DCIT., CIRCLE 3(1), HYDERABAD vs. ROHINI MINERALS PRIVATE LIMITED, HYDERABAD

The Revenue has raised more or less common grounds of appeal both for the A.Y.2014-15 and 2015-16. Therefore, for the sake of brevity, grounds of appeal for the A.Y.2014-15 are reproduced as under :

The Ld.CIT(A) erred in law and facts by holding purchases made from M/s Jagannath Agro to the tune of Rs.2,36,00,792/- as genuine.

Further, Ld.CIT(A) ignored the statement on oath given by Shri Shhailabh Khandelwal wherein he admitted that M/s Jagannath Agro provided accommodation entries on commission by bogus sales which includes receiving payments through banking channels and giving back cash to parties. He also stated that M/s Jagannath Agro does not have any real business. 4. Any other grounds that may arise during the hearing will be submitted before Hon’ble ITAT with kind permission. 3. The brief facts of the case are that the assessee, M/s Rohini Minerals Private Limited is engaged in the business of production and sale of poultry feeds. The assessee has filed its return of income for the A.Y.2014-15 on 30.09.2014, declaring total income of Rs.9,08,72,987/-. The assessment has been subsequently, reopened u/s 147 of the Income Tax Act, 1961 (“the Act”) for the reasons recorded, as per which, the information available with the department reveals that during the F.Y.2013-14, relevant to A.Y.2014-15, the assessee had made purchases to the tune of Rs.2,20,81,719/- from M/s Jagannath Agro Ltd. and such financial transaction has been reported to be bogus in nature, therefore, notice u/s 148A was issued and called upon the assessee to file objections, if any for proposed reassessment. Further upon consideration of the objections, if any filed by the assessee, order u/s 148A(d) dated 28.07.2022 was passed, as a consequence, notice u/s 148 of the Act dated 29.07.2022 was issued and served on the assessee. In response to the notice u/s 148 of the Act, the assessee had filed return of income on 25.08.2022, declaring total income at Rs.9,08,72,987/-.

Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee had filed relevant evidences, including bills in support of purchases from M/s Jagannath Agro Ltd., transport bills for transportation charges paid against purchases and also copies of bank statements to prove the payment made through proper banking channel. The assessee further submitted that merely on the basis of third party statement, no addition can be made, unless the statement of third party is provided to the assessee and also an opportunity of cross examination with the person who gave adverse statement against the assessee. The Ld.CIT(A) after considering the relevant submissions of the assessee and also taking note of various evidences filed by the assessee, including relevant purchase bills and lorry receipts, observed that although the AO doubted the genuineness of purchases from M/s Jagannath Agro Ltd., in light of statement of Shri Shailabh Khandelwal, but the fact remains that the assessee has filed relevant evidences to prove the purchases are genuine, which are supported by necessary evidences. Further, the assessee had also proved that it has reported total turnover of Rs.622 crores as against this, its total purchases was at Rs.536,78,09,897/-. The AO has doubted the purchases to the tune of Rs.2.36 crores that too on the basis of statement of third party, but the fact remains that the statement of third party was not confronted to the assessee. In the absence of any reason to disbelieve the claim of the assessee, merely on the basis of statement of a third party, additions cannot be made. Therefore, deleted addition made by the AO. Relevant findings of the Ld.CIT(A) are as under :

Aggrieved by the order of the Ld.CIT(A), the Revenue is now in appeal before the Tribunal.

The Ld.Sr.AR, Shri Srinath Sadanala submitted that the Ld.CIT(A) erred in holding that the purchases made from M/s Jagannath Agro to the tune of Rs.2,36,00,792/- is genuine, without appreciating the fact that Shri Shailabh Khandelwal in his statement recorded u/s 131 of the Act has admitted that the above company provide accommodation entries on commission basis. Although the AO has brought out above facts in the assessment order, in light of information available with the department, coupled with the statement recorded from Shri Shailabh Khandelwal, but the Ld.CIT(A) allowed relief to the assessee, only on the ground that no contrary evidence has been brought on record to disbelieve the evidences filed by the assessee. Therefore, he submitted that the order of the Ld.CIT(A) should be set aside and the addition made by the AO should be sustained.

Shri S.K.Gupta, learned Counsel for the assessee, on the other hand, referring to statement recorded from Shri Shailabh Khandelwal submitted that, no where in the statement Shri Khandelwal indicted the assessee company. Although he has stated that M/s Jagannath Agro Ltd. indulged in providing accommodation entries, but there is nothing on record from his statement that the assessee is also part of the accommodation entries provided by the above company. On the other hand, the assessee has filed all evidences including relevant purchases bills and also proved payment through proper banking channel. The Ld.CIT(A) after considering relevant submissions and also taking note of evidences filed by the assessee, allowed relief to the assessee. Therefore, he submitted that the order of the Ld.CIT(A) should be upheld and the appeal filed by the Revenue should be dismissed.

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that the assessee has furnished various evidences including purchase bills, transport bills and also relevant bank statement to prove the payment made through proper banking channel to M/s Jagannath Agro Ltd. for purchases. It is also admitted fact that going by the volume of turnover declared by the assessee for the year under consideration and the corresponding purchases, the purchases from M/s Jagannath Agro Ltd. is minuscule, which is even less than 1% of total purchases. The AO never disputed these facts, however, made additions towards purchases from M/s Jagannath Agro Ltd. only on the ground that Shri Shailabh Khandelwal has given an adverse statement against the company, M/s Jagannath Agro Ltd. and stated that the said company was indulged in providing accommodation entries to various parties for commission. Except this, the AO has not caused any enquiry, to establish his suspicion that the said purchases from the company are bogus. In our considered view, when the assessee has supplied relevant evidences in support of purchases, merely on the basis of statement of third party, additions cannot be made towards purchases as bogus in nature. No doubt, statement recorded from third party may lead to suspicion to gather further information by conducting enquiry. However, unless the AO conducts further enquiry to ascertain real nature of transactions, in light of information that may be available to the AO, in our considered view, only on the basis of third party statement, no additions can be made, more so, in the case, where the said statement was not confronted to the assessee company for its comments and cross examination. In the present case, the AO made additions towards purchases, merely, on the basis of statement of third party i.e. Shri Shailabh Khandelwal, without providing his statement to the assessee for its rebuttal and also cross examination contrary to the settled principle of law. Therefore, in our considered view, unless the statement is given to the assessee, no additions can be made on the basis of third party statement.

Coming back to the purchases made by the assessee from M/s Jagannatha Agro Ltd. Admittedly, the assessee had made purchases of Rs.2,36,00,792/- from M/s Jagannath Agro Ltd. and to justify the purchases from the above company, furnished all evidences including purchase bills and supporting transportation bills. The AO, in principle, accepted that the assessee has submitted bills and transport bills, but rejected the argument of the assessee, only on the ground that in few transport bills name of the consigner and consignee is missing. In our considered view, based on few instances of irregularity in transport bills, genuineness of purchases cannot be doubted, when the assessee has furnished every bill for purchases and payment made through proper banking channel. Therefore, we are of the considered view, that the AO erred in making additions towards purchases from M/s Jagannath Agro Ltd. as bogus in nature, without conducting further enquiry and also without bringing further material on record to establish that the payment made against purchases was received back in cash by the assessee. This principle is supported by the decision of Hon’ble Bombay High Court in the case of Principal Commissioner of Income Tax Vs.Vaman International (P.)

The sum and substance of ratio laid down by various High Courts is that genuineness of purchases cannot be doubted only on the basis of third party statements, unless independent enquiry is conducted to ascertain true nature of transactions, in light of various evidences filed by the assessee. In the present case, since the assessee has filed various evidences to prove the genuineness of the purchases, in our considered view, the AO is erred in making addition only on the basis of statement of third party. The Ld.CIT(A) has rightly deleted the additions made by the AO. Thus we are inclined to uphold the order of the Ld.CIT(A) and delete the additions made by the AO.

In the result, appeal filed by the Revenue for the A.Y.2014- 15 is dismissed.

The facts and issues involved in this appeal are identical to the facts and issues, but for the figures, which we had considered in A.Y.2014-15. The reasons given by us in preceding Para Nos.7 to 9 shall mutatis mutandis apply to this appeal as well. Therefore, for similar reasons, we are inclined to uphold the findings of the Ld.CIT(A) and dismiss the appeal filed by the Revenue.

Any other grounds that may arise during the hearing will be submitted before Hon’ble ITAT with kind permission. 15. The brief facts of the case are that the assessee company is engaged in the business of production and sale of poultry feed. The assessee filed its return of income for the A.Y.2018-19 on 29.10.2018, declaring total income of Rs.18,72,95,310/-. The case was selected for scrutiny and during the course of assessment proceedings, it was noticed that the assessee company had made bonus payment to the Directors and claimed deduction u/s 36(1)(ii) of the Act. The AO called upon the assessee to justify the payment of bonus, in light of provisions of section 36(1)(ii) of the Act. In response, the assessee submitted that the company had paid bonus to two of its Directors under the terms of contractual agreement for rendering services. The said bonus payment is stipulated by contractual agreement between the Directors and the company and Board resolution, authorizing the company to pay bonus to the Directors. The assessee further submitted that the company has paid bonus through cheque and also deducted applicable TDS as per the provisions of law. Further, the Directors have paid tax at maximum marginal rate on their total income, including bonus and salary received from the appellant company. Therefore, submitted that payment of bonus to Directors cannot be treated as any sum paid to an employee as bonus or commission for services rendered where, such sum would not have been payable to him as profit or dividend, if it had not been paid as bonus or commission. The AO after considering relevant submission of the assessee and also taking note of the details submitted by the assessee, observed that the payment made by the assessee to Directors is in lieu of dividend, which is covered by exception provided in section 36(1)(ii) of the Act. Further, the two directors were only shareholders and also decision making authority. The bonus payment was in lieu of dividend. Bonus payment was a device for tax evasion. The directors had distributed dividend in the form of bonus and therefore, payment was covered by the exceptions provided in section 36(1)(ii) of the Act. The assessee has not made any bonus payment in the earlier years and also not explained, why suddenly huge bonus payment has been made to the Directors for the year under consideration. Therefore, observed that although the assessee contends that payment of bonus to the Directors is for the services rendered, but the fact remains that the payment is distribution of dividend, which falls under the provisions of 36(1)(ii) of the Act.

Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has filed detailed written submissions on the issue, which has been reproduced at para 7 on pages 5 to 10 of the order of the Ld.CIT(A). The sum and substance of the argument of the assessee before the Ld.CIT(A) are that the payment of bonus to two directors is in terms of contractual agreement for services rendered to the company and the said payment does not fall under the purview of any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profit or dividend. The assessee had also relied upon certain judicial precedents and argued that once the Directors are not covered under the ambit of Payment of Bonus Act, 1965, then any payment made to said directors cannot be considered in light of relevant provisions of the Act and also in case, the assessee is able to establish the payment with relevant supporting evidences and proved the services rendered by the Directors, then the same cannot be disallowed u/s 36(1)(ii) of the Act.

The Ld.CIT(A) after considering the relevant submissions of the assessee and also taking note of provisions of section 36(1)(ii) held that, the AO failed to appreciate that the payment of performance bonus to the two directors of the appellant company was in no way sharing of profits of the company, but on account of acknowledgement of the services rendered to the company, for which the performance bonus was paid apart from the salary paid to the Directors. Further, the AO has not brought out, as to how the above payment was paid in lieu of dividend, except stating, had the company declared the dividend, the question of payment of bonus would not arise. However, the fact remains that the assessee has furnished copy of Board Resolution of the Board meeting dated 20.06.2018, which clearly supports the decision of payment of performance bonus, in addition to the existing remuneration for the stated reasons. Further, Board Resolution had also specified the reasons for one time performance bonus to the Directors. It is also noted that the two directors to whom the performance bonus has been paid has different share holding in the company and the bonus is not linked to the shareholdings of the above Directors and therefore, payment cannot be in lieu of dividend, as it is known that as per the provisions of the Companies Act, 1956, the dividend is paid at the same rate to all the shareholders and is based on the shares held by the shareholders. The Ld.CIT(A) further held that the assessee had also filed relevant evidences and proved that the Directors had paid tax on total income, including bonus received at maximum marginal rate and if we go by the tax payable by the company on the profit, if at all bonus payment was not paid and the tax paid by the Directors in their individual hands, it is tax neutral exercise, because, in both, the profit or income is at maximum marginal rate. Therefore, held that the AO erred in disallowing bonus of Rs.25 crores u/s 36(1)(ii) of the Act and thus, directed the AO to delete the additions towards payment of bonus to Directors. Relevant findings of the Ld.CIT(A) are as under :

Aggrieved by the order of the Ld.CIT(A), the Revenue is in appeal before the Tribunal.

Shri B.Bala Krishna, Ld.CIT-DR submitted that the Ld.CIT(A) erred in holding that the payment of performance bonus does not fall under the provisions of 36(1)(ii) of the Act, ignoring the provisions, which clearly stated that any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profit or dividend, then the same falls under the provisions of section 36(1)(ii) of the Act. The Ld.CIT-DR further submitted that although the assessee files relevant evidences and proves payment of performance bonus for services rendered to the company, but the AO has brought out clear facts and analysis that the performance of the company, when compared to earlier years has come down, which is evident from drastic decrease in turnover. Therefore, the argument of the assessee that the bonus is paid on performance of the Directions is devoid of merit. The Ld.CIT-DR further referring to section 11 of the Payment of Bonus Act, 1965 (“the Bonus Act”) submitted that the law prohibits more than 20% bonus to employees. In the present case, going by the amount of salary paid to Directors and the impugned bonus paid, then it is in excess of the statutory limit of the Bonus Act and therefore, definitely falls under the provisions of section 36(1)(ii) of the Act. The Ld.CIT(A), without considering relevant provisions, simply deleted the additions made by the AO, therefore, the order of the Ld.CIT(A) should be set aside and the additions made by the AO should be sustained.

The learned counsel for the assessee, Shri S.K.Gupta, Advocate, on the other hand, supporting the order of the Ld.CIT(A) submitted that the company has paid performance bonus for services rendered to the company. The assessee has also filed relevant evidences, including Board Resolution for authorizing the company to pay bonus to its Directors for rendering the services. The Board Resolution also explained the reasons for payment of bonus. Further the company has deducted TDS at maximum marginal rate and Directors have filed returns of income and paid tax at maximum marginal rate, which means, it is tax neutral, whether the tax paid on the profit by the company or the Directors, does not alter the total taxes payable on the income. The learned counsel for the assessee, further replying to the argument of the Ld.CIT-DR, in light of section 11 of the Bonus Act, 1965, submitted that two of the Directors do not cover under the Bonus Act, 1965, because the Payment of Bonus Act is applicable to employees who draw salaries below the threshold limit.

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that the assessee company has paid performance bonus of Rs.12,50,00,000/- each to two of its Directors, Shri G.Ranjith Reddy and Shri Thirupathi Reddy, aggregating to Rs.25,00,00,000/-. The payment of bonus to Directors is authorized by Board of Directors in their meeting held on 20.06.2018, which clearly specified the payment of performance bonus to Directors. As per the Resolution of Directors, the company has paid performance bonus to two of its Directors, for services rendered to the company, which resulted in improved performance and profitability. The assessee had also deducted TDS applicable as per law and the Directors have paid tax on total income including bonus payment by the assessee company at maximum marginal rate. These are undisputed facts. Therefore, issue of disallowance of performance bonus to Directors under the provisions of section 36(1)(ii) needs to be examined, whether, this bonus payment is part of salary for rendering service to the company or any sum paid to an employee as bonus or commission for services rendered where, such sum would not have been payable to him as profit or dividend, if it had not been paid as bonus or commission.

The provisions of section 36(1)(ii) of the Act, deals with deduction provided for while computing profits or gains from business or profession and as per the said provision, any sum paid as bonus or commission for services rendered, where, such sum would not have been payable to him as profit or dividend is not allowable as deduction. A plain reading of the provisions makes it very clear that, bonus will not be allowed, only if such sum paid to an employee as bonus or commission for services rendered where, such sum would not have been payable to him as profit or dividend. In the present case, the assessee has made out a case that performance bonus paid to its Directors is for services rendered with the company, which is commensurate with the services rendered by the Directors and therefore, in our considered view, merely for the reason that the company has paid bonus to two of its Directors, it cannot be said that the said payment is in lieu of dividend distribution to the Directors. Further, there is difference between bonus and dividend. Dividend is distributed in terms of the provisions of the Companies Act at equal rate to shareholders, including shareholder directors. Bonus is paid to employees, depending upon the contractual understanding between the employee and company, unless the employee is covered under the provisions of the Bonus Act, 1965. The Payment of Bonus Act, 1965 mandates the employer to pay minimum bonus of 8.33% of their salary and maximum 20% of their salary, depending upon the profit or loss of the company. The payment of bonus does not depend upon the profit or loss of the company. It is purely based on the statutory requirement as per the Bonus Act, and contractual obligation of the employer. As per the Payment of Bonus Act, 1965, any employee drawing salary in excess of prescribed limit does not compulsorily cover under the said Act. In the present case, there is no dispute with regard to fact that both the Directors are drawing salary, in excess of prescribed threshold limit as per the Bonus Act, therefore, any payment to the above two directors does not cover under the Bonus Act to this extent, the arguments of the Ld.CIT-DR in light of section 11 of the Bonus Act does not hold good.

Having said so, let us come back what is the nature of payment to two of its Directors. Admittedly, the assessee has paid performance bonus to two Directors, which is supported by Board Resolution passed by the Board meeting held on 20.06.2018, where the reason for payment of performance bonus has been specified. As we have already stated earlier, there is difference between dividend and bonus. Dividend is distributed equally to all shareholders, whereas bonus payment is contractual obligation between the parties. In the present case, the assessee has filed all evidences and proved that the payment of performance bonus to Directors is on the basis of contractual obligation and for the services rendered to the company. Further, the assessee had also proved with relevant evidences, that the services rendered by two of its Directors has resulted in substantial growth and profitability of the company. Therefore, in our considered view, once the bonus payment is part of remuneration payable to an employee or director as per contractual understanding between the company and the employee and the said bonus is part of their remuneration, in our considered view, the AO cannot press into service, the provisions of section 36(1)(ii) of the Act, merely for the reason that the said payment is huge and the assessee has not made out a case for payment of such huge amount to any employee. Further, the assessee has also filed relevant evidences and proved that the company has deducted TDS on payment of bonus to Directors as part of remuneration as per applicable TDS provisions of the Act and also the Directors have filed their returns of income and paid taxes at maximum marginal rate on their total income, which includes performance bonus received and on going through the income tax returns filed by both the directors, we find that both of them have paid taxes on MMR on total amount of performance bonus received from the appellant company. Therefore, in our considered view, if we go by the rate of tax payable by the appellant company on this income and the rate of taxes paid by the directors on their total income, there is no difference in taxes paid by the Directors on the performance bonus paid by the appellant company. Had the company has not paid bonus to the employees and paid taxes on its own as its profits, the assessee would have paid 30% tax on such bonus payment. Since the Directors have paid maximum marginal rate of tax on their income, which includes performance bonus received by the appellant company, in our considered view, when there is no loss of taxes, it can at best be said that it is tax neutral and there is no loss of revenue to the Government. Therefore, we are of the considered view that once the assessee has proved the payment of bonus to the directors as part of remuneration in terms of contractual obligation between the parties and further, there is no loss of revenue, in our considered view, the AO cannot bring the said payment within the provisions of section 36(1)(ii) of the Act. In our considered view, the provisions of section 36(1)(ii) will come into play, where assessee makes payment to any employee, as bonus or commission for services rendered, where such sum would not have been payable to him as profit or dividend, if it had not been paid as bonus or commission. Since the assessee has paid performance bonus for the services rendered to the Directors, in our considered view, the provisions of section 36(1)(ii) cannot be pressed into service. The Ld.CIT(A), after considering the relevant facts has rightly directed the AO to delete the additions made towards performance bonus. Thus, we are inclined to uphold the findings of the Ld.CIT(A) and dismiss the appeal filed by the Revenue.

In the result, all the three appeals filed by the Revenue for the A.Y.2014-15, 2015-16 and 2018-19 are dismissed.