HEATHERGREY COLLECTIVE LLP,MUMBAI vs. JURISDICTIONAL ASSESSING OFFICER, CIRCLE 22(1), MUMBAI

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ITA 2588/MUM/2026Status: DisposedITAT Mumbai31 July 2026AY 2018-20197 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the bonus payments were made to regular employees of the assessee, and the mode of payment through a sister concern, which was later reimbursed, should not be the sole basis for disallowance. The Tribunal also found that the cash payments did not exceed the threshold for Section 40A(3) invocation.

What were the facts?

The assessee claimed a deduction for bonus expenditure of Rs. 3,31,506/-. The Assessing Officer disallowed this amount, initially under Section 36(1)(ii) and later confirmed by the CIT(A) under Section 37(1), citing issues with payment through a sister concern and lack of proper documentation.

What were the issues?

Whether bonus expenditure paid through a sister concern is an allowable deduction, and whether Section 40A(3) is applicable to the cash payments made.

Which sections of the Income-tax Act were involved?

Section 36(1)(ii),Section 37(1),Section 40A(3)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “E” BENCH; MUMBAI

Hearing: 24.07.2026Pronounced: 31.07.2026

IN THE INCOME TAX APPELLATE TRIBUNAL “E” BENCH; MUMBAI BEFORE SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER AND SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER ITA No. 2588/Mum/2026 (Assessment Year: 2018-19)

Heathergrey Collective LLP Jurisdictional Assessing 201, Peninsula Tower 1, Officer, Circle 22(1) Peninsula Corporate Park, vs. Area Code-Mum, AO Type- C, Ganpatrao Kadam Marg, Lower AO Number-1, Range Code- Parel, West, Mumbai, 197, Jurisdictional - Circle Maharashtra, 400013. 22(1), Building Name - Piramal Chamber, Mumbai, PAN: AAKFH2261C Maharashtra, 400012. (Appellant) (Respondent) For Assessee : Shri Sanjay C. Shah, CA For Revenue : Shri Ashok Charan, Sr.DR Date of Hearing : 24.07.2026 Date of Pronouncement : 31.07.2026 O R D E R PER VIKRAM SINGH YADAV, A.M :

This is an appeal filed by the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi [‘Ld.CIT(A)’], dated 17.01.2026, pertaining to Assessment Year (AY) 2018-19, wherein the Assessee has taken the following grounds of appeal: “1. Ld Commissioner of Income-tax (Appeals) ["CIT(A)"] erred in confirming the disallowance of bonus expenditure of Rs. 3,31,506/- made by Ld. Assessing Officer ["AO"]. The impugned disallowance is bad in law and liable to be deleted. 2. Ld. CIT(A) erred in confirming the disallowance of bonus expenditure of Rs. 3,31,506/- made by Ld. Assessing Officer ["AO"] u/s.36(1)(ii) of the Income-tax Act, 1961 ["the Act"], despite expressly holding in paragraph

ITA No. 2588/Mum/2026; A.Y. 2018-19 Heathergrey Collective LLP 5.6 of his order that Section 36(1)(ii) was inapplicable. Having rejected the very basis of the disallowance made by Ld. AO, Ld. CIT(A) could not have confirmed the same under altogether a difference provision i.e. Section 37(1), without issuing a show cause notice. The impugned disallowance is, therefore, bad in law and liable to be deleted. 3. Ld. CIT(A) erred in not appreciating that the bonus of Rs. 3,31,506/- was a genuine business expenditure, incurred wholly and exclusively for Appellant's business, being neither capital nor personal in nature and is therefore allowable u/s.37(1). The impugned disallowance is bad in law and liable to be deleted. 4. Ld. CIT(A) erred in invoking Section 40A(3), which was neither raised in the assessment order nor formed part of the subject matter of the appeal. Ld. CIT(A) cannot introduce a fresh ground of disallowance beyond the scope of the assessment. Raising Section 40A(3) for the first time without any show cause notice travels beyond the jurisdiction conferred by Section 251. Accordingly, the Order of Ld. CIT(A) is bad in law. 5. Ld. CIT(A) erred in not appreciating the fact that the provisions of Section 40A(3) are not applicable to the facts of the present case as the cash payments were below the threshold limit provided in the Section 40A(3). Accordingly, the Order of Ld. CIT(A) is bad in law. 6. Ld. CIT(A) erred in not appreciating the fact that the mistake in reporting by the tax auditor, in clause 20(a) of Form 3CD, could not have been rectified by filing a revised Tax Audit Report as the provision for revision of Audit Report under sub-rule 3 of rule 6G of the Income-tax Rules, 1962 came into effect from 1st April, 2021 (i.e. from AY 2021-22). The Auditor's clarificatory letter furnished during assessment proceedings sufficiently addressed this position.” 2. Briefly, the facts of the case are that the assessee has filed its return of income, declaring total income at Rs. 1,42,57,980/- dated 06.11.2018, which was selected for scrutiny. During the assessment proceedings, the Assessing Officer observed that as per Form 3CD Col 20(a) “any sum paid to an employee as bonus or commission for services rendered, where such sum was otherwise payable to him as profits or dividend”, the amount was not disallowed as per 36(i)(ii). On perusal of the submission of the assesse, it was seen that the amount of Rs. 3,31,506/- has been paid as bonus by its sister concern ‘The Trading Corporation’. The narration as per bank statement with respect to the transaction reflects as “NEFT DUMMY ACCOUNT” in two transactions (i.e) Rs. 3,24,502 on

ITA No. 2588/Mum/2026; A.Y. 2018-19 Heathergrey Collective LLP 11.10.2017 and Rs. 4,38,548/- on 13.10.2017. The assessee in response to the Show Cause Notice issued has given the break-up of employees to whom the bonus was paid and letter of confirmation from The Trading Corporation. However, the details of employees does not mention about the designation of the employees. Also, it cannot be ascertained whether these are actually employees of “Heathergrey Collective LLP” or “The Trading Corporation”. The assessee has also not provided any satisfactory explanation on why amount was transferred to its sister concern and then transferred to employees. Though the assessee has stated that part of the payments have been made through banking channel, proof for the same have not been produced. The transaction “NEFT DUMMY ACCOUNT” contains payments made to both employees of “Heathergrey Collective LLP” and “The Trading Corporation”. Therefore, in absence of satisfactory explanation and as the amount has been transferred by the sister concern and not by the assessee, the amount with respect to bonus payments made by the sister concern was disallowed under section 36(i)(ii) amounting to Rs. 3,31,506/-.

3.

The assessee thereafter carried the matter in appeal before the ld. CIT(A), who has since dismissed the appeal of the assesse. In the impugned order, the ld CIT(A) has stated that the assesse has filed its submissions along with copy of the ITR, copy of computation of income, audited account, a chart giving the name of the persons to which such payments have been made, a letter from Bank clarifying that ‘NEFT DUMMY ACCOUNT’ actually mean the bulk payments in various bank accounts. The submissions so filed by the assessee were considered and as per ld. CIT(A), the assessee has submitted the additional evidences without giving any application under Rule 46A of the I.T. Rules and without giving any reason as to why the assessee has not been able to produce these evidences before the AO. In fact, the Form No.-35, the assessee in Column 12 has stated that no additional evidences are being

ITA No. 2588/Mum/2026; A.Y. 2018-19 Heathergrey Collective LLP submitted. Therefore, the ld. CIT(A) did not admit the additional evidences filed by the assessee. Further, the ld CIT(A) stated that even taking into consideration these evidences, the assessee has failed to prove that these payments have actually been made to the employees of the assessee company, because neither any certificate from bank has been produced that the transactions named as ‘NEFT DUMMY ACCOUNT’ has actually been transferred to which bank account, whether these bank accounts belongs to employees of the assessee company, name of the persons given in chart are actually the employees of the assessee and the reasons as to why the payments in cash as well as cheque has been made not from the bank account of the assessee but from the bank account of sister concern, how these payments which has not been made through account payee cheque to the persons whom the payments have been claimed are not to be considered in violation of section 40A(3) of the I. T. Act. Therefore, even with the additional evidences, though, not admitted, the assessee has failed to prove the genuineness of these payments. Accordingly, the ld. CIT(A) held that the bonus payments claimed to be made from the bank account of sister concern cannot be considered for the business of the assessee, accordingly, the act of the AO for making the disallowance on this ground is justifiable and liable to be upheld. The ld CIT(A) further held that though the AO has invoked section 36(1)(ii) for such disallowance as the amount was part of Col. 20(a) of Form 3CD of Audit Report wherein the Auditor itself has classified such payments u/s 36(1)(ii) of the Act, however, in his view, these payments are liable to be disallowed u/s 37(1) of the I.T. Act and also under the general principle of taxation which requires expenses to be allowed only if they are genuinely made for the business of the assessee. The ld. CIT(A) accordingly held that as the assessee has failed to prove that these payments have actually been made to the employees of the assessee, disallowance of such payments was upheld.

ITA No. 2588/Mum/2026; A.Y. 2018-19 Heathergrey Collective LLP 4. Against the said findings and order of the ld CIT(A), the assesse is in appeal before us.

5.

During the course of hearing, the ld. AR submitted that though the auditor had mentioned the bonus amount in Form 3CD, they have subsequently, issued a clarificatory letter stating that the bonus amount was customary to employees with whom they have employer-employee relationship, these employees are eligible for monthly salary and their customary bonus and neither they are eligible for any dividend nor profits of the company and hence, the bonus paid to them is fully allowable as expenses from profits of the company. The disclosure against Tax Audit Report is only informatory to the extent that company has paid customary bonus to its employees. It was further submitted that the bonus was paid by the sister concern i.e., “The Trading Corporation” to the employees of the assessee firm which is subsequently reimbursed to them and in support copy of the ledger account of The Trading Corporation along with bank statement highlighting the payment made on behalf of the assessee was submitted. Further, regarding the finding of the Assessing Officer in context of “NEFT DUMMY ACCOUNT”, it was submitted that the assessee has submitted a letter from the bankers wherein they have clarified that term “NEFT DUMMY ACCOUNT” is used for bulk payment. It was further submitted that the details of the employee wise bonus paid was submitted during the assessment proceedings. Further, necessary details in terms of complete list of employees giving details of name, designation, salary paid, bonus paid has been duly submitted which has not been appreciated by the lower authorities. It was further submitted that the ld. CIT(A), having expressly holding that the provisions of Section 36(1)(ii) of the Act are not applicable, could not have confirmed the addition invoking the provisions of Section 37(i) without issuing a show cause. It was further submitted that the bonus so paid was a genuine bonus expenditure incurred wholly

ITA No. 2588/Mum/2026; A.Y. 2018-19 Heathergrey Collective LLP and exclusively for the assessee’s business being neither capital nor personal in nature and is therefore duly allowable u/s. 37(1) of the Act. Ld. CIT(A) It was further submitted that the ld CIT(A) has erred in not appreciating the fact that the provisions of Section 40A(3) are not applicable to the facts of the present case as the cash payments were below the threshold limit provided in the Section 40A(3) of the Act.

6.

The ld. DR has been heard, who has relied on the order passed by the lower authorities.

7.

We have heard the rival contentions and perused the material available on record. The ld CIT(A) has fairly held that the provisions of section 36(1)(ii) are not applicable in the instant case and therefore, the limited issue for consideration is whether the payment of bonus is an allowable deduction u/s 37(1) of the Act and whether the provisions of section 40A(3) are attracted in the instant case. During the course of hearing with the assistance of the ld AR on behalf of the assesse, we have gone the assessee’s paperbook containing the necessary details of employees and the salary and bonus payments being paid to them and find that the bonus payments have been paid to regular employees of the assessee in respect of whom the salary expenses have been paid by the assesse and duly allowed by the Assessing officer and therefore, where there is no dispute on the salary expenditure, the bonus payout to same set of employees cannot be subject matter of any dispute. Further, unlike the salary payment, only distinguishing fact regarding bonus payment is that the same has been paid initially by its sister concern and later on reimbursed by the assesse and all these transactions are duly undertaken through the banking channels and reflected in the books of accounts. However, mere mode of payment cannot be the sole basis of disallowing the expenses where there is no dispute otherwise on the allowability of the expenses being paid to the regular employees of the

ITA No. 2588/Mum/2026; A.Y. 2018-19 Heathergrey Collective LLP assesse. It is also not the case of the Revenue that the sister concern making the payment on behalf of the assesse has also claimed the said expenses in its return of income. Further, except for an amount of Rs 72,300/- which has been paid to the employees in cash, rest all payments have been paid through cheque and even in respect of cash payment, individual cash payments to few of the employees doesn’t exceed the threshold requiring invocation of section 40A(3) of the Act. In light of the same, the addition so made and sustained by the ld CIT(A) is hereby directed to be deleted.

8.

In the result, the appeal filed by the assesse is allowed.

Order pronounced on 31.07.2026

Sd/- Sd/- SIDDHARTHA NAUTIYAL VIKRAM SINGH YADAV (JUDICIAL MEMBER) (ACCOUNTANT MEMBER)

Mumbai, Dated: 31.07.2026 Karishma J. Pawar, SR. PS

Copy to : 1) The Appellant 2) The Respondent 3) The CIT concerned 4) The D.R, ITAT, Mumbai 5) Guard file

By Order

Dy./Asst. Registrar I.T.A.T, Mumbai

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