Delhi High Court Disallows Bonus in lieu of dividend paid to Directors of Company

The facts in brief are that the appellant is a private limited company. Sh. Arvind Chadha and Sh. Anoop Chadha are two share-holders and directors holding 50% equity shares each since inception of the company. In the Assessment year 2011-2012, the company has paid bonus of Rs.1 crore each to both the directors namely Sh.Arvind Chadha and Sh.Anoop Chadha. Similarly in the assessment year 2014-2015 the company has paid bonus of Rs.1.5 crore each to both the Directors. Assessing Officer disallowed the same relying upon Section 36 (1)(ii) of the Act.The Assessing Officer was inter alia of the view that bonus was paid to avoid payment of dividend distribution tax.

The Commissioner of Income Tax (appeal) in the appeal filed by the Assessee vide orders dated 24.03.2014 and 29.11.2016 confirmed the disallowance and took a view that had the impugned bonus not been paid to these two directors, the amount would have been paid to them as a dividend.

The order of the CIT (A) was challenged before the ITAT. The Tribunal also agreed with the Assessing Officer and CIT (A) and upheld the order of assessing officer and CIT(A). Aggrieved by the order of the ITAT, the appellants have challenged the order before this Court.

Delhi High Court Order:

24. In the present case, there is not even an iota of word that the amount paid is commission for services rendered or bonus. There are only two directors in the company. The entire amount has been paid to both of them. It is not the case of the appellant that there has been any term of employment nor is there any case that any special services has been rendered by these two directors. On the similar analogy, the judgment in Career Launcher Ltd. (supra) is also distinguishable. In Career Launcher Ltd. it was inter alia held as under:

“19. The revenue’s contention that the Tribunal erred in allowing the bonus payment to the directors cannot be accepted. It has not disputed the facts viz., (a) that the payment was supported by board resolutions and (b) that none of the directors would have received a lesser amount of dividend than the bonus paid to them, having regard to their shareholding. Further, the directors are full-time employees of the company receiving salary. They are all graduates from IIM, Bangalore. Taking all these facts into consideration, it would appear that the bonus was a reward for their work, in addition to the salary paid to them and was in no way related to their shareholding. The bonus payment cannot be characterised as a dividend payment in disguise. The Tribunal hasfound that having regard to the shareholding of each of the directors, they would have got much higher amounts as dividends than as bonus and there was no tax avoidance motive. The quantum of the bonus payment was linked to the services rendered by the directors. It cannot therefore be said that the bonus would not have been payable to the directors as profits or dividend had it not been paid as bonus/commission.

20. The issue has been considered by this Court in AMD Metplast Pvt. Ltd v. DCIT (2012) 341 ITR 563 in the light of the judgment of the Bombay High Court in Loyal Motor Service Co. Ltd v. CIT (1946) 14 ITR 647. It was observed that the judgment of the Bombay High Court (supra) does not assist the revenue and that so long as the bonus or commission is paid to the directors for services rendered and as part of their terms of employment it has to be allowed and sec.36(1)(ii) does not apply.”

25. The conclusion as reached in the CIT v. Career Launcher India Ltd. 358 ITR 179 (Del) was as long as the bonus or commission is paid to the directors for services rendered and as part of their term of employment, it has to be allowed.

26. We consider that the question of law is very well settled. There is no substantial question of law in the present cases. The assessing officer and CIT (A) have given a concurrent finding that the assessee has paid the bonus in lieu of the dividend and therefore, the above sum is disallowed under Section 36 (1) (ii) of Act. The ITAT also after considering the findings of the assessing officer and the CIT (A) had inter alia held that the payment of bonus or commission is not allowable as deduction under Section 36 (1) (ii) of the Act in the hands of the assessing company. In the absence of any substantial question of law, the appeals are liable to be dismissed. Hence, the present appeals along with the pending applications are dismissed.