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Income Tax Appellate Tribunal, Hyderabad ‘A Bench, Hyderabad
Before: Shri Manjunatha G. & Shri K.Narasimha Chary
सुिवधई की तधरीख/Date of Hearing: 12/02/2024 घोर्णध की तधरीख/Date of 11/03/2025 Pronouncement: आदेश / ORDER PER BENCH : These appeals filed by the Revenue are directed against orders dated 26.07.2024, 20.08.2024 and 21.08.2024 of the Commissioner of Income Tax (Appeals) [“Ld.CIT(A)”], National Faceless Appeal Centre, Delhi pertaining to A.Y.2018-19, 2014- 15 and 2015-16.
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.
2. The Ld.CIT(A) ignored the fact that the assessee company did not provide confirmations called for from M/s Jagannath Agro to confirm authenticity of transactions.
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/-.
4. During the course of assessment proceedings, the Assessing Officer (“the AO”) noticed that the assessee has made purchases to the tune of Rs.2,36,00,792/- from M/s Jagannath Agro Ltd. To support the purchases from the above party in the backdrop of information available with the department, the AO called upon the assessee to file relevant evidences. In response, the assessee filed purchase bills along with lorry receipts to prove the genuineness of purchases and also filed relevant bank statement and argued that the payment against purchases has been made through proper banking channels. The AO after considering the submissions of the assessee and also taking note of relevant details, submitted by the assessee, observed that in some transport receipts, name of the consigner and consignee are missing. Although the assessee claims to have made payment through banking channel, but, mere payment through cheque would not prove the genuineness of the transactions. Therefore, by taking note of statement recorded from Shri Shailabh Khandelwal on 29.01.2015 observed that the information gathered by the department, coupled with statement recorded u/s 131 of the Act from Shri Shailabh Khandelwal, where he has clearly admitted that M/s Jagannath Agro Ltd. was not having any business activity and only issues bogus bills for commission. Therefore, observed that the purchases claimed to have been made from M/s Jagannath Agro Ltd. is bogus in nature and thus rejected the arguments of the assessee and made addition of Rs. 2,36,00,792/- to the total income of the assessee.
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 :
“6.4. As the relevant purchases have been debited to the Profit and Loss account and claimed as a deduction in computing the profits of the business chargeable to tax, the onus was on the appellant to prove the genuineness of the purchases with satisfactory evidences. I find that the primary onus that was casted on the appellant has been discharged by it by filing the required documents before the AO (in form of bank statement highlighting the payment made to Mis. Jagannath Agro Ltd., copy of transport receipts, material receipts, weighment slips, way bills and inward slips, ledger copy of M/s. Jagannath Agro in the books of company, copy of invoices for purchases made from M/s. Jagannath Agro, copy of stock register highlighting the purchases made from the party). Then the onus was shifted on the AO to bring out any specific defects in the said documents submitted by the appellant. However, the AO has not brought on record any material evidence or made any further enquiries to conclusively prove that the said purchases are bogus. The appellant has uploaded all the above documents even before me. The AO has not doubted the authenticity of the above documents. Mere reliance by the AO on the sworn statement of some Shri Khandelwal that too without affording the appellant any opportunity to cross examine in this regard, would not in itself suffice to treat the purchases as bogus and make the addition. If the AO doubted the genuineness of this said purchases, it was incumbent upon him to cause further inquiries in the matter to ascertain the genuineness or otherwise of the transactions. Without causing any further enquires in respect of the said purchases, the AO cannot make the addition by merely relying on statement of third party, Shri Khandelwal; without the appellant being afforded any opportunity of cross examination of that person. Therefore, the order of AO suffers from legal infirmities, deficiencies and is against the due procedure of natural justice. 6.5. On the issue of bogus purchases, different Hon’ble High Courts/Income- tax Tribunals of the Country, including the jurisdictional tribunal of Hyderabad, have delivered its judgments estimating income from Nil to 10-15% of the amount of such bogus purchases/unproved purchases depending upon the peculiar facts and circumstances of each case. The income embedded in bogus purchase/unproved purchase has been estimated by the judicial authorities as a percentage of such purchases. However, in case the Assessing Officer has not made any independent inquiry and has made the addition on the basis of third party report, total addition has been deleted by the judicial authorities.
6.6. Reference is placed upon the judgment of Hon’ble Bombay High Court in the case of Principal Commissioner of Income-tax vs. Vaman International (P.) Ltd. [2020] 422 ITR 0520 (Bom) wherein, on similar facts, the AO solely relying on the statement of a third party made addition on account of bogus purchases without any inquiry made by him to bring on record any evidence to prove his allegation of bogus purchase, Hon'ble High Court deleted the entire addition made by the Assessing Officer. 6.6.1. Hon’ble Bombay High Court in the above case held that the mere reliance by the Assessing Officer on the statement of two persons made before the sale tax department without giving the opportunity of cross examine to the assessee was not sufficient to make the addition. The court held that if the Assessing Officer doubted the purchases, the Assessing Officer was required to make further enquiry, which he did not make. The High Court in the above case, referred to the judgment of Gujarat High Court in the case of it Krishna Textiles v. CIT [2008] 174 Taxman 372/[2009] 310 ITR 227 to observe that in that case it was held that the onus was on the revenue to prove that the income belongs to the assessee. The Assessing Officer in this case did not doubt the sales, stock record maintained by the assessee. Hon'ble High Court in the above case deleted the addition by observing that the Tribunal had given a finding of fact by analysing the various documentary evidences filed by the assessee in support of its claim and in its view no substantial question of law arose there. 6.7. In another judgment, the Hon’ble Delhi High Court deleted the entire addition made by lower authorities in the case of Commissioner of Income-tax Act v. Odeon Builders (P.) Ltd. [2019] 110 taxmann.com 64/418 ITR 315/266 Taxman 461 (SC) on suspicion, conjectures and surmises by the Assessing Officer. The _judgment of Delhi High Court has subsequently been up held by the Supreme Court. 6.7.1. In this case, the ClT(Appeals), ITAT and the Delhi High Court had deleted the addition made by the Assessing Officer by treating the purchase amount as income from undisclosed sources. The Supreme Court in the above case held that disallowance made by the Assessing Officer solely by relying on third party information gathered by Investigation Wing of the Department which had not been independently subjected to further verification by the Assessing Officer who had not provided copy of such statement to the assessee was not justified. 6.7.2. The Hon'ble Court also observed that the initial onus of substantiating purchases through documentation including purchase bills, transportation bills, confirmed copy of account of the suppliers, the fact of payment through bank and furnishing of copies of VAT return and income tax returns of the suppliers, had been discharged by the assessee, the Assessing Officer could not make addition without further scrutiny. 6.8. Hon’ble Bombay High Court in the case of Commissioner of Income-tax vs. Nikunj Eximp Enterprises (P.) Ltd. [2013] 35 taxmann.com 384/216 Taxman 471 (Mag.)/[2015] 372 ITR 0619 (Bom) deleted the addition made by the Assessing Officer for bogus purchase. The assessee had filed letter of confirmation of seven suppliers, copies of bank statement reflecting the entries of payment through account payee cheques to suppliers, copies of invoices for purchase and detail of stock inventory. The sales in the above case were not doubted since these had been made to a government department namely Advance Research and Development Laboratory. 6.8.1. Hon'ble court also held that merely because the suppliers had not appeared before the Assessing
Officer or CIT (Appeals), it could not be concluded that the purchases were not made and the addition made was deleted. 6.9. Hon’ble Bombay High Court in the case of Principal Commissioner of Income-tax v. Nitin Ramdeoji Lohia - [2022] 145 taxmann.com 546 has held that the AO had not finished the investigation in the case and had not looked into the affidavits and confirmation letters submitted by the assessee from the dealers from whom it made purchases. The assessee demonstrated the fact of making purchases from these parties, and the AO presented no evidence to contradict this. Further, the fact that AO did not challenge the sales indicates that these were not bogus purchases. If the purchases were fake, it would not have been possible for the assessee to complete the sale transaction. In the instant case, where corresponding sales are not disputed, the purchases cannot be held as bogus unless the purchases are made from bogus entities. Therefore, the Hon'ble Court held that the transaction could not be considered as a sham transaction and deleted the addition made by the AO. 6.10. In the factual matrix of the case, where the AO failed to cause any enquiry to be made to establish his suspicions that the said purchases are bogus, the appellant has brought on record documentary evidences to establish the genuineness of the purchase transactions, the action of the AO in ignoring these evidences without controverting it with any enquiry or observing any defects and without affording the appellant the opportunity of cross-examination of whom statement was relied upon, marking purchases from the above party as bogus, is not tenable and therefore, cannot be accepted because the said purchases had been explained with necessary evidences to establish that the said purchases from the party was genuine and which has not been controverted by the AO. No material was brought on record by the AO to establish that the payments made for purchases to the above party was received back in cash by the appellant. The appellant has submitted documentary evidence before the AO and also before me to establish that the said purchases were genuine. Further, the Hon'ble Bombay High Court in the case of Ashish International in of 2009 has held that the genuineness of the statements relied upon by Revenue is not established when the assessee disputes the correctness of those statements and has not been afforded opportunity to cross examine these parties. Moreover, when the payment for the said purchases to the concerned party is through ‘proper banking channels and there is no evidence brought on record by the AO to establish that the said payments were routed back to the appellant, the addition made by the AO is not Sustainable. As such, the AO is directed to delete the addition of Rs.2,36,00,792/- made on this account. Accordingly, Grounds on this issue succeed.”
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.)
Ltd.(2020) 422 ITR 0520 (Bom), wherein, on similar facts, the Hon’ble High Court held that, the AO solely relying on the statement of a third party made addition on account of bogus purchases, without any inquiry made by him to bring on record any evidence to prove his allegation of bogus purchases. Hon’ble Gujarat High Court in the case of Krishna Textiles Vs. CIT [2008] 174 Taxman 372 [2009] held that, the onus was on the revenue to prove that the income belongs to the assessee. The AO in this case did not doubt the sales, stock record maintained by the assessee. In the absence of any contrary finding as to the incorrectness in the purchases and sales declared for the year, merely on the basis of statement of third party, no additions can be made. A similar view has been taken by Hon’ble Delhi High Court in the case of CIT Vs. Odeon Builders (P>) Ltd. [2019] 266 Taxman 461 (SC). Hon’ble Bombay High Court in the case of CIT Vs. Nikunj Eximp Enterprises (P.) Ltd. [2015] 372 ITR 0619 (Bom) held that once the assessee has filed letter of confirmation of seven suppliers, copies of bank statement reflecting the entries of payment through account payee cheques to suppliers, copies of invoices for purchase and detail of stock inventory and also proved the sales, then the AO cannot make additions only on the basis of statement of third party.
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.
ITA No.1080/Hyd/2024, A.Y.2015-16
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.
, A.Y.2018-19 14. The Revenue has raised the following grounds of appeal :
1. The Ld.CIT(A), NFAC erred in law and facts by holding payment of Rs.25,00,00,000/- as bonus ignoring Sec.36(1)(ii) of the Income Tax Act.
2. The Ld.CIT(A), NFAC wrongly accepted the claim of assessee company regarding payment of bonus without discussing the services rendered by the directors during the F.Y.2017-18 especially when the directors are employees of assessee company.
3. The Ld.CIT(A) ignored the fact that both directors were shareholders of the assessee company, each director holding 50% of the shares during FY 2017-18 as per IT Return. The bonus was paid in lieu of dividend to avoid taxes.
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.
Therefore, disallowed the bonus payment of Rs.25 crores to two directors u/s 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 :
“8. The instant appeal is against the order under section 143(3) r.w.s.143(3A) and 143(3B) of the I.T.Act, 1961 dated 17.03.2021 and the grounds of appeal are against the addition of Rs. 25,00,00,000/- on account of performance bonus paid to the directors of the appellant company. Since the grounds are inter-linked, the same are adjudicated together. 8.1 As per the Assessment Order, the brief facts of the case are that the appellant company is engaged in the business of Production and Sale of Poultry feed and filed return of income declaring total income of Rs.18,72,95,310/-. The case of the appellant company was picked up in scrutiny, in course of which the AO examined the issue of payment of Rs.25,00,00,000/- as performance bonus of the two directors of the appellant company, apart from the salary paid, which was claimed as deduction u/s 36(1)(ii) of the Act and asked for justification and allowability of the same. The AO has discussed the submission made by the Appellant in Para 3 of the Assessment Order but was not satisfied with the same and accordingly made disallowance of deduction of bonus of Rs. 25,00,00,000/- u/s 36(1)(ii) of the Act. The appellant has challenged the above disallowance in the above grounds of appeal. 8.2. During the appellate proceedings, the appellant has filed the written submission and also responded to the queries raised vide notice u/s 250, which have been extracted in the preceding para. The appellant has contended that it had furnished a detailed submission before the AO, (copy of which has also been furnished now) in support of its claim and the disallowance of the expenditure has been made by the AO without properly appreciating the facts and making erroneous conclusion. The main reason for making the above disallowance was that:
(i) the two directors were the only shareholders and they were also decision making authority; (ii) the bonus payment was in lieu of dividend; (iii) bonus payments was a device for tax evasion; (iv) the directors had distributed dividend in the form of bonus and therefore payment was covered by the exceptions provided in section 36(1)(ii). 8.3 In the appellate proceedings, the appellant has brought out that the two directors Shri G. Ranjith Reddy and Shri. A. Thirupathi Reddy were not the only share holders, as contended by the AO above, but were having share holding of 5.81% and 18.07% respectively during the year and the same is also evidenced by the financials of the appellant company. I also find that the above contention of the appellant is correct as note No.2 in the balance sheet having list of shareholders holding more than 5 percent shareholding shows that the above two Directors had only 5.81 percent and 18.07 percent share holding which was also the same in the earlier year. As regards the other argument of the AO that the above sum was paid in lieu of dividend, the appellant has contended that the AO has drawn an erroneous conclusion “that the dividend was payable by the Company and the Company instead of paying dividend had paid bonus to its employee shareholder and such payment of bonus was in lieu of dividend and the claim of deduction will not be allowable under section 36(1)(ii)”. But, the AO failed to appreciate that the payment of performance bonus to the two directors of the appellant company was in no way a 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 them and it was not in-lieu of dividend as no such payment was made to the other shareholders. I also find that in the assessment order the AO has not brought out as to how the above amount was paid as bonus in lieu of dividend but for merely stating the same. On the other hand, the appellant 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. The Board Resolution clearly states that “in view of increased growth both in turnover and profits of the company due to the efforts of the directors for many years and also increased responsibilities of the directors, the chairman proposed to give performance bonus in addition to the existing remuneration of Dr.G.Ranjit Reddy, MD and Dr.A. Tirupathi Reddy , Director of the company. The Board discussed and approved to pay additional performance bonus of Rs.12.50 Crores for the F.Y.2017-18 to Dr.G. Ranjit Reddy, MD. Similarly, the board discussed and approved to pay additional performance bonus of Rs.12.50 Crores for the FY.2017-18 to Dr.A.Tirupathi Reddy, Director of the company”. Therefore, the appellant has clearly brought out that the above performance bonus cannot be treated in lieu of payment of dividend but paid to the employee directors, acknowledging the services rendered by them and their increased responsibilities and role for the increased growth and turnover of the appellant company and the same is also supported by the Board Resolution of the appellant company. It is also noted that the two directors to whom the above performance bonus of Rs.12.50 Crores each has been paid have different shareholdings in the company i.e. 5.18% and 18.07% during the year and therefore, the performance bonus is not linked to the shareholding of the above employee directors in the company and therefore, the above payments cannot be in lieu of dividend, as it is known that as per the provisions of the Company’s Act, 1956, the dividend is paid at the same rate to all the shareholders and is based on the shares held by the shareholders. 8.4. Further, as regards the reason given by the AO that the bonus payment were a device for tax evasion, it is noted that in the assessment order, the AO has not brought out as to how it was a device for tax evasion, except stating that the decision of shareholder directors to pay bonus instead of declaring dividend was obviously with the intention to reduce profit for avoiding payment of taxes. On the other hand, the appellant has brought out that the above performance bonus paid to the directors was included in their income from salary and the tax at the highest rate was deducted by the appellant company. The above two directors have also included the above performance bonus as income from salary in the individual returns filed by them and paid the tax at the highest slab rate and for the above purpose, the copies of Form 16, 26AS extracts , ITRs of the directors and the computation of income have been filed to demonstrate that taxes at the highest slab rate has been paid on the above amount in the hands of the directors and therefore, there is no tax evasion on account of the above payment of performance bonus to the employee directors. 8.5. It is also noted that the appellant has relied upon various judicial pronouncements to support its above claim and the gist of the decisions brought out in the written submissions has been extracted in the preceding para. I also find that the Honorable Delhi High Court in the case of Carrier Launcher India Ltd., vide order dated 19.04.2012 while granting relief to the assessee has observed “held that it was not disputed regarding bonus (a) that the payment was supported by board resolutions and (b) that none of the directors would have received the lesser amount of dividend than the bonus paid to them, having regard to the shareholdings. Further, the directors are full time employees of the company receiving salary . Taking all these facts into consideration, it would appear that the bonus was a reward for their work, in addition to the salary paid to them and was in no way related to their shareholding. It was deductible u/s.36(1)(ii)”. 8.6. In the case of AMD Metplast Pvt. Ltd. (2012) 341 ITR 563, the Hon’ble Delhi High Court while granting relief to the appellant has observed “A was the Managing Director and in terms of the Board Resolution was entitled to receive commission for services rendered to the company. It was a term of employment on the basis of which he had rendered service. Accordingly, he was entitled to the amount. Commission was treated as a part and parcel of salary and tax had been deducted at source. A tax on both the salary component and the commission. The payment of dividend was made in terms of the companies Act, 1956. The dividend had to be paid to all shareholders equally. This position could not be disputed by the Revenue. Dividend was a return on investment and not salary or part thereof’.
8.7. In the case of DCIT Vs. Abro Technologies Pvt. Ltd. in of 2016, Honourable ITAT, Delhi vide order dated 25.02.2020 has on the same issue while allowing deduction for commission paid to directors held that “there was no dispute that the directors were given commission for increasing and promoting sales of the assessee by their efforts and over the period of time the assessee’s turnover increased many fold and also the profit . Further, similar commission paid to the directors in terms of same agreement had been allowed in the past by the AO himself. Further, since the directors in terms of board resolution were entitled to receive commission for rendering services to the company and it was in terms of their employment on the basis of which they were rendering services, such remuneration/commission would be considered as part and parcel of salary. It was also not disputed that TDS had been deducted on such commission as salary. Otherwise also, if the payment of dividend was made in terms of Company's Act, 1956, which had to be paid to all the shareholders equally and dividend was-basically a return of investment and not salary or part thereof. Accordingly, commission paid to directors was allowed”. 8.8. Considering the factual matrix of the case, the assessment order, the written submissions filed by the appellant and the documents furnished and the judicial pronouncements as extracted above and the discussion above, it is held that the disallowance of deduction of performance bonus of Rs.25,00,00,000/- made by the AO u/s 36(1)(ii) of the Act cannot be sustained. The AO is directed to delete the above disallowed. Accordingly, the grounds are Allowed.”
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.
Order pronounced in the Open Court on 11th March, 2025.