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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI N.K. BILLAIYA & SHRI PAWAN SINGH
PER N.K. BILLAIYA, AM:
This appeal by the assessee is preferred against the order of the Ld. CIT(A)-8, Mumbai dated 22.1.2013 pertaining to Assessment year 2009-10.
The sum and substance of the grievance of the assessee is that the Ld. CIT(A) erred in confirming the disallowance made by the AO on account of performance bonus paid to Directors amounting to Rs. 1,38,60,000/-.
The return for the year was filed on 30.9.2009 declaring total income at Rs. 1,80,26,654/-. The return was selected for scrutiny assessment under CASS and accordingly statutory notices were issued and served upon the assessee.
3.1. While scrutinizing the return of income, the Assessing Officer found that the assessee has paid commission to its Directors over and above the remuneration. The assessee was asked to explain why the payment made as commission to the directors should not be disallowed u/s. 36(1)(ii) of the Act.
3.2. The assessee filed a detailed reply vide letter dated 14.10.2011 stating that during the year under consideration, the company has achieved sales of Rs. 27.13 crores as compared to Rs. 14.29 crores in the immediately preceding year. It was explained that the jump in sales of around 90% is solely because of the efforts of the directors and in consideration of their efforts, the company has paid commission. The payment has been authorized by the Board of Directors. This explanation of the assessee did not find any favour with the AO who was of the firm belief that if the assessee had not paid the commission to the Directors was clearly payable as dividend to the shareholders. The AO further observed that instead of paying the dividend, the company has opted to pay the same in the form of commission and hence this payment of commission falls under mischief of exception provided by Sec. 36(1)(ii) of the Act. The AO concluded by holding that the efforts taken by the Directors would surely be one of the factors in increase in profitability. But that certainly cannot be the only factor.
3.3. The issue raised in this case is not for denying the efforts taken by the Directors, but on allowability to the commission paid to them when the same would have been payable to them as dividend in view of increase profitability. Out of the claim of Rs. 1.80 crores, the AO disallowed Rs. 1,38,60,000/- and added back to the income of the assessee.
Aggrieved by this, the assessee carried the matter before the Ld. CIT(A) but without any success.
Before us, the Ld. Counsel for the assessee reiterated what has been stated before the lower authorities. It is the say of the Ld. Counsel that the decision relied upon by the Revenue authorities being the Special Bench decision in the case of Dalal Broacha Stock Broking Pvt. Ltd. Vs ACIT 131 ITD 36 is misplaced and do not apply on the facts of the case for the simple reason that in that case, there was no evidence to show that any services were rendered by the Directors. The Ld. Counsel stated that the facts of the case in hand are clearly supported by the decision of the Hon’ble High Court of Delhi in the case of CIT Vs Career Launcher India Ltd. 358 ITR 179.
Per contra, the Ld. Departmental Representative strongly supported the findings of the Ld. CIT(A).
We have given a thoughtful consideration to the orders of the authorities below. There is no denying that the assessee has paid commission to its Directors which is around 1.40% of the increased sales. A perusal of the factual matrix shows that in A.Y. 2007-08 on a turnover of Rs. 17.04 crores, Rs. 6,46,525/- was paid to commission to the Directors and in A.Y. 2008-09 on a turnover of Rs. 14.28 crores, Rs. 30 lakhs were paid as commission and in these years, the payment of commission was accepted by the Revenue authorities. It can be seen that in A.Y. 2008-09, there is a fall in turnover by about 3 crores though there is a jump in the payment of commission by 5 times and this was accepted by the Revenue authorities in earlier years. However, on the same set of facts during the year under consideration, the AO took a view that if the commission had not been paid, the same would have been distributed as dividend. On identical set of facts, the Hon’ble High Court of Delhi in the case of Career Launcher India Ltd (supra) had the occasion to consider the following:
“The next question that is common to the assessment years 2005-06 and 2006-07 relates to the allowance of the bonus paid to the directors of the assessee-company. In the assessment proceedings for the assessment year 2005-06, the Assessing Officer took the view that section 36(1)(ii) was applicable to the payment of bonus of Rs. 32,22,000 to the directors of the company and it was to be disallowed because it would have been payable to the directors as dividends had it not been paid as bonus. The assessee explained that the payment of bonus was supported by the board resolutions, that the directors were full-time employees of the company drawing salary, that all of them were management graduates from IIM, Bangalore and, therefore, it would not be correct to say that the bonus would have been payable as dividends so as to attract section 36(1)(ii). It was submitted that dividends were not being paid in the guise of bonus and in support of the claim it was pointed out that the payment of bonus was not in any way related to the shareholding of the directors. The relevant shareholding details and the bonus payment in respect of each director were given to the Assessing Officer which he has reproduced in paragraph 3 of the assessment order.
These submissions were, however, rejected by the Assessing Officer who held that on a proper reading of the section it was clear that if the company could have declared dividend on the shareholding but had not done so, then any payment of bonus/commission to the directors was hit by the section. He noted that no dividend was declared by the company despite substantial profits. According to him, the company was avoiding 13.5 per cent. dividend distribution tax and some more tax on income since individuals pay 5 per cent. less tax than companies, and thus the total tax avoided came to about 20 per cent. because of the payment of the bonus to the directors. He, therefore, disallowed the entire payment of bonus. In the assessment year 2006-07, for substantially the same reasons the Assessing Officer disallowed the entire bonus payment of Rs. 37,44,000 to the directors. The Commissioner of Income-tax (Appeals) in his consolidated order for the two years upheld the disallowance. In the further appeals preferred by the assessee before the Tribunal, it was held, agreeing with the assessee, that if the assessee had paid dividend on the shareholding of the directors then such payment would have been more than the bonus paid and, therefore, section 36(1)(ii) was not applicable. The Tribunal referred to two directors specifically and noted that having regard to their shareholding, they would have been entitled much higher amounts as dividends than the amounts paid to them as bonus. It also recorded a finding that none of the directors would have received bonus as dividend in case bonus was not paid. It also noted that the payment of bonus was supported by a board resolution. The Revenue's contention that the Tribunal erred in allowing the bonus payment to the directors cannot be accepted. It has not disputed the facts viz., (a) that the payment was supported by board resolutions, and (b) that none of the directors would have received a lesser amount of dividend than the bonus paid to them, having regard to their shareholding. Further, the directors are full-time employees of the company receiving salary. They are all graduates from IIM, Bangalore. 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 characterised 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. The issue has been considered by this court in AMD Metplast P. Ltd. v. Deputy CIT [2012] 341 ITR 563 (Delhi) in the light of the judgment of the Bombay High Court in Loyal Motor Service Co. Ltd. v. CIT [1946] 14 ITR 647 (Bom). It was observed that the judgment of the Bombay High Court (supra) does not assist the Revenue and that so long as the bonus or commission is paid to the directors for services rendered and as part of their terms of employment it has to be allowed and section 36(1)(ii) does not apply. 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.”
Drawing support from the decision of the Hon’ble High Court of Delhi (supra), we set aside the findings of the Ld. CIT(A) and direct the AO to delete the impugned addition.
In the result, the appeal filed by the assessee is allowed.