authority's approach, arguing that the disallowance for the years in question (2011-2012 and 2014-2015) was unjustified given the historical acceptance of such payments.

3. Double Taxation on the Same Amount Paid as Bonus:
The appellant's counsel contended that the disallowance of the bonus payments resulted in double taxation. The directors had already declared the bonuses as part of their salary under Section 15 of the Act and paid taxes on them at the highest tax rate. Consequently, the company would also be liable to pay tax on the same amount, leading to an incidence of double taxation, which was argued to be illegal.

4. Interpretation of Section 36(1)(ii) of the Income Tax Act:
Section 36(1)(ii) allows deductions for any sum paid to an employee as bonus or commission for services rendered, provided such sum would not have been payable as profits or dividends if not paid as bonus or commission. The court examined various precedents, including the judgments in AMD Metplast Pvt. Ltd. v. DCIT and CIT v. Career Launcher India Ltd., which emphasized that payments made as part of the terms of employment for services rendered should be allowed as deductions.

5. Whether the Bonus Payments Were in Lieu of Dividends:
The court scrutinized whether the bonuses paid to the directors were genuinely for services rendered or merely a means to avoid dividend distribution tax. The court noted that there was no evidence of any special services rendered by the directors or any terms of employment justifying the bonuses. The court concluded that the bonuses were effectively in lieu of dividends, as the entire amount was paid to the two directors who were also the sole shareholders.

Conclusion:
The court held that the question of law was well-settled, and there was no substantial question of law in the present cases. The concurrent findings of the Assessing Officer, CIT(A), and ITAT indicated that the bonuses were paid in lieu of dividends, thus disallowing the deductions under Section 36(1)(ii). The appeals were dismissed, affirming the disallowance of the bonus payments to the directors.