Remuneration to Director who is a CA due to Experience which has no bearing on his Shareholding, is not ‘Dividend’: ITAT [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has held that the remuneration paid to Director of company, who is an experienced Chartered Accountant in commensuration with his experience which has no bearing on his shareholding, cannot be construed as ‘Dividend’ under the Income Tax Act, 1961.

The assessee Company is engaged in the business of Management Consultancy Services. The AO, while completing the assessment proceedings, held that the assessee company had paid salary and other allowances to its Directors as per the Board Resolutions. It was also noticed that the ‘bonus’ paid to its one Director, who was also the major shareholder was more than 10%. The AO further noted that as per provisions of section 36(1)(ii), profit or dividend should not be paid in the form of bonus. It was noted that assessee could not furnish any evidence for the performance of the Director enabling him to get the bonus much more than the salary and much more as compared to other employees. He, therefore, disallowed Rs. 1,77,79,000/- on account of ‘bonus’ and added the same to the income of the assessee.

The Tribunal observed that the AO has not brought any material on record to substantiate this allegation that the amount in question was actually payable as a dividend. In fact, Mr Sanjay Mehta was having only 11% shareholding in the assessee company and if Rs.1.78 crores had been paid as a dividend (and not as bonus) to him, the assessee would have had to distribute dividends to tune of Rs. 16.16 crores, whereas it was having loss of Rs. 1.17 crores during the year and accumulated profits of Rs.6 crores only. This is because, shareholding of Mr. Sanjay Mehta was 11% only and all the equity shareholders have equal rights. Mr. Sanjay Mehta is stated to be a Chartered Accountant by profession and a senior consultant with many years of experience.

The assessee further submitted that bonus was a variable remuneration for professional services rendered and amount of bonus was decided by the Board prior to the commencement of the financial year i.e. vide Board Resolution dated 10th March, 2010. We further find that it was actually paid during the year, on 31st August, 2010 and 30th November, 2010 and not post closing of the year. No bonus / dividend was paid to the remaining major shareholders holding 89% equity;

The Tribunal further observed that “also similar circumstances prevailed in the case of the assessee in the earlier assessment years, A.Ys 2007-08, 2009-10 and 2010-11, wherein additions/disallowances made by the Assessing Officer on this account were deleted by the CIT(A). From the Assessee’s Paper Book, which is containing pages 148 to 153 having the copy of order dated 1.10.2018 passed by the AO in assessee’s own case for the assessment year 2009-10 pursuant to the order passed by the Delhi Bench of the ITAT wherein the AO held that assessee was justified in making payment of bonus amounting to Rs. 2,35,00,000/- to Mr. Sanjay Mehta and the same was allowed as a deductible business expenditure; copy of the order passed by the AO in the assessee’s own case for the assessment year 2010-11 pursuant to the order passed by the Delhi Bench of the Tribunal reveals that Sh. Sanjay Mehta had rendered services to the assessee company during the financial year 2009-10 relevant to assessment year 2010-11 and allowed the bonus payment of Rs. 1,97,43,000/- to him and allowed the same as deductible business expenditure.”