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TMI Blog2020 (10) TMI 930X X X X Extracts X X X X X X X X Extracts X X X X ..... This at glance is not in accordance with principles of proportionality. Hence, we remit this issue to the file of the AO with the direction to assessee to submit its details of direct and indirect expenses which has been incurred in incurring exempt income. Addition being the interest income reflected in the AIR information not credited in the profit and loss account - HELD THAT:- Contention of assessee is that the said income did not belong to the assessee and it was mistake on the part of IL FS Securities Ltd. to show the above sum as income of the assessee was not made before the AO nor the assessee had asked the Assessing Officer to issue/make any inquiry from the concerned entity. Hence matter is remitted to the file of the Assessing Officer. AO is directed to examine the assessee s plea that the said income reflected in AIR information is wrong in as much as some does not belong to the assessee. Disallowance u/s 36(l)(ii) - Payment of bonus to its directors shareholders - HELD THAT:- AO in this case if he wants to invoke provisions of section 36(1)(ii) on the touchstone of M/S. DALAL BROACHA STOCK BROKING PVT. LTD. [ 2011 (6) TMI 251 - ITAT, MUMBAI]. AO will ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii). 2. The CIT(A) erred in upholding the action of the Assessing Officer in making an addition of a sum of ₹ 44,589; being interest income on account of non-reconciliation of AIR. The appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer inasmuch as the CIT(A) and the Assessing Officer have not correctly appreciated the facts of the case in its entirety and hence, the impugned addition requires to be deleted. 3. The CIT(A) erred in upholding the action of the Assessing Officer in making a disallowance of ₹ 5,00,000 under section 36(l)(ii) of the Act; being bonus paid to the Directors of the Company by holding that such payments are in lieu of dividend or profits. The appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer inasmuch as the CIT(A) and the Assessing Officer have not correctly appreciated the facts of the case in its entirety and hence, the impugned disallowance requires to be deleted. 3. Brief facts of the case are that the assessee-comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Civil appeal No. 10 of 2019)(SC) (iii) CIT v Reliance Utilities Power Ltd reported in 313 ITR 340 (Bom) The AO has computed disallowance of expenditure under rule 8D(2)(iii) at ₹ 236,733 @ 0.5% of the average value of investment. The appellant has submitted that major expenses have been incurred under the head employee expenses and other expenses which have been incurred for the purpose of appellant's business of share broking and depository participant. In this regard, I find that the appellant is a company and some expenses would be attributable, out of the expenses under the head employee benefit and other expenses relating to the running of office establishment directors remuneration, towards earning of exempt dividend income. Since the management, the related staff and establishment would be involved in the decision making regarding the investment to be made and held, disallowance of expenditure under rule 8D(2)(iii) amounting to ₹ 236,733/- which is less than the exempt dividend income is found to be in order and is upheld. In view of the above discussion, the disallowance of ₹ 15,19,159/- made by the AO u/s 14A rw rule 8D is restricted to & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer are not applicable, in as much as satisfaction of the Assessing Officer is very much evident in the assessment order. Accordingly, this limb of claim of learned Counsel of the assessee s argument is not correct. However, we note that the exempt income earned is only ₹ 3,99,270/- and the disallowance for administrative expenses incurred in this regard is ₹ 2,36,733/-. This at glance is not in accordance with principles of proportionality. Hence, we remit this issue to the file of the Assessing Officer with the direction to assessee to submit its details of direct and indirect expenses which has been incurred in incurring exempt income. The Assessing Officer shall record his satisfaction or otherwise with the computation of the assessee and thereafter decide the issue as per law. 12. Apropos issue No. 2 Brief facts of this issue are as under :- The Assessing Officer made an addition of ₹ 43,254 and ₹ 1,335 aggregating ₹ 44,589 being the interest income reflected in the AIR information not credited in the profit and loss account. The interest income reflected in AIR Information from IL FS Securities Services Ltd is ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said income reflected in AIR information is wrong in as much as some does not belong to the assessee. 17. Apropos issue No. 3 The disallowance u/s 36(l)(ii) of ₹ 5,00,000/-. Brief facts on this issue are that the AO has observed in the assessment order that the assessee has paid ₹ 250,000/- each as bonus and incentive to Mrs. Nidhi R Mehta and Mr. Rakesh Mehta, apart from payment made to them as director's remuneration. The AO has disallowed the above said payment of bonus aggregating to ₹ 5,00,000/- u/s 36(l)(ii) of the Act, considering that the company was having more than 1 crore of profits which could have been distributed amongst the shareholders in the form of dividend. The said two directors held shares of the assessee company and said amount of ₹ 2.5 lakhs each, if not paid to them as bonus, was payable as dividend to the two shareholders. The AO has relied on the decision of the ITAT, Mumbai Special Bench in the case of M/s Dalai Broacha Stock Broking Pvt. Ltd. 131 ITD 36. 18. The learned CIT(A) noted assessee s pleas as under :- The Assessing Officer has made a disallowance of a sum of ₹ 5,00,000, being bonus of ₹ 2,50, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idend. This part applies only to employees who are partners or shareholders. Thus, in so far allowability of expenditure on account of bonus or commission u/s 36(l)(ii) is concerned, it applies to all employees including shareholder employee. The disallowability is restricted to only partners and shareholders as only in those cases, payment could be in lieu of profit or dividend. We therefore, reject the argument advanced by the Ld. AR that the provision of section 36(l)(ii) apply only to non-share employee. In view of the foregoing discussion and the for the reason given earlier, we are of the view that the payment of commission of ₹ 1.20 crores to the three working directors was in lieu of dividend and the same is not allowable as deduction u/s 36(1)(ii). We answer the reference accordingly. In view of above discussion, the addition of ₹ 5,00,000/-made u/s 36(l)(ii) of the Act is upheld and ground no. 5 is dismissed. 20. Against the above order the assessee is in appeal before us. 21. We have heard both the counsel and perused the records. Learned Counsel of the assessee submitted that the assessee has duly paid bonus to its directors shareholders. That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of section 36(l)(ii). The relevant portion of the judgment is reproduced below: .... What is the requirement of commercial expediency must be judged, not in the light of the. 19th century laissez faire doctrine which regarded man as an economic being concerned only to protect and advance his self interest. but in the context of current socio-economic thinking which places the general interest of the community above the persona! interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing far the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves, etc., a part of it should in all fairness go to the employees... The Id. Authorised Representative for the assessee argued that provisions of section 36(1)(ii) are applicable only in the case of employees who are not share holders. His argument was that the provision is not applicable when the payment of commission is in lieu of dividend and since dividend is payable only in the case of share hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st look lo the first part of the clause. That refers to any .sum. Reading the clause in that way the, plain meaning appeal's to be that when a particular amount was paid by way of bonus lo an employee, if the same amount would have been paid lo him as a shareholder ax dividend or profit, the company cannot be allowed a deduction on the ground of payment of bonus. To put it in other words the clause is intended to prevent an escape from taxation by describing a payment as bonus, when in fad ordinarily it should have reached the shareholder as profit or dividend. These arguments would be equally applicable in the case of a partnership as in the case of a limited company. This construction I etuis to no hardship, it does not allow a wrong payment of bonus lo escape taxation. An illustration will perhaps make the position clear. Five, persons in a firm realizing that the profits of the year were ₹ 50,000 and they had an equal share in the profits of the business decide that instead of receiving ₹ 10,000 each as the share of profits each of them will be paid ₹ 10,000 as bonus or commission. In such a case the firm, when sough to be assessed, may contend that & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Motor Service Company Ltd. (supra). In this case we are convinced in view of the discussion made earlier that it is a case of paying commission which was otherwise payable as dividend, to escape taxation . 24. We note that section 36(1)(ii) provides for allowability :- 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 :- ( ii ) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission . Though we note that though in the said decision of Special Bench has clearly held that section 36(1)(ii) does not envisage examination about the reasonableness of payment or adequacy of services rendered by the employees as the same were held by the Special bench to be relevant factor in deciding the allowability of deduction. However as noted by us above Special Bench has clearly given a categorical finding that there was a case of tax evasion/avoidance and in those fact the Special bench has quantified the amount of tax avoidance ..... X X X X Extracts X X X X X X X X Extracts X X X X
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