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Facts
The Assessing Officer (AO) disallowed a significant portion of remuneration paid to directors, considering it a disguised dividend. The Commissioner of Income Tax (Appeals) deleted this disallowance. The appeal concerns the AO's challenge to this deletion.
Held
The Tribunal restored the issue of director remuneration disallowance back to the CIT(A) to examine the shareholding of the directors and their entitlement to the payments, considering relevant case laws. The Tribunal also dismissed the AO's grounds related to disallowance for non-deduction of TDS on transporter payments.
Key Issues
Whether the remuneration paid to directors is a genuine business expenditure or a disguised dividend, and whether disallowance under Section 40(a)(ia) is attracted for non-deduction of TDS on transporter payments.
Sections Cited
36(1)(ii), 143(3), 40(a)(ia), 194C(7), 194C(6)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI PRASHANT MAHARISHI & SHRI SOUNDARARAJAN K.
Per Prashant Maharishi, Vice President 1.
is filed by The Deputy Commissioner of Income Tax, Circle 3 (1) (1), Bangalore (the ld. AO) against the appellate order passed by the National Faceless Appeal Centre, Delhi (the ld. CIT(A) dated 12 October 2023 wherein the appeal filed by Nutricraft India Private Limited (the assessee) against the assessment order passed by The Assistant Commissioner of Income Tax, Circle 5(1)(1), Bangalore dated 30 December 2019 passed under section 143(3) of The Income-tax Act , 1961 [ The Act ] for assessment year 2017-18 was partly allowed.
The learned assessing officer is aggrieved with the appellate order and has raised the following grounds of appeal:-
“ a. Whether on the facts and in the circumstances of the case, the Ld.CIT(A) is right in law, to hold the view that only because the payment of remuneration to the partners is TDS compliant 86 has been offered to tax by the respective recipients, the said payment justified as a genuine business requirement? b. Whether in the facts and in the circumstances of the case, the Ld.CIT(A) has erred in adjudicating the payment of remuneration as genuine despite there being a payment in form of dividend thereby attracting the tax liability in terms of dividend distribution tax? c. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred by not verifying whether there were any extra services for payment of huge remuneration rendered by the Directors thus making it fall under exceptions as per section 36(1)(ii) for it to be eligible for deduction. d. Whether on the facts and in the circumstances of the case, the Ld.CIT(A) is right in law in to hold the view that the violation of the section 194C(7) does not result in disallowance u/s 40(a)(ia) even as the benefit of section 194C(6) is available only on fulfillment of conditions laid down in section 194C(7)? e. Whether in the facts and circumstances of the case, the CIT(A) has erred by not considering the fact that the section 194C(6) and 194C(7) are to be read together and thus after obtaining PAN from the transporters, the requisite particulars obtained from the transporters are furnished to the prescribed authority as provided u/s 194C(7), disallowance u/s 40(a)(ia) would get attracted.”
As the learned assessing officer as per form No. 36 stated that the order passed by the appellate authority on 12 October 2023 is received by him only on 12 October 2023, however the appeal has been filed on 21 February 2024 wherein causing a delay of 68 days in filing of the appeal.
The learned assessing officer has presented a petition for condonation of the delay in filing of the appeal stating that the delay is for unintentional and unavoidable reasons. It was stated that due to pressing time barring matters and other miscellaneous work the filing of the appeal is delayed by 68 days and therefore it was prayed for the condonation of delay in filing of the appeal.
The learned CIT DR reiterated the same fact and submitted that the delay may be condoned.
The learned CIT DR also placed on record the letter dated 17/9/2025 wherein the learned assessing officer has given a complete detail how there is a delay in filing of the appeal. In the above stated communication in paragraph No. 3 the learned AO has stated that the present incumbent was promoted as Joint Commissioner Of Income Tax and subsequently transferred to another charge. The office charge was handed over to the new incumbent officer on 12 February 2024. Prior to transfer, the then incumbent officer was burdened with the preparation of detailed handing over note, given many sensitive matters having the limitation date in the month of March. Therefore, the new incumbent officer, upon assuming the charge, was overburdened with multiple time bound statutory works, scrutiny assessment and related administrative responsibility in the charge which required his urgent attention as the limitation date was expiring on 31st of March 2024.
The learned assessing officer has further given the detailed work undertaken wherein he stated that total assessment – 80, penalty orders – 4, notices under section 148A – 109, order under section 148A – 206, order giving effect, – 44, rectification – 48, modified assessment orders – 11, verification – 26, deemed information – 6, and notice under section 153C – 7 were pending with him. Therefore, the total No. of 541 actions were pending in the month of March.
Over and above, it was stated that there were more than 73 audit objections having tax impact of thousands of crores were taken up in the month of December – January for initiating necessary remedial action as the limitation date for the same was also expiring on 31st of March 2024. He further stated that the impugned charge was carved out out of 5 erstwhile circles and two special ranges which was managed by a total of 07 Deputy Commissioner of income tax. Therefore, due to the above aforesaid circumstances and heavy workload the delay of 72 days occurred in filing of the appeal.
It was further stated that the delay was inadvertent and occurred due to the reasons beyond the control of the then jurisdictional assessing officer. The learned AO further stated that same is for sufficient cause, and therefore it may be condoned.
The learned authorised representative Ms. Lunkar relied heavily on the decision of the Hon’ble Supreme Court in case of Civil Appeal No. 11794 of 2025 in case of Shivamma (dead) by legal heirs versus Karnataka Housing Board and others, dated 12 September 2025 and also the decision of the coordinate bench in dated 18 June 2025 wherein on the identical facts and circumstances it was held that there is no sufficient cause and delay was not condoned. Therefore, it was submitted that delay should not be condoned.
We have carefully considered the rival contention and perused the orders of the learned lower authorities. We find that the learned assessing officer by way of a detailed note given a reason that why the delay caused of 72 days in filing of the appeal which is narrated in paragraph No. 5 above. We find that the delay is for sufficient cause and therefore we condone the delay in filing the appeal of the learned assessing officer, we admit the same.
Coming to the facts of the case we find that the assessee company is engaged in the business of manufacturing and marketing of animal feeds. It filed its return of income on 29/11/2017 with the returned income of ₹ 65,777,280/–. The case was selected for the complete scrutiny.
The ld. AO found that assessee has paid a remuneration to its director amounting to ₹ 11,39,00,000/- which is hit by the provisions of section 36 (1) (ii) of the act, so he disallowed the excess amount compared to earlier years holding that :-
“4. Disallowance of Bonus payments to Directors. On perusal of the financials, it was found that the assessee has made considerable payments to directors cum shareholders of the company under the head “ remuneration including bonus). It was found that in the previous year, the payment was given to the director cum shareholders of the company in the form of dividend. However in AY 2017-18, the company instead of making the payments as dividend has suddenly hiked the remuneration and bonus and whole amount is paid as remuneration / bonus instead of dividend. In AY 2017-18, total of Rs. 14,15,12,648 has gone to 3 directors cum shareholders in the form of bonus/remuneration. This is very high compared to the revenue of the company. The following are the details of the payment. Particulars Current Previous year Year 2016-17 2015-16 (Rs) (Rs) Interim dividend N K Lanka - 4,42,04,158 G R Reddy - 3,47,31,839 Chiranjibi Sahoo - 2,63,12,001 10,52,47,998 - Director's Remuneration (Including salary, bonus and contribution to PF) N K Lanka 5,96,75,370 2,99,02,844 G R Reddy 4,63,01,631 2,31,84,462 Chiranjibi Sahoo 3,55,35,647 1,78,59,812 14,15,12,648 7,09,47,118
Therefore Section 36(1)(ii) will be attracted. Section 36(1)(ii) reads as under: “any sum paid to an employee as bonus or commission21 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”
Therefore the deduction is allowed only if the same was not to be given as a dividend. The assessee stated that this remuneration was paid as they were full time employees of the company and hence it should be allowed as expenses. The assessee did not submit any copy of the agreement with the party or the exact nature of service rendered by the party for which the hike in the remuneration/bonus was made. Moreover the shareholder is a director of the company .If the assessee is stating that the payment is in the form of salary, then there should be a consistency in the payment. In the AY 2017-18, the payment to the directors almost doubled without any reason. Therefore the claim cannot be allowed as the company has avoided dividend distribution tax by paying the share holder as bonus instead of dividend. Therefore the remuneration can be claimed as expense only to the extent of what was paid in AY 2016-17. The remuneration paid last year is Rs.7,09,47,118 however this year is Rs.14,15,12,648. Therefore the difference of Rs.7,05,65,530 is disallowed as expense under Section 36(1)(ii) of the Act. It is pertinent to quote the decision of ITAT Special Bench, Mumbai in case of Dalal Broacha wherein the disallowance by the AO was upheld. The ITAT stated that “ there is no evidence to show that the directors had rendered any extra service for payment of such a huge remuneration/bonus in addition to have rendered as an employee for which salary was paid” In the instant case too, the assessee has substantial accumulated profits. Instead of declaring dividend, the assesee doubled the payment to the directors. Moreover the asessee could not bring on record any documents to prove that the extra work was done by these directors. Therefore the additional bonus payment is disallowed under Section 36(1)(ii).”
When the matter reached before the learned CIT – A he deleted the above disallowance holding as under: -
"5.1.2 From the facts of the case, it is to note that the payments made to the Directors have been approved by the Board of Directors vide
Board resolution passed. The appellant paid the remuneration including bonus to them by taking due cognizance of their educational qualifications, expertise gained in their field, experience rendered with the Company and scores of other factors. It is further noted that the Directors have included bonus and remunerations paid by the appellant for taxation purpose in their individual returns of income. The appellant has also placed reliance on the decisions rendered in cases viz., ITAT-Mandovi Motors Pvt Ltd V ACT, 8 taxmann.com 225 (Bangalore)(2010), Hon’ble Delhi High Court- AMD Metplast (P) ltd V DCIT (2012) 20 taxmann.com 647 (Delhi), Hon’ble Delhi High Court in Chryscapital Investment Advisors (India) P Ltd V DCIT(2015) 232 Taxmann 20/56 Taxmann.com 417, in support of its claim of payments made. Therefore, considering the facts and circumstances of the case, the disallowance made by the AO is accordingly not warranted and hence is deleted. Consequently, the grounds raised in connection with disallowance of Rs.7,05,65,530/- made u/s. 36(1)(ii) of the Act are allowed."
15. Therefore, the learned assessing officer aggrieved with this finding of the learned CIT – A is in appeal before us. The learned CIT DR vehemently stated that that the learned assessing officer has challenged the deletion of the above ground as per ground No. A – C. The issue is also squarely covered by the decision of the Hon’ble Supreme Court in case of SRC Aviation Private Limited Versus Assistant Commissioner of Income Tax and another wherein the special leave petition filed by the assessee against the decision of the Hon’ble Delhi High Court disallowing the payment of bonus to the two directors of the petitioner company was dismissed and therefore the issue is squarely covered by the decision of the Hon’ble Supreme Court.
Against this, the learned authorised representative vehemently stated that learned CIT – A was shown the copy of the board resolution, profile of all the directors and the income tax returns of those directors
who have offered the above sum is their income and on which tax is deducted at source. Therefore, the learned CIT – A has correctly deleted the above disallowance. She further relied upon the decision of the Hon’ble Delhi High Court in case of CIT versus Carrier Launcher India Ltd 20 taxmann.com 637, Loyal Motor Services Co Ltd versus CIT 14 ITR 647 (Bombay), AMD Plast Private Limited versus DCIT 20 taxmann.com 647. It was submitted that this issue is squarely covered in favour of the assessee.
She further submitted that the decision of the SRC Aviation Private Limited of Hon’ble Delhi High Court placed at paper book page No. 177 – 188 in 140 taxmann.com 193 (Delhi) is distinguishable because there was not even an iota of word that the amount paid as commission for services rendered bonus. The entire amount has been paid to both directors who are the only directors in the company. And further there has not been any terms of employment nor is there any case that any special services have been rendered by these two directors and therefore the Hon’ble Delhi High Court distinguished the decision of the Hon’ble Delhi High Court in case of Carrier Launcher. She submitted that in the present case the complete details are available before the learned CIT – A with respect to the rendition of the services also and hence the above decision does not apply to the facts of the case.
We have carefully considered the rival contention and perused the orders of the learned lower authorities. According to the provisions of section 36 (1)(ii) the assessee is allowed deduction if any sum paid to an employee as bonus or commission for services rendered, where the said sum would not have been payable to him as profits are dividend if it had not been paid as a bonus or commission. It provides that any sum paid to the 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 is deductible. This provision is an enabling provision allowing deduction of bonus or commission paid to employees. The said payment is to be made from profits subject to the conditions mentioned in the section. The reasonableness of payment or adequacy of services rendered by the employees is not relevant factors in deciding the allowability of deduction. It is also not necessary that the payment should be made commensurate to the rendering of services or there should be some extra services rendered for payment on account of bonus or commission. It is also not required that whether the tax is deducted at source or not. It is also immaterial that whether the recipient of the income has offered this income as his income in the return of income, all these are the irrelevant factors.
The learned assessing officer has relied upon the decision of the special bench in case of Dalal Barocha Stock Brokers Pvt Ltd (2011) 10 ITR (Trib) 357 (Mumbai) (SB) wherein the assessee company during the relevant year had paid commission to the tune of Rs 40 lakhs to the three working directors. They are the only shareholders of the company and owned the entire share capital. During the assessment
proceedings, the Assessing Officer asked the assessee to explain as to why the claim of expenditure on account of the commission should not be disallowed as the assessee earned substantial profits and the same amount could have been distributed as dividend. The assessee submitted that the commission was not in lieu of profit or dividend as the payments had been made to the directors for the hard work they had put in improving the profits of the company. The assessee company was bound to declare dividend compulsorily. Since it wanted to improve its net worth to attract FIIs the company was not declaring dividend. The three directors were holding shares at 50%, 25% and 25% and therefore the case the amount of commission had been distributed as dividend, they would not have got the same amount as dividend. It held that the payment of dividend by a company is not compulsory and it is dependent upon the profitability and other conditions of the business. Therefore, in cases, where dividend is not payable, the payment of bonus or commission can be allowed as deduction in case of employee shareholders also under Section 36(1)(ii) as in that case it could not be said that payment of bonus or commission is in lieu of dividend. Thus the provisions of Section 36(1)(ii) are also applicable to share holder employees subject to the condition that payment is not made in lieu of dividend. The provisions of Section 36(1)(ii) can be split in two parts. The first part viz., ‘any sum paid to an employee as bonus or commission for services rendered’ is an enabling provision. This part applies to all employees. The second part is a disabling provision which provides that ‘if the sum so paid in lieu of profit or dividend’, it cannot be allowed as deduction. This part applies only to employees who are partners or shareholders. Thus, in so far allowability of expenditure on account of bonus or commission under Section 36(1)(ii) is concerned, it applies to all employees including shareholder employees. The disallow ability is restricted only to partners and shareholders as only in those cases, payment could be in lieu of profit or dividend. The special bench, therefore, rejected the arguments of the assessee that the provisions of Section 36(1)(ii) apply only to non-shareholder employees. Thus, The legal position is that any expenditure on account of payment of commission to an employee will be allowable as deduction under the provisions of Section 36(1)(ii) irrespective of the fact whether the employee is a shareholder or not or whether the commission has been paid for some extra services or for the some services subject to the condition that the payment is not in lieu of dividend. In case extra services have been rendered for payment of commission, it will be one of the relevant factors to consider while deciding whether the case is covered by exception provided in Section 36(1)(ii) i.e., whether the payment of commission is in lieu of dividend. In the present case, no evidence is available on record to support the plea that the directors had rendered any extra services for payment of huge commission in addition to services rendered as an employee for which salary has been paid. No such evidence has been placed nor even the details of any such extra services have been given. The special bench held that in view of the above discussions that the payment of commission of Rs.1.20 crores to the three working directors was in lieu of dividend and the same is not allowable as deduction under Section 36(1)(ii). The special bench further held that the provisions of Section 37(1) will not also be applicable in such cases.
The learned CIT – A allowed the appeal of the assessee deleting the above disallowance stating that it is to note that the payments made to the Directors have been approved by the Board of Directors vide Board resolution passed. The appellant paid the remuneration including bonus to them by taking due cognizance of their educational qualifications, expertise gained in their field, experience rendered with the Company and scores of other factors. It is further noted that the Directors have included bonus and remunerations paid by the appellant for taxation purpose in their individual returns of income. Therefore, the learned CIT appeal has not understood the context of the provisions of section 36 (1) (ii)) of the act but has deleted the disallowance without considering the argument of the learned assessing officer wherein he has relied upon the decision of the special bench of tribunal. He has not at all considered that what those shareholders and whether the directors to whom the bonus has been paid what is the shareholding. Without examining the shareholding, the impact of the provisions of section 36 (1) (ii) could not have been determined at all.
Though the learned authorised representative has relied upon the decision of the Hon’ble Delhi High Court in case of CIT versus Carrier Launcher India Ltd 20 taxmann.com 637 wherein the bonus payment
quantum was linked to the services rendered by the directors and therefore the Hon’ble Delhi High Court stated that the provisions of section 36 (1) (ii) was not hit. In that case as appearing in paragraph No. 15 the relevant shareholding details in the bonus payment was provided to the assessing officer. Before us there is no such details are either discussed by the learned assessing officer or the learned CIT – A, the detail of the shareholding is very material in deciding this issue. Therefore, the reliance on this judgement does not help the case of the assessee. Further the learned CIT DR has relied upon the decision of the Hon’ble Delhi High Court in 140 taxmann.com 193 in SRC Aviation Private Limited versus ACIT wherein it has been held that amount paid as bonus by assessee company to its directors in view of dividend and not in lieu of any services rendered by them could be allowed as deduction under section 36 (1) (ii) of the act. In this decision all the decisions cited by the learned authorised representative are also considered and distinguished. The learned CIT – A has not at all considered any of these decisions while deleting the above disallowance.
Further when the verification of the resolution placed at page No. 68 of the paper book submitted by the learned authorised representative, the bonus was paid to the directors out of the available net profits of the company in the ratio of salary paid to them and not exceeding five times the annual salaries of the directors. There was no reference of what were those directors have performed to on the bonus. The monthly salary of the director Shri N K Lenka was Rs 9,41,165/–, Shri
G R Reddy of Rs 713601/- and shri Chiranjilal Sahoo of Rs 5,65,259/– . For the impugned assessment year the bonus is paid to all these three directors of ₹ 47,927,838/–, ₹ 37,440,387/– and ₹ 28,531,775/– amounting in all to ₹ 113,900,000/– as bonus. There is no evidence that what kind of services they have been rendering to the company to on this kind of bonus where their annual remuneration was only Rs 2 66,40,300/–. It is apparent that the bonus of ₹ 16.28 crores is distributed in the ratio of 42%, 33% and 25% to these three directors. As it is not available before us that what is the shareholding, we cannot decide this issue here that these payments are made to these persons in the ratio of their shareholdings.
We further find that that the learned assessing officer has also carried out a different kind of exercise and made a disallowance stating that for the assessment year 2016 – 17 the total remuneration paid was ₹ 70,947,118. However, the same remuneration has gone up to ₹ 141,512,648/–. Therefore, the difference of ₹ 70,565,350 is disallowed as expenses under section 36 (1) (ii) of the act. We also find that the learned CIT – A has not corrected the above aberration but deleted the whole of the addition without looking into the provisions of this section.
In view of the above facts we restore this ground of appeal
back to the file of the learned CIT – A to consider the provisions of section 36. (1) (ii), examine the shareholding of these three directors and then decide whether the payment is made to these directors who are the shareholders of the assessee company in the ratio of their shareholding or not. The learned CIT – A is also directed to look into the decisions of the Hon’ble Delhi High Court cited by the learned authorised representative as well as by the learned CIT DR and then apply the ratio laid down therein. After that, he may decide the issue in accordance with the law. In the result ground No. a-c of the appeal of the learned assessing officer is allowed as indicated above.
25. The issue as per ground No. d and e shows that assessee has made payments to transporters and claimed the same as expenses. There was no Tax deduction made on the payments. On a query, the appellant stated before the AO that the transporters had provided declaration forms for owning less than 10 vehicles and hence no TDS was made. It was noted by the AO that few declaration forms were submitted by the appellant and also submitted the breakup of the payments made to transporters and the cases where threshold of TDS was not crossed. However, holding that the appellant simply accepted the declaration form and has not deducted Tax at source but failed to intimate the prescribed authority, such particulars, in such form and within such time as may be prescribed, the AO made a disallowance u/s. 40(a)(ia) of the Act. The AO made disallowance @30% of Rs. 2,97,27,452/- i.e. Rs. 89,18,235/-.
The Ld. CIT (A) deleted the disallowance holding that 5.2.2 The AO made disallowance u/s. 40(a)(ia) holding that that appellant did not submit the declaration forms obtained from the parties to the prescribed
authority as required u/s. 194C(7) for non-deduction of tax at source, whereas the appellant contended that the disallowance cannot be made u/s. 40(a)(ia) for non-compliance with the provisions of section 194C(7). The appellant stated that it has fulfilled the requirement u/s. 194C(6) and there was no disallowance called for since there was no liability to deduct tax at source. In this connection, reliance is placed on the decision of ITAT, Delhi dated 23.03.2023 wherein it was held that disallowance u/s. 40(a)(ia) does not arise just because there is violation of sec 194C(7) provisions. The facts depict that the appellant had duly complied with the provisions of sec 194C(6) by obtaining declarations from the persons for non-deduction of tax. Therefore, the disallowance u/s. 40(a)(ia) does not arise because there is violation of sec 194C(7) provisions. Considering the issues of the case on hand, relying on the case law referred ,the disallowance is deleted.
The learned departmental representative vehemently supported the order of the learned assessing officer whereas the learned AR supported the order of the learned CIT – A.
We have carefully considered the rival contention and find that when the assessee has complied with the provisions of section 194C (6) by obtaining declaration from the persons for non-deduction of tax, the disallowance is correctly deleted by the learned CIT – A. Accordingly ground No.d and e of the appeal are dismissed.
In the result appeal filed by the learned assessing officer is partly allowed for statistical purposes.
Pronounced in the open court on this 16th day of December, 2025.