M/S. THE ALCHEMISTS ARK PRIVATE LTD.,PUNE vs. INCOME-TAX OFFICER,

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ITA 755/PUN/2016Status: DisposedITAT Pune09 May 2018AY 2011-126 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal noted that the nature of the payment (bonus vs. variable pay) and its linkage to turnover needed deeper examination. It also considered that a Special Bench decision relied upon by the AO had been reversed by the Delhi High Court.

What were the facts?

The assessee paid Rs. 30 lakhs as variable pay/performance bonus to its two directors, who held 40% shares each. The Assessing Officer (AO) disallowed this amount, treating it as dividend not deductible under the Act.

What were the issues?

Whether the variable pay/performance bonus paid to directors is deductible expenditure or in the nature of dividend. Whether the case is covered by the specific judgments cited by the assessee.

Which sections of the Income-tax Act were involved?

Section 36(1)(ii),Section 37(1)

AI-generated summary — verify with the full judgment below

Cases cited in this judgment(4)Show list

Detected automatically from the text. Citations are also linked where they appear in the judgment. The count shows how many other judgments on BharatTax rely on the same authority.

Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE

Before: SHRI D.KARUNAKARA RAO, AM & SHRI VIKAS AWASTHY, JM

For Appellant: Shri Suhas Bora
For Respondent: Shri Ajay Modi, JCIT
Hearing: 04.05.2018Pronounced: 09.05.2018

आदेश आदेश / ORDER आदेश आदेश

PER D. KARUNAKARA RAO, AM :

This is the appeal filed by the Assessee against the order of CIT(A)-5, Pune, dated 18-01-2016 for the Assessment year 2011-12.

2.

Grounds raised by the assessee are extracted as under : “1. The Ld.CIT(A) erred in disallowing variable pay defined as performance bonus paid to the directors to the extent of Rs.30,00,000/- 2. The appellant prays for just and equitable relief. 3. The appellant prays to add, alter, amend, explain, and modify the ground/s as the occasion may demand.”

3.

Briefly stated relevant facts are that assessee is engaged in the business of consultancy and training, e-learning for companies and

individuals. Assessee filed the return of income declaring total income

of Rs.16,81,575/- At the end of the assessment proceedings u/s.143(3)

of the Act, AO made major addition of Rs.30 lakhs as per the discussion

given in Para Nos. 6.1 to 6.10 of the assessment order. Finally, the

assessed income is determined at Rs.51,64,220/-.

4.

Facts relating to addition of Rs.30 lakhs include that the assessee

has two directors namely (1) Mr. Raymond Moses; and (2) Mr. Tyagrajan

Shriram. 80% of the shares are held by both of them (40% each).

During the year, assessee paid total sum of Rs.1.02 crores as salary

and bonus of the Employees and the Directors. Out of Rs.1.02 crores,

Rs.90 lakhs is paid to these two directors. It includes bonus of Rs.30

lakhs, i.e. Rs.15 lakhs each. AO scrutinized this claim of Rs.30 lakhs

paid to the Directors. AO invoked the provisions of section 36(1)(ii) of

the Act and submitted that the payment made to these directors as

bonus is not deductible amount. AO is of the opinion that the said

amount would not have been payable to them either as profits or as

dividends if it had not been paid as bonus. In response, assessee

changed his explanation and stated that the expenditure is allowable as

it is a case of “variable pay” linked to the turnover. According to him,

the claim is allowable alternatively u/s.37(1) of the Act. Assessee relied

on various decisions in support of the claim. Assessee relied on the

judgment of Hon’ble Delhi High Court in the case of Shriram Pistons

and Rings Ltd. Vs. CIT dated 29-09-2008. Eventually, the AO relied on

the Special Bench decision of the Mumbai Bench of the Tribunal in the

case of M/s. Dalal Broacha Stock Broking Pvt. Ltd. Vs. ACIT 131 ITD 36

(ITAT Mumbai-SB) for the proposition that the commission paid to the

Director attracts the provisions of section 36(1)(ii) of the Act. AO also

relied on the judgment of Hon’ble Bombay High Court in the case of

M/s. Loyal Motor Services Co. Ltd. 14 ITR 647 (Bom.) and held that the

facts are comparable. Heavily relying on the judgment of Special Bench

of the Tribunal in the case of M/s.Dalal Broacha Stock Broking Pvt. Ltd.

Vs. ACIT (supra), judgment of Bombay High Court in the case of

Subodh Chandra Poppatlal Vs. CIT 24 ITR 566 (Bom.) and others, AO

treated the bonus of Rs.30 lakhs paid to the Directors is in the nature

of dividend which is neither allowable u/s.36(1)(ii) nor u/s.37(1) of the

Act.

5.

Aggrieved with the said decision of the AO, assessee filed an

appeal before the CIT(A). This issue was discussed by the CIT(A) in para

No.3.3 of his order and confirmed the addition made by the AO. While

confirming the CIT(A) held that payment of Rs.30 lakhs was in nature of

bonus to the Directors, who has 40% share holding each. The CIT(A)

held that the claim falls within the scope of provisions of section 36(1)(ii)

of the Act. Applicability of Hon’ble Bombay High Court’s judgment in

the case of Subodh Chandra Poppatlal Vs. CIT, as well as judgments in

the cases of Malwa Vanaspati & Chemical Co. Ltd. Vs. CIT 154 ITR 655

(MP), Khimji Visram & Sons (Gujarat) Pvt. Ltd. Vs. CIT 209 ITR 993

(Guj.) were also relied upon by the CIT(A).

6.

Aggrieved with the order of CIT(A), assessee filed the present

appeal before the Tribunal with the grounds referred above.

7.

At the outset, Ld. Counsel for the assessee brought our attention

to the decision of Special Bench of the Tribunal in the case of M/s.Dalal

Broacha Stock Broking Pvt. Ltd. Vs. ACIT (supra) submitted that the

said order has been reversed by the Hon’ble Delhi High Court in various

cases. Further, relying on the decisions of Pune Bench of the Tribunal

in the case of Mahafeed Speciality Fertilizers (India) Pvt. Ltd. Vs. ACIT –

ITA No.2274/PUN/2014, dated 09-08-2017 (posterior to the order of

CIT(A) dated. 18-01-2016) and Arihantam Infraprojects Pvt. Ltd. Vs.

JCIT – ITA No.2201/PN/2012, ITA No.2280/PN/2012 & ITA

No.1767/PN/2013, dated 30-11-2015, Ld. Counsel for the assessee

submitted that the matter can be remanded back to the file of AO for

fresh adjudication in the light of the said jurisdictional orders of the

Tribunal.

8.

On the other hand, Ld. DR for the Revenue relied on the orders of

the AO and the CIT(A).

9.

We heard both the parties and perused the orders of the Revenue.

There is no dispute on the fact relating to the figures of the payment of

Rs.30 lakhs bonus to the two Directors. However, there is confusion in

the nomenclature with regard to the nature of the payments if the same

constitute bonus or variable pay. Assessee has changed the

nomenclature of the same from time to time. Therefore, there is a

requirement of going deeper into the nature of transaction, if the same

is paid for the services rendered by the Directors or otherwise. AO

needs to examine, if the same is linked to the turnover or not. It is

undisputed fact that the same is not remuneration as per the

agreement of employment and if the said payment is outside the scope

of the terms and conditions of the employment in all cases. AO need to

categorise these payments in the light of the changes in the

nomenclature of the payments.

10.

Coming to the Special Bench decision of Mumbai Bench of the

Tribunal in the case of M/s. Dalal Broacha Stock Broking Pvt. Ltd. Vs.

ACIT (supra), we find the AO need to examine this aspect after

comparing the facts as well as the nature of payments made to the two

Directors. Further, it is the case of the assessee that his case is covered

by the decisions of the Pune Bench in the case of Mahafeed Speciality

Fertilizers (India) Pvt. Ltd. Vs. ACIT and in the case of Arihantam

Infraprojects Pvt. Ltd. Vs. JCIT (supra). Therefore, there is a

requirement of comparing the facts on the issue to that of the decisions

cited by the Ld. Counsel for the assessee. We find the above decisions

of the Pune Bench of the Tribunal explain the provisions relating to

section 36(1)(ii) of the Act which help the AO to come to proper

appreciation of legal position qua the facts of the case.

Accordingly, as discussed in open court, we are of the opinion

that the request of the Ld. Counsel for the assessee for remanding the

issue to the file of AO need to be considered favourably. Accordingly, we

remand the issue to the file of AO. AO shall grant reasonable

opportunity of being heard to the assessee in accordance with the set

principles of natural justice. AO shall examine the judgmental laws and

the facts on the issue and pass a speaking order. Thus, the grounds

raised by the assessee are allowed for statistical purposes.

11.

In the result, appeal of the assessee is allowed for statistical

purposes.

Order pronounced in the open court on this 09th day of May, 2018.

Sd/- Sd/- (VIKAS AWASTHY) (D. KARUNAKARA RAO) �याियक �याियक सद�य �याियक �याियक सद�य सद�य /JUDICIAL MEMBER लेखा सद�य लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य

पुणे Pune; �दनांक Dated : 09th May, 2018 सतीश

आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : अ�ेिषत

अपीलाथ� / The Appellant 1. ��यथ� / The Respondent 2. 3. The CIT(A)-5, Pune 4. CIT-5, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “A Bench” Pune; 5. गाड� फाईल / Guard file. 6.

आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER,स आदेशानुसार

स�यािपत �ित //True Copy// //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

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