No 194C Disallowance for Missing Transporter Details; Directors’ Bonus Issue Remanded

Conclusion: Failing to report transporter details in your quarterly TDS return was a procedural error, not a tax deduction failure. Since assessee was not liable to deduct tax (thanks to the declarations), Section 40(a)(ia)—which applied only when tax is deductible but not deducted—could not be invoked. Bonus paid to directors, which was disallowed by AO as being “in lieu of dividend” under Section 36(1)(ii), could be allowed as a business deduction was remanded back to examine the shareholding of the directors.

Held: Assessee-company was engaged in the business of manufacturing and marketing animal feed. For Assessment Year 2017–18, it filed its return declaring income of ₹65.77 crore. During scrutiny, AO noticed that assessee had paid remuneration, including bonus, aggregating to ₹14.15 crore to three director–shareholders, as against ₹7.09 crore in the immediately preceding year. In earlier years, payments to the same persons were partly made in the form of dividends. AO was of the view that the sharp increase in remuneration/bonus, coupled with the non-declaration of dividends, indicated that the payments were made in lieu of dividend to avoid dividend distribution tax. Invoking section 36(1)(ii), AO disallowed the incremental amount of ₹7.05 crore. On appeal, CIT(A) deleted the disallowance, holding that the remuneration was approved by the Board, paid considering the directors’ qualifications and experience, subjected to TDS, and offered to tax in the hands of the recipients. Aggrieved, the Revenue filed an appeal before the Tribunal with a delay of 68 days, which was sought to be condoned on account of administrative exigencies and heavy workload. Revenue contented that CIT(A) erred in holding the remuneration to be genuine merely because TDS was deducted and the recipients offered the income to tax; the substantial increase in remuneration in lieu of dividend attracted the mischief of section 36(1)(ii). Assessee contended that the remuneration and bonus were paid pursuant to Board resolutions, based on qualifications, experience, and services rendered by full-time directors; the amounts were duly subjected to TDS and taxed in the hands of the directors; Section 36(1)(ii) does not mandate proof of extra services, nor does it require comparison with dividends. It was held that Revenue had demonstrated sufficient cause through a detailed explanation of administrative burden, transfer of charge, and time-bound statutory responsibilities. Tribunal held that section 36(1)(ii) contained an enabling provision allowing deduction of bonus/commission to employees, and a disabling provision applicable where such payment was in lieu of dividend or profits, particularly in the case of shareholder-employees. Tribunal observed that Board approval, TDS compliance, and taxation in the hands of recipients were not determinative factors for allowability under section 36(1)(ii). It also found that there was no clear evidence on record demonstrating the nature of services or justification for the steep increase in remuneration. Tribunal set aside the order of the CIT(A) on the issue of disallowance under section 36(1)(ii) and restored the matter to his file for fresh adjudication. CIT(A) was directed to examine the shareholding pattern of the directors; determine whether the impugned payments were in lieu of dividend; and re-adjudicate the issue in the light of relevant judicial precedents.

FULL TEXT OF THE ORDER OF ITAT BANGALORE