Bangalore ITAT Deletes Bonus Disallowance and Consequential Penalty; CIT(A) Faulted for Ignoring Additional Evidence

Bhuvaneshwari Enterprises Vs ITO (ITAT Bangalore)

Bangalore ITAT Deletes Bonus Disallowance and Consequential Penalty; CIT(A) Faulted for Ignoring Additional Evidence

The Bangalore ITAT in Shri Bhuvaneshwari Enterprises v. ITO deleted the disallowance of ₹2.64 lakh bonus paid to employees and consequently quashed the penalty of ₹1.63 lakh levied for alleged misreporting of income. The assessee, a liquor business partnership firm, had claimed bonus expenditure which was disallowed by the Assessing Officer because the amount was not reflected in the salary ledger produced during assessment proceedings.

Before the CIT(A), the assessee explained that the bonus payments were maintained in a separate bonus ledger, duly recorded in the profit and loss account and audit report, and that failure to furnish the ledger before the Assessing Officer was due to an oversight. Although these details were available before the CIT(A), the appellate authority nevertheless confirmed the disallowance.

The Tribunal observed that once complete details of the bonus payment were on record and the expenditure was consistent with salary payments made to employees, there was no justification for sustaining the disallowance. ITAT further noted that the CIT(A) failed to properly exercise powers under Rule 46A by not appropriately considering the additional evidence and not following the prescribed procedure. Accordingly, the disallowance of ₹2,64,000 was directed to be deleted.

Since the penalty of ₹1,63,152 was levied solely on account of the disallowance of bonus expenditure, the Tribunal held that the penalty could not survive after deletion of the quantum addition. Both the quantum appeal and penalty appeal were therefore allowed.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. ITA No. 1007/Bang/2026 for assessment year 2018-19 is filed by Shri Bhuvaneshwari Enterprises, the assessee-appellant, against the appellate order dated 23 January 2026 passed by the National Faceless Appeal Centre, Delhi. By that order, the appeal filed by the assessee against the assessment order dated 27 January 2021 passed by the National e-Assessment Centre, Delhi under section 143(3) read with sections 143(3A) and 143(3B) of the Income-tax Act, 1961, was dismissed.

2. ITA No. 1002/Bang/2026, relating to the same assessment year, is filed against the confirmation of the penalty order by the learned CIT(A).

3. We first consider the facts of the quantum appeal in ITA No. 1007/Bang/2026. The assessee is a
partnership firm engaged in the business of sale of liquor. It filed its return of income on 27 October 2018 declaring total income of ₹ 3,95,910. The case was selected for scrutiny and notice under section 143(2) was issued on 28 September 2019.The Assessing Officer noted that the assessee had claimed expenditure towards salary, wages and bonuses, including bonus of ₹ 2,64,000. The assessee furnished the salary ledger showing salary payments of ₹ 13,20,000 to 11 employees, but the bonus expenditure was not reflected in that ledger. A notice was therefore issued asking why the bonus should not be disallowed. Since no reply was filed, the Assessing Officer disallowed the bonus expenditure of ₹ 2,64,000 under section 37 of the Act and determined the total income at ₹ 6,59,910.

4. Aggrieved, the assessee preferred an appeal before the learned CIT(A). During the appellate proceedings, the assessee submitted that the bonus of ₹ 2,64,000 was paid in accordance with the Payment of Bonus Act and was within the permissible limits. It was duly disclosed in the profit and loss account and audited financial statements. The assessee explained that the bonus payments were recorded in a separate ledger and not in the salary ledger, and that the failure to furnish the bonus ledger before the Assessing Officer was due to an oversight by the audit staff. The assessee produced the relevant ledger before the learned CIT(A) and submitted that the bonus payment was consistent with its regular accounting practice and comparable with earlier years.

5. The learned CIT(A) held that the assessee had failed to discharge its onus and that the Assessing Officer’s findings were specific and justified. He accordingly dismissed the appeal. Before us, the learned authorised representative, Sri Narendra Sharma, Advocate, supported the submissions made before the learned CIT(A) and stated that complete details relating to the bonus payment of ₹ 2,64,000 had been furnished. He explained why the Assessing Officer made the addition and contended that the learned CIT(A), despite the details being filed before him, failed to consider the assessee’s explanation and confirmed the disallowance.

6. The learned Departmental Representative, Sri Ganesh R. Ghale, Standing Counsel for the Department, supported the orders of the lower authorities and submitted that the assessee had failed to substantiate the bonus payment before the Assessing Officer; therefore, the disallowance was rightly made.

7. We have carefully considered the rival submissions and the reasons recorded for the disallowance. Although the assessee did not furnish the details of bonus payment before the Assessing Officer, those details were available before the learned CIT(A), as noted in paragraph 6 of the appellate order. The learned CIT(A) recorded that the bonus of ₹ 2,64,000 was shown in the profit and loss account and audit report, and that the entries were maintained in a separate bonus ledger rather than in the salary ledger. Once the complete details were available, and the bonus payment of ₹ 2,64,000 was consistent with the salary payment of ₹ 13,20,000 to 11 employees, we find no reason to uphold the orders of the lower authorities confirming the disallowance.

8. We also note that ground No. 2 states that the assessee filed an application for admission of additional evidence under Rule 46A, which was not considered by the learned CIT(A) before confirming the disallowance. Rule 46A empowers the learned CIT(A) to admit additional evidence in specified circumstances, subject to the prescribed procedure. In the present case, the learned CIT(A) did not properly exercise that power or follow the required procedure, including granting the Assessing Officer an opportunity to examine the additional evidence. Further, even on merits, the disallowance is not sustainable. Accordingly, we direct the Assessing Officer to delete the disallowance of ₹ 2,64,000 relating to bonus paid to employees.

9. In the result, the appeal of the assessee in ITA No. 1007/Bang/2026 is allowed.

10. ITA No. 1002/Bang/2026 is filed by the assessee against the penalty of ₹ 1,63,152 levied by the learned Assessing Officer at 200% of the tax payable on the alleged under-reported income arising from misreporting, consequent to the disallowance of ₹ 2,64,000 towards bonus. Since we have already deleted the disallowance of ₹ 2,64,000 in ITA No. 1007/Bang/2026, the assessee’s appeal against the penalty order is also allowed.

11. In the result, both appeals filed by the assessee are allowed.

Order pronounced in the open court on 22^ndJune, 2026