Tulip Kanth

New Delhi, April 16, 2022: Dismissing an appeal against the order of the Income Tax Appellate Tribunal, the Delhi High Court has held that the ITAT is the final arbiter of the facts and the High Court can interfere in the order of the ITAT only if there is substantial question of law or there is manifest illegality or such order suffers from perversity. 

The Division Bench of Justice Manmohan and Justice Dinesh Kumar Sharma was hearing two appeals filed by an Aviation Company under Section 260A of the Income Tax Act assailing the Income Tax Appellate Tribunal’s (ITAT) order pertaining to assessment year 2011-2012 and 2014-2015.

The facts in brief are such that the appellant is a private limited company and the directors, who are also the share-holders, have been holding 50% equity shares each since inception of the company. In the Assessment year 2011-2012, the company had paid bonus of Rs 1 crore each to both the directors.Similarly in the assessment year 2014-2015 the company had paid a bonus of Rs 1.5 crore each to both the Directors. The Assessing Officer disallowed the same relying upon Section 36 (1)(ii) of the Act.The Assessing Officer was 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 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 dividend. This 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 challenged the order before this Court.

The main issue involved in this appeal was whether the amount paid to the two directors/shareholders in the assessment years 2011-12 and 2014-15 should be allowed as a deduction or should be included in the income of the company.

On the scope of jurisdiction of Section 260A, the Division Bench said,“It is a settled proposition that ITAT is the final arbiter of the facts. High Court can interfere in the order of the ITAT only if there is substantial question of law or there is manifest illegality or it suffers from perversity. The general rule is that High Court should be slow in interfering into the findings of ITAT, unless it suffers from any of the grounds mentioned hereinabove.”

Coming to the interpretation of Section 36 (1) (ii) of the Act, the Division bench placed heavy reliance on the judgment of the Bombay High Court in Loyal Motor Service Company Limited v. Commissioner of Income Tax.

In Loyal Motor Service Company’s case(Supra)  the company granted a bonus at the rate of two months’ salary to its forty-one employees and the total sum required to pay this bonus was Rs  6,084 of which Rs 1,954  went to the twenty-eight other employees and Rs. 4,130  to the thirteen shareholder employees. It was observed therein that the whole sum of Rs 4,130 paid as bonus to the shareholder employees would be allowable as deduction under the provisions of s.10(2)(x).

Taking the analogy in Loyal Motors Service Company’s Case(Supra) ,the Court opined that the basic object of Section 36 (1) (ii) is intended to prevent an escape from taxation by describing a payment as bonus. The simple test is that had the bonus or commission not been paid, it would have added to the profits or dividend of the company. Thus, the deduction is permissible only if the sum paid is bonus or commission for services rendered.

According to the Bench, there was not even an iota of word that the amount paid was commission for services rendered or bonus.There are only two directors in the company and the entire amount had been paid to both of them. It was not the case of the appellant that there had been any term of employment nor was there any case that any special services had been rendered by these two directors. 

The Court referred to the ratio laid down in CIT v. Career Launcher India Ltd. wherein it was opined that 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.

Noticing that no substantial question of law was involved in the present cases, the Bench affirmed that the assessing officer and CIT (A) had given a concurrent finding that the assessee had paid the bonus in lieu of the dividend and therefore, the above sum was disallowed under Section 36 (1) (ii) of Act. The Court asserted that 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 was not allowable as deduction under Section 36 (1) (ii) of the Act in the hands of the assessing company. 

Thus, the Bench dismissed the present appeals along with the pending applications considering that there was absence of any substantial question of law.

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