Prithvi Iron Mills Pvt. Ltd. Vs ACIT (ITAT Jaipur)
Statutory Bonus to Workers Is Not Dividend in Disguise: Tax Audit Reporting Alone Cannot Justify Disallowance
Background of the dispute
The assessee company manufactured MS angles, channels and steel. It filed its return declaring total income of ₹1,70,57,350.
While processing the return under section 143(1), the CPC disallowed ₹2,07,438 claimed as employee bonus, citing an inconsistency between the return and the tax audit report concerning section 36(1)(ii). The adjustment resulted in assessed income of ₹1,72,64,790 and a demand of ₹82,550.
The company explained that the payment represented minimum statutory bonus at 8.33% of wages under the Payment of Bonus Act, 1965. It had been paid on 2 November 2021, stated to be before the applicable return-filing due date.
Appellate authority presumed a disguised distribution of profits
The JCIT(A) noticed that the auditor had reported ₹3,37,632 under clause 20(a) of Form 3CD. He considered this disclosure to raise a presumption that the recipients could otherwise have received the amount as profits or dividend.
He further held that the company had not supplied employee-wise details, computation sheets or evidence establishing the statutory liability. The nature of the payment was consequently treated as unexplained.
Relying on Dalal Broacha Stock Broking and SRC Aviation, the JCIT(A) confirmed the disallowance.
Before the Tribunal, the company demonstrated that its bonus sheet and relevant cash-book and bank-book extracts had already been submitted during the first appeal.
Section 36(1)(ii) targets remuneration replacing dividend
The Tribunal explained that section 36(1)(ii) allows bonus or commission paid to employees for services rendered. Its restriction applies where the amount would otherwise have been payable to them as profits or dividend.
The mischief addressed is distribution of shareholder profits under the guise of remuneration. Dividend represents a return on capital; bonus rewards labour.
The decisions relied upon by the JCIT(A) concerned shareholder directors. In SRC Aviation, the adverse factual finding was that bonus paid only to two directors represented payment in lieu of dividend.
Neither decision established that bonus paid to employees holding no shares could be disallowed merely because the employer was a company.
Employee-wise records established statutory bonus
The bonus sheet recorded aggregate wages of ₹24,90,266 and bonus of ₹2,07,438, computed at 8.33%. Employees were identified by name, with their wages and corresponding bonus.
The books showed payment of ₹1,66,874 in cash and ₹40,564 through the HDFC Bank cash credit account, both on 2 November 2021.
The Tribunal observed that this rate corresponded to the minimum bonus contemplated by the Payment of Bonus Act. Such payment arose from a statutory obligation, rather than an employer’s decision to distribute profits.
The finding that no supporting details had been furnished was contradicted by the record. Form 35 specifically identified the “Bonus Payment Sheet” as evidence, and the appellate order acknowledged a reply “with annexures”.
No evidence connected workers with dividend entitlement
Neither the CPC nor the JCIT(A) identified material showing that any recipient was a shareholder or director, or entitled to receive the amount as profits or dividend. The Department furnished no such evidence before the Tribunal either.
The recipients were workers receiving bonus calculated on their wages. A worker holding no shares has no entitlement to company dividend. A payment that the worker could never receive as dividend could not be treated as its substitute.
Accordingly, the restrictive condition in section 36(1)(ii) was not attracted on these facts.
Audit disclosure could not override the underlying evidence
The Tribunal rejected the presumption drawn solely from reporting under clause 20(a). Reporting an amount against that clause did not itself establish that recipients were shareholders or that payment replaced dividend.
Even assuming a presumption arose, the employee-wise bonus sheet and accounting records rebutted it. The Revenue had not controverted those documents.
The Tribunal expressly confined its adjudication to ₹2,07,438, distinguishing that disputed adjustment from the ₹3,37,632 figure mentioned in the audit report.
It relied on Mount Kellett Capital Management India, concerning payment to a person who had ceased to be a shareholder, and AMD Metplast, which allowed service-related commission even to a shareholder managing director.
Disallowance deleted on merits
The Tribunal held the employee bonus allowable and directed deletion of the entire ₹2,07,438 disallowance. The appeal was allowed outright.
Having granted relief on merits, it left undecided whether the adjustment fell within section 143(1)(a)(iv). The ruling therefore should not be presented as invalidating CPC’s adjustment jurisdiction.
Author’s comments
The decision highlights the danger of treating tax audit reporting as a conclusive admission of disallowability. The payment’s character must be established from the recipients, services and supporting records.
Equally, shareholder status alone does not automatically prohibit deduction, as AMD Metplast illustrates. The statutory inquiry is whether remuneration substitutes for profits or dividend.
Here, statutory-rate bonus to identified workers provided a clear answer. The practical lesson is to preserve employee-wise computations and payment evidence, and reconcile audit-report figures with the deduction claimed. A reporting label cannot replace examination of the actual transaction.
Cases Discussed
- SRC Aviation (P.) Ltd. v. ACIT (Delhi High Court) – [2022] 445 ITR 40 (Delhi). Distinguished. The Delhi High Court’s decision involved bonus paid to two shareholder directors in lieu of dividend. The Jaipur Tribunal held that the decision did not support disallowance of statutory bonus paid to non-shareholder workers.
- SRC Aviation (P.) Ltd. v. ACIT (Supreme Court) – [2022] 449 ITR 169 (SC). Noted. The Supreme Court dismissed the special leave petition against the Delhi High Court judgment in view of concurrent findings of fact. The Tribunal distinguished the underlying shareholder-director circumstances.
- DCIT v. Mount Kellett Capital Management India (P.) Ltd. (ITAT Mumbai) – ITA No. 269/Mum/2015, dated 27.11.2018. Relied upon. Bonus or commission paid for services rendered was allowable where the recipient was no longer a shareholder when payment was made. The Jaipur Bench held that the present case stood on stronger facts because the workers were not even alleged to have been shareholders.
- AMD Metplast (P.) Ltd. v. DCIT (Delhi High Court) – [2012] 341 ITR 563 (Delhi). Relied upon. Commission paid to a shareholder managing director for services rendered under the terms of appointment was allowable. The Tribunal applied the principle that service-related remuneration does not become dividend merely because of shareholding.
- Dalal Broacha Stock Broking (P.) Ltd. v. Addl. CIT (ITAT Mumbai Special Bench) – [2011] 131 ITD 36 (Mum.) (SB). Distinguished. The dispute concerned commission paid to shareholder directors in lieu of dividend. The Tribunal held that its factual circumstances did not justify disallowance of bonus paid to ordinary employees without shareholding.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
1. This appeal by the Assessee is directed against the order of the learned Additional/Joint Commissioner of Income Tax (Appeals), Raipur [hereinafter referred to as “the learned JCIT(A)”] dated 29.10.2025 arising out of the intimation dated 24.08.2022 issued by the Centralized Processing Centre, Bengaluru (hereinafter referred to as “the CPC”) under section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for the assessment year 2021-22.
2. The grounds of appeal raised by the Assessee before us in the memorandum of appeal in Form No. 36 read as under:
“1. That the worthy Addl. CIT(A) erred on facts and in law in passing an order which is contrary to the facts of the case & position of law thereon.
2. That the worthy Addl. CIT(A) erred in confirming the addition of Rs. 2,07,438/- made by the assessing officer made on the ground that this deduction was not allowable as bonus u/s 36(1)(ii) of the Income Tax Act.
3. That the worthy Addl. CIT(A) erred in holding that payout of Rs. 2,07,438/- would have been made as dividend, had it not been made as bonus.
4. The appellant reserve the right to amend, alter, add or modify any ground of Appeal is so required or needed.”
3. Briefly stated, the facts of the case are that the assessee, a private company engaged in the manufacture of MS angles, channels and steel, filed its return of income for the year under consideration on 01.02.2022 declaring a total income of Rs 1,70,57,350. The CPC processed the return under section 143(1) of the Act and disallowed Rs 2,07,438 claimed as bonus paid to employees, on the ground of an inconsistency between the claim in the return and the amount reported in the tax audit report against the item relating to section 36(1)(ii) of the Act. The total income was thus determined at Rs 1,72,64,790 and a demand of Rs 82,550 was raised.
4. The assessee carried the matter in appeal. Before the learned JCIT(A), it contended that the bonus was paid to its workers and employees at the minimum rate of 8.33% of wages under the Payment of Bonus Act, 1965, as a statutory obligation forming part of their salary, and that the payment was made on 02.11.2021, before the due date of filing the return under section 139(1) of the Act. The learned JCIT(A) noticed that the tax auditor had reported a sum of Rs 3,37,632 under clause 20(a) of Form No. 3CD and held as under:
“15. … This categorical disclosure raises a presumption that the payment was made to persons who could otherwise have received such amount as profit or dividend.
16. The appellant has not furnished any evidence to demonstrate that the recipients of the impugned bonus were non-shareholder employees or that the payments were mandated by the Payment of Bonus Act, 1965. No computation sheet, employee-wise details, or proof of statutory liability under the Bonus Act has been submitted. In the absence of such evidence, the nature of payment remains unexplained and therefore attracts the restrictive clause of section 36(1)(ii).”
Holding that the decisions in Dalal Broacha Stock Broking (P.) Ltd. v. Addl. CIT [2011] 131 ITD 36 (Mum.) (SB) and SRC Aviation (P.) Ltd. v. ACIT [2022] 445 ITR 40 (Delhi) supported the Revenue, the learned JCIT(A) confirmed the disallowance and dismissed the appeal.
5. Before us, the learned Authorised Representative (hereinafter referred to as “the learned AR”) relied on the written submissions dated 14.09.2026 and a paper book of 48 pages. It was submitted that the learned JCIT(A) proceeded on the erroneous footing that no evidence had been produced, whereas the assessee had filed before the learned JCIT(A) its written submissions, the employee wise bonus payment sheet, the relevant page of the cash book and the relevant page of the bank book, all of which are placed in the paper book with a certificate of the counsel that they were filed before the learned JCIT(A). It was urged that the payees were employees who had rendered services, that the bonus was paid under the statutory requirement of the Payment of Bonus Act, 1965 and not in lieu of dividend, and that section 36(1)(ii) of the Act therefore had no application. Reliance was placed on the order of the Mumbai Bench of the Tribunal in DCIT v. Mount Kellett Capital Management India (P.) Ltd. (ITA No. 269/Mum/2015, dated 27.11.2018) and on the judgment of the Hon’ble Delhi High Court in AMD Metplast (P.) Ltd. v. DCIT [2012] 341 ITR 563 (Delhi).
6. The learned Departmental Representative (hereinafter referred to as “the learned DR”) relied on the orders of the lower authorities and supported the disallowance.
7. We have heard the rival contentions and perused the material on record, including the paper book. The short question before us is whether the bonus of Rs 2,07,438 paid by the assessee to its employees is hit by section 36(1)(ii) of the Act. Grounds 1, 2 and 3 raise this single issue and are therefore taken up together.
8. Section 36(1)(ii) of the Act, so far as relevant, reads as under:
“(ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission;”
9. The provision allows bonus or commission paid to an employee for services rendered. The deduction is denied only where the sum would have been payable to the employee as profits or dividend had it not been paid as bonus or commission. The mischief aimed at is the distribution of profits to shareholders in the guise of remuneration. Dividend is a return on capital; bonus is a reward for labour. The restriction therefore presupposes that the payee has an entitlement to the profits of the company as dividend, which arises from holding its shares. Both the decisions relied on by the learned JCIT(A), namely Dalal Broacha Stock Broking (P.) Ltd. (supra) and SRC Aviation (P.) Ltd. (supra), concerned bonus or commission paid to shareholder directors, as noticed in paragraphs 12, 13 and 17 of the impugned order itself. In SRC Aviation (P.) Ltd. (supra), the bonus was paid only to the two directors of the company in lieu of dividend, and the Special Leave Petition against that judgment was dismissed by the Hon’ble Supreme Court in SRC Aviation (P.) Ltd. v. ACIT [2022] 449 ITR 169 (SC) in view of the concurrent findings of fact. Neither decision lays down that bonus paid to employees who hold no shares can be disallowed under section 36(1)(ii) of the Act.
10. The details of the payment, as borne out by the paper book, are summarised below:
| Particulars | Date | Amount (Rs) |
|---|---|---|
| Total wages of the employees as per the bonus sheet | F.Y. 2020-21 | 24,90,266 |
| Bonus at 8.33% of wages as per the bonus sheet | 2,07,438 | |
| Paid in cash as per the cash book (“cash paid bonus as per bonus register”) | 02.11.2021 | 1,66,874 |
| Paid through the HDFC Bank CC account as per the bank book (“paid bonus as per bonus register”) | 02.11.2021 | 40,564 |
| Total bonus paid and disallowed by the CPC | 2,07,438 |
The bonus sheet lists the employees by name, with their wages and the bonus computed on them. The bonus works out to 8.33% of the total wages, which corresponds to the minimum bonus contemplated under the Payment of Bonus Act, 1965. Such minimum bonus is a statutory obligation of the employer and does not depend on the employer choosing to share its profits.
11. The learned JCIT(A) has held that no computation sheet or employee wise details were submitted. This finding is not borne out by the record. The table in paragraph 6 of the impugned order itself records that the assessee filed its reply on 06.06.2023 “with annexures”. Form No. 35 lists the “Bonus Payment Sheet” as the documentary evidence relied upon. The reply placed at Annexure A of the paper book gives the break up of the payment in cash and through the bank on 02.11.2021 and refers to the bonus sheet and the copies of the cash book and the bank book. In these circumstances, the conclusion that the nature of the payment “remains unexplained” rests on an incorrect premise.
12. More importantly, neither the CPC nor the learned JCIT(A) has referred to any material to show that any of the payees was a shareholder or a director of the assessee, or that any of them would have been entitled to the amount as profits or dividend. No such material was placed before us by the learned DR either. The payees are workers paid bonus at the statutory rate on their wages. A worker who holds no shares has no claim to dividend, and a payment that he could never have received as dividend cannot be said to have been paid to him in lieu of dividend. The test laid down in section 36(1)(ii) of the Act is thus not attracted on the facts of this case.
13. The learned JCIT(A) has also drawn a presumption from the fact that the tax auditor reported the bonus against clause 20(a) of Form No. 3CD. That clause calls for a disclosure of bonus or commission paid to employees, with a reference to section 36(1)(ii) of the Act. The mere reporting of the amount of bonus in that clause is not a finding by the auditor that the payees were shareholders or that the sum would otherwise have been payable to them as dividend. A label in a form cannot convert the wages of labour into a return on capital. Even if such reporting were to raise some presumption, it stands rebutted by the bonus sheet and the books of account discussed above, which the Revenue has not controverted. We also note that the amount reported in clause 20(a), as noticed by the learned JCIT(A), is Rs 3,37,632, whereas the adjustment made by the CPC and disputed before us is Rs 2,07,438. Our adjudication is confined to the amount of Rs 2,07,438 that is in dispute.
14. Our view is supported by the order of the Mumbai Bench of the Tribunal in Mount Kellett Capital Management India (P.) Ltd. (supra), where the bonus was paid to a person who had ceased to be a shareholder. The Bench held in paragraph 4.6 as under:
“4.6. In view of the above factual position that Shri Suresh Prabhala was not a shareholder when the bonus/commission was paid to him and once he is not a shareholder and commission/bonus paid for the services rendered, the provisions of Section 36(1)(ii) mandates that the bonus is to be allowed.”
The case of the assessee before us stands on a stronger footing, since there is not even an allegation that any of the payees was ever a shareholder. Nothing has been placed before us to show that the above order of the Mumbai Bench has been reversed or modified by a higher forum.
15. The Hon’ble Delhi High Court in AMD Metplast (P.) Ltd. (supra) allowed commission paid to a managing director who also held shares in the company, since the commission was paid for services rendered under the terms of his appointment. If commission paid to a shareholder managing director for services rendered is not hit by section 36(1)(ii) of the Act, bonus paid at the statutory rate to workers who hold no shares can hardly be.
16. In view of the above discussion, we hold that the bonus of Rs 2,07,438 paid to the employees is allowable as a deduction and is not hit by section 36(1)(ii) of the Act. The disallowance of Rs 2,07,438 made by the CPC and confirmed by the learned JCIT(A) is directed to be deleted. Having decided the issue on merits, we do not find it necessary to examine whether such an adjustment could at all have been made within the limited scope of section 143(1)(a)(iv) of the Act. Grounds 1, 2 and 3 are allowed. Ground 4 is general in nature and requires no adjudication.
17. In the result, the appeal filed by the Assessee is allowed.
Order pronounced in the open court on 08.10.2026
