The assessee, Mehta Equities Ltd. has paid Rs. 250,000 each as bonus and incentive to Mrs. Nidhi R Mehta and Mr. Rakesh Mehta, apart from payment made to them as director’s remuneration.
The AO has disallowed the payment of bonus aggregating to Rs. 5,00,000 under section 36(l)(ii) of the Income Tax Act, considering that the company was having more than 1 crore of profits which could have been distributed amongst the shareholders in the form of a dividend.
The two directors held shares of the assessee company and an amount of Rs. 2.5 lakhs each, if not paid to them as bonus, was payable as dividend to the two shareholders.
The CIT(A) observed that the payment of commission of Rs. 1.20 crores to the three working directors was in lieu of dividend and the same is not allowable as deduction under section 36(1)(ii).
The assessee submitted that the assessee has duly paid bonus to its directors shareholders. That there is no law that the assessee-company can be forced to pay dividend.
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.
The Coram consisting of Pawan Kumar Gadale and Shamim Yahya opined that the Assessing Officer in this case if he wants to invoke provisions of section 36(1)(ii) 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.
“Assessing Officer shall examine the assessee’s submission that both the shareholder 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 CIT(A) himself in his order,” the ITAT said.Subscribe Taxscan AdFree to view the Judgment