Case Law Details
Mehta Equities Ltd. Vs DCIT (ITAT Mumbai)
The issue under consideration is whether the CIT(A) is correct in upholding the action of the Assessing Officer in making a disallowance under section 36(1)(ii) of the Act; being bonus paid to the Directors of the Company by holding that such payments are in lieu of dividend or profits?
That there is no law that the assessee-company can be forced to pay dividend. However, learned Counsel of the assessee could not make cogent submission regarding the applicability of the provisions of section 36(1)(ii) as to whether the impugned sum would have been falling under the realm of dividend. In this regard we note authorities below have relied upon the ITAT Special Bench decision in the case of M/s Dalai & Broacha Stock Broking Pvt. Ltd. (131 ITD 36). The Assessing Officer has quoted also from Hon’ble Bombay High Court decision in the case of Loyal Motor Service Co. Ltd. Vs. CIT (14 ITR 647). Though we note that in the said decision of Special Bench has clearly held that section 36(1)(ii) does not envisage examination about the reasonableness of payment or adequacy of services rendered by the employees as the same were held by the Special bench to be relevant factor in deciding the allowability of deduction. However as noted by us above Special Bench has clearly given a categorical finding that there was a case of tax evasion/avoidance and in those fact the Special bench has quantified the amount of tax avoidance involved also. Hence on the touchstone of the aforesaid decision we are of the considered opinion that the Assessing Officer in this case if he wants to invoke provisions of section 36(1)(ii) on the touchstone of the above Special Bench decision, will have to give clear cut finding as to what was tax avoidance or tax evasion involved in this case. For this purpose the Assessing Officer will need to examine the amount of dividend which the assessee-company would have declared under the provisions of relevant payment of dividend as per the Company’s Act. He shall also compute tax sought to be avoided by the assessee company by the so called scheme of the company. Furthermore, in this regard the decision of Hon’ble Supreme Court in the case of Excel Industries Ltd. (38 Taxman 100 (SC) is also relevant here. In the said case Hon’ble Supreme Court has expounded that if the tax effect is revenue neutral, the proposition need not be disturbed. Here Assessing Officer shall examine the assessee’s submission that both the share holder directors or owners of the company have filed their individual return and have been taxed at the highest bracket in the context of this Hon’ble Supreme Court decision. So the tax impact and the emerging tax neutrality if any, needs to be evaluated on the touchstone of this decision also. The claim in this regard was duly submitted, as noted by learned CIT(A) himself in his order. Accordingly, in the background of the aforesaid discussion and precedent ITAT set aside the issue of allowability of payment of bonus to the director shareholders in accordance with our direction and the decisions quoted above.
FULL TEXT OF THE ITAT JUDGEMENT
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Particulars : There is inconsistency in Any sum paid to an employee as bonus or commission for services rendered, where such sum was otherwise payable to him as profits or dividend.[36(1)(ii)]claimed in return in schedule OI and audit report
₹30,000
Amount mentioned in form Annexure 3CD (b)
₹0
Amount mentioned in the Income Tax Return (a)
₹30,000
Variance (b)-(a) returne rectification