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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI ARUN KUMAR GARODIA & SHRI PAVAN KUMAR GADALE
O R D E R Per A. K. GARODIA, A. M.: This appeal is filed by the assessee and the same is directed againstthe order of ld. CIT (A) – 4, Bangalore dated 28.02.2018 for A. Y. 2014 - 15. 2. The assessee has raised four grounds as per concise grounds of appeal
. In course of hearing, it was submitted by the learned AR of the assessee that Ground No. 1 is general and Ground No. 3 is not pressed and Ground No. 4 regarding initiation of penalty proceedings u/s 271 (1) (c) is premature and only one ground i.e. Ground No. 2 is to be decided. He pointed out that the issue involved in Ground No. 2 is regarding disallowance of Rs. 120,65,600/- being Bonus paid to a Shareholder u/s 36 (1) (ii). Accordingly, we hold that we willdecide this Ground No. 2 and the remaining grounds are rejected.
3. At the very outset, it was submitted by the learned AR of the assessee that this issue is covered in favour of the assessee by the tribunal order rendered in the case of ACIT vs. Mandovi Motors (P) Ltd. as reported in 8 Taxmann.com 225 (Bang). He submitted a copy of this tribunal order and [pointed out that Para 4.5 Page 2 of 8 to 4.7 of this tribunal order are relevant in which the tribunal has followed the judgment of Hon’ble Bombay High Court rendered in the case of CIT vs. Sesa Goa Ltd., 316 ITR 399. Learned DR of the revenue placed reliance on the orders of the authorities below.
4. We have considered the rival submissions. We find that the dispute is regarding bonus paid to Mr. Abhijeet Shah, who is holding 34.62 % of the shares of the assessee company and is a director of the assessee company. It is also noted that Mr. Abhijeet Shah was paid salary also for the services rendered by him to the assessee company as a director and he was paid dividend also in respect of his share holding. The submissions of the assessee before CIT (A) are reproduced by CIT (A) in Para 8.2 of his order. This Para is reproduced herein below for ready reference because the assessee has placed reliance on several judicial pronouncements and relevant portion of these judgments are reproduced in the written submissions. This Para reads as under:- “8.2 Assessee’s submissions:- The Assessee filed detailed written submission dated 28/12/2017 during the appeal-proceedings. The relevant part of the Assessee’s submissions is extracted as under. “2.4 Inadmissibility of bonus payment to a shareholder employee under section 36(1)(ii) - Rs 1,20,65,600 (Ground IV): At the very outset, it is pertinent to note two important facts in case of the Appellant: o Mr Abhijit Shah is a Director Shareholder in the company, accordingly he is also holding an office of employement in the Company. He dedicates his entire time in the day to day affairs of the Appellant Company. o The company has declared dividends out of the profits of the FY 2013-14 In light of the above facts we wish to submit as follows: Section 36(1)(ii) the Act 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 on account of bonus or commission paid to employees. The said payment is to be made out of profits subject to the conditions mentioned in the section. Any expenditure incurred on account of payment of commission or bonus
Page 3 of 8 to a person other than an employee is not covered by this provision. The bonus paid is a part of the salary/remuneration to the Managing/Whole-time Directors, given their position as the Managing/Whole-time Directors of the company whereby they are entrusted with the task of superintendence and control of the affairs of the company, the same cannot normally be said to be in lieu of the dividend paid. It should be noted here that bonus or profit in lieu of or in addition to salary or wages paid to an employee is specifically considered to be part of salary in the inclusive definition of salary. Bonus paid to a Director is salary if the Director is an employee of the company. Further, the said directors had paid tax on such bonus at the maximum marginal rate, this, coupled with the fact that the Appellant company has also declared dividend out of the profits of the year under question. leave no doubt, that, no tax avoidance motive could be attached from the payment of bonus. The learned AO has only relied on the provisions of section 36(1)(ii) of the Act and stated that the expenses in question were hit by section 36(1)(ii) of the Act. There is no basis or material or evidence brought on record by the learned AO to support the contention that the bonus would have been paid as dividend to the shareholder. The Companies Act, 1956 contains the limitations and restrictions in the matter of payment of dividend and such discretion of the company either to pay or not to pay dividend cannot be assumed. The learned AO cannot allege that had the bonus not been paid, that would have necessarily been paid as dividend to the director shareholder. It could not be ignored that the Appellant company had substantial profits out of which dividend has also been declared. As far as law goes, both the Income-tax Act, 1961 and the Companies Act, 1956 recognise that managerial remuneration to Directors can be structured either as salary or commission/bonus or as a combination of both. as per the provisions of the Companies Act, 1956, dividend is to be paid equally to an entire class of shareholders, i.e., members who have been allotted shares of the same class, face value and have identical terms of issue, as indicated in section 86 of the Companies Act. To put it differently, all equity shareholders of the same class, whose names appear on the Register of Members, as on the specified date would be entitled to the dividend as proposed by the Board of Directors and approved by the shareholders in General Meeting. In this regard, the Honourable Delhi High Court in the case of AMD Metplast (P.) Ltd. v. DCIT10. has held in the favour of the Assessee stating as follows:
"We fail to understand how the aforesaid observations assist and help the Revenue in the factual matrix of the present case. Ashok Gupta is the Managing Director and in terms of the board resolution is entitled to receive commission for services rendered to the company. It is a term of employment on the basis of which he had rendered service. Accordingly. he was entitled to the said amount. Commission was treated as a part and parcel of salary and TDS has been deducted. Ashok Gupta was liable to pay tax on both the salary component and the commission. Payment of dividend is made in terms of the Companies Act. 1956. Dividend has to be paid to all shareholders equally. This position cannot be disputed by the Revenue. Dividend is a return on investment and not salary or part thereof. Herein the consideration in the form of commission which was paid to Ashok Gupta was for services rendered by him as per terms of appointment as a Managing Director. In view of the aforesaid position, we answer the question of law in negative and in favour of the assessee and against the Revenue. The appeal is accordingly allowed." Further, in case of CIT v. Career Launcher India Ltd8 the Honourable High Court held as follows: “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. The bonus payment cannot be characterized as a dividend payment in disguise. The Tribunal has found that having regard to the shareholding of each of the directors. they would have got much higher amounts as dividends than as bonus and there was no tax avoidance motive. The quantum of the bonus payment was linked to the services rendered by the directors. It cannot therefore be said that the bonus would not have been payable to the directors as profits or dividend had it not been paid as bonus/commission. Having regard to the above legal position and the factual findings recorded by the Tribunal we are unable to say that the Tribunal erred in holding that the bonus payment was allowable under section 36(1)(ii) of the Act. The substantial questions of law are answered in the affirmative. against the revenue and in favour of the assessee for both the years." The learned AO has placed reliance on the ruling of the Honourable Bombay High Court in the case of Loyal Motor Service Co. Ltd. v. CIT9. However the learned AO failed to appreciate that the Honourable High Court has held in the favour of the Appellant and clearly holds that if the shareholders are actually the employees of the Company and have been given bonus, based on the salary the amount
Page 5 of 8 paid cannot be refused. The above judgment also make it clear that in case of a shareholder-employee the provisions of section 36(1)(ii) shall come into play only in cases where a reasonable conclusion can be drawn that a dividend was payable by the company and that the company had paid commission in lieu of the dividend. The provisions of section 36(1)(ii) of the Act cannot be applied on a blanket basis to all cases of commission paid to shareholder-Directors but call for a judicious decision based on a realistic assessment of the prevailing facts. In the case of CIT vs. Convertechequipments private limited13 the Honourable Delhi High Court held as follows: "This Court is of the opinion that in view of the fact that no fresh circumstances have come to notice to take a different view, no substantial question of law arises on the point of the disallowance under section 36(1)(ii). The decisions of the income tax authorities involved concurrent findings on pure questions of fact. Moreover, a Division Bench of this Court in Metplast Pvt. Ltd. v. DCIT, (2012) 341 1TR 563, after referring to the judgment of the Bombay High Court in Loyal Motors Services Company Ltd. v. CIT. (1946) 14 ITR 647 opined that the commission, if found to be paid for services rendered by the director as per the terms of the appointment, cannot be said to be distribution of dividend or profits in the guise of commission. It was noticed that while commission was paid as a form of remuneration for actual services rendered, dividend is a return of investment and is paid to all its shareholders equally. It was thus held that if the commission is paid for actual services rendered, section 36(1)(ii) will not apply.” In case the Directors who have a substantial/dominant shareholding in the company and who do not hold any executive position in the company but are paid bonus. In such a situation, a case can be made out for the lifting of the corporate veil and for the invocation of section 36(1)(ii) However, where, the managerial personnel occupying an executive position resulting in an employer-employee relationship, irrespective of their level of shareholding in the company and when remuneration is structured as a combination of salary, commission and other perquisites/benefits, In such cases. there is a direct correlation between the commission paid and services rendered. In such cases the commission paid only represents a manner of structuring managerial remuneration, so as to incorporate an element of variable result-oriented incentives in the process of structuring executive remuneration. Accordingly, in such a situation there does not seem any scope for the provisions of section 36(1)(ii) of the Act to come into play or for making a corresponding disallowance. The above makes it clear that a blanket disallowance of bonus paid to persons who are also substantial shareholders cannot be made by Page 6 of 8 applying the provisions of section 36(1)(ii) of the Act. An informed and rational decision should be made after a realistic and detailed appraisal of the underlying facts and circumstances. Accordingly, we request your good self to direct the learned AO to delete the above disallowance under section 36(1) (ii) of the Act.”
We find that in addition to various judgments cited before CIT (A) as noted above, learned AR of the assessee has cited before us the tribunal order rendered in the case of ACIT vs. Mandovi Motors (P) Ltd. (Supra). Para 4.5 to 4.7 of this tribunal order are relevant and hence, the same are reproduced herein below for ready reference.:- “4.5 We have heard the rival submission and perused the material on record. One of the conditions mentioned in section 36(1)(ii) is that the amount payable to employees as bonus or commission should not otherwise have been payable to them as profit or dividend. The plain reading of the clause means that the profits of a business will not be allowed to be dwindled by merely describing the payment as bonus or commission, if the payment is in lieu of dividend or profits. This is provided to check the employer from avoiding tax by distributing his/its profits by way of bonus among the member employees of his/its concern, instead of distributing the sum as dividend or profits. However, the sum paid as bonus or commission is not affected by this condition, if the same is not otherwise payable as profit or dividend. For instance, if shareholders of a company are employees in their company and receive bonus (by virtue of their employment and not with reference to their shareholding), the admissibility of bonus would not be affected by this condition. We are fortified by the decisions of the Hon'ble Bombay High Court in the case of Loyal Motor Service Co. v. CIT [1946] 14 ITR 647 and CIT v. Sesa Goa Ltd. [2009] 316 ITR 399 (Bom.). 4.6 Let us have a glimpse of section 36(1)(ii) as under:- "Section 36(1) - The deductions provided for the following clauses shall be allowed in respect of the matters dealt with herein, in computing the income referred to in section 28 – (i)** ** ** (ia)** ** ** (ib)** ** ** (ii) any sum paid to an employee as bonus or commission for the 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." [Emphasis supplied].
Page 7 of 8 4.7 From the above, it is clear that the bonus will not be allowed only if such sum paid to him or her is otherwise payable to him or her as profits or dividends. In the present case, the bonus is paid for the services of the working directors and the same cannot be disallowed just because they hold a few shares in the assessee company. They will not be entitled to such sum in entirety as dividends or profits in case such sum is not paid as bonus to them. Whatever dividend if any, payable to them will be only a fraction of such sum.”
Various judgments noted by the AO in the assessment order are very old and these judgments are in context of Section 10 (2) (x) of 1922 Act and not in the context of Section 36 (1) (ii) of 1961 Act. Section 10 (2) (x) of 1922 Act required that the payment of bonus commissions should be reasonable but there is no such requirement in Section 36 (1) (ii) of 1961 Act and hence, these judgments noted by the AO are not applicable. Therefore, respectfully following this tribunal order and various judgments cited before CIT (A) as noted above in Para 8.2 of the order of CIT (A) reproduced above, we decide the issue in favour of the assessee because this is not the case of the revenue that the amount in dispute i.e. Rs. 120,65,600/- paid by the assessee to its director as bonus was otherwise payable to the director as dividend and therefore, the provisions of section 36 (1) (ii) are not helping the revenue in the facts of the present case. This ground is allowed.
In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on the date mentioned on the caption page.