DCIT Vs M/s. Mount Kellett Capital Management India Pvt. Ltd. (ITAT Mumbai)
Conclusion: Since the director was not a shareholder when bonus was paid to him and also the bonus was not paid out of the earlier years’ accumulated profits, therefore, deduction of bonus paid to director was allowable under 36(1)(ii).
Held: AO during the course of assessment proceedings noticed that assessee-company had made payment of bonus apart from salary to the Executive Chairman and Director of the company, Shri S. It claimed deduction under section 36(1)(ii) for the same. According to the AO, during the year under consideration, 50% of shares of assessee-company were held by Shri S, which was transferred to Mount Kellett Capital Management (Mauritius) Ltd. Therefore, AO disallowed the claim of bonus expenses paid to Shri S by holding that he was Director as well as shareholder of assessee-company and bonus paid to Director/shareholder was not allowable u/s. 36(1)(ii). It was held Shri S was not a shareholder when the bonus/commission was paid to him and once he was not a shareholder and commission/bonus paid for the services rendered, the provisions of Section 36(1)(ii) mandates that the bonus was to be allowed. Admittedly, this bonus was not out of the earlier years’ accumulated profits. Hence deduction under section 36(1)(ii) was allowable.
FULL TEXT OF THE ITAT JUDGEMENT
These two appeals filed by the Revenue as well as the assessee are directed against the order of the Commissioner of Income Tax(Appeals)-4, Mumbai.
Revenue’s appeal in ITA No. 269/Mum/2015:
2. The first issue in this appeal of Revenue is as regards the order of the CIT(A), deleting the disallowance of bonus payment paid by the assessee to Shri Suresh Prabhala. For this, Revenue has raised the following two grounds:
“1. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in deleting the disallowance made by the AO on account of bonus paid by assessee to Shri Suresh Prabhala, holding that the bonus paid was in connection with his employment and not in respect of shares held by Shri Suresh Prabhala and also wrongly distinguishing the decision of Special Bench of ITAT, Mumbai int eh case of Dalal Broacha Stock Broking Ltd”.
2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in deleting the disallowance made by the AO, on account of bonus paid by the assessee to Mr. Suresh Prabhala, holding that there were no profits available with the assessee company ignoring the fact that assessee company has offered ₹ 11,92,23,908/-as business profit for AY. 2009-10”.
3. Brief facts of the case are that the AO during the course of assessment proceedings noticed that assessee-company has made payment of bonus apart from salary to the Executive Chairman and Director of the company, Shri Suresh Prabhala amounting to ₹6,66,50,000/-. According to the AO, during the year under consideration, 50% of shares of the assessee-company were held by Shri Suresh Prabhala, which was transferred to Mount Kellett Capital Management (Mauritius) Ltd.
According to AO, the Director’s commission/bonus is not allowable expense as per the provisions of Section 36(1)(ii) of the Income Tax Act, 1961 [herein after referred to as ‘Act’]. According to him, assessee was issued show cause notice as to why the commission/bonus paid to Shri Suresh Prabhala be not disallowed. Assessee replied that Mr. Suresh Prabhala has acquired 5,000 equity shares in the assessee-company on 11-08-2008 but subsequently, transferred 4,999 equity shares to Mount Kellett Capital Management (Mauritius) Ltd., and one share to Mount Kellett HK Holdings LLC on 16-09-2008 respectively. Assessee filed copies of Form FC-TRS filed with Reserve Bank of India for transfer of equity shares from Shri Suresh Prabhala to Mount Kellett Capital Management (Mauritius) Ltd., and Mount Kellett HK Holdings LLC. According to assessee, Shri Suresh Prabhala ceased to be shareholder in the assessee-company on 16-09-2008. But the AO disallowed the claim of bonus expenses of ₹ 6,66,50,000/- paid to Shri Suresh Prabhala by holding that he is Director as well as shareholder of the assessee-company and bonus paid to Director/shareholder is not allowable u/s. 36(1)(ii) of the Act. Aggrieved, is preferred an appeal before the CIT(A). The CIT(A) after considering the submissions of assessee and also considering the decision of Special Bench of ITAT in the case of Dalal Broacha Stock Broking (P) Ltd., Vs. Addl. CIT [131 ITD 36], deleted the disallowance by observing in para 5.3.1.3.6 to 5.3.1.3.8 as under:
“5.3.1.3.6 Having carefully and dispassionately considered the rival submissions and in view of the above, the second condition with respect to allowability of deduction under section 36(1)(ii) of the Act is also satisfied. Therefore, it is not a case covered by the decision of the Dalal Broacha Stock Broking Pvt. Ltd., Vs. ACIT (supra). Ld.AR has clearly distinguished facts of the present case from the facts recorded in the case of the said Dalal Broacha Stock Broking Pvt. Ltd., Vs. ACIT (supra) and which may be tabulated as under:
