TMI Blog2019 (4) TMI 560X X X X Extracts X X X X X X X X Extracts X X X X ..... A. K. GARODIA, A. M.: This appeal is filed by the assessee and the same is directed against the order of ld. CIT (A) 4, Bangalore dated 28.02.2018 for A. Y. 2014 - 15. 2. The assessee has raised four grounds as per concise grounds of appeal. In course of hearing, it was submitted by the learned AR of the assessee that Ground No. 1 is general and Ground No. 3 is not pressed and Ground No. 4 regarding initiation of penalty proceedings u/s 271 (1) (c) is premature and only one ground i.e. Ground No. 2 is to be decided. He pointed out that the issue involved in Ground No. 2 is regarding disallowance of ₹ 120,65,600/- being Bonus paid to a Shareholder u/s 36 (1) (ii). Accordingly, we hold that we willdecide this Ground No. 2 and the remaining grounds are rejected. 3. At the very outset, it was submitted by the learned AR of the assessee that this issue is covered in favour of the assessee by the tribunal order rendered in the case of ACIT vs. Mandovi Motors (P) Ltd. as reported in 8 Taxmann.com 225 (Bang). He submitted a copy of this tribunal order and [pointed out that Para 4.5 to 4.7 of this tribunal order are relevant in which the tribunal has followed the judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whole-time Directors, given their position as the Managing/Whole-time Directors of the company whereby they are entrusted with the task of superintendence and control of the affairs of the company, the same cannot normally be said to be in lieu of the dividend paid. It should be noted here that bonus or profit in lieu of or in addition to salary or wages paid to an employee is specifically considered to be part of salary in the inclusive definition of salary. Bonus paid to a Director is salary if the Director is an employee of the company. Further, the said directors had paid tax on such bonus at the maximum marginal rate, this, coupled with the fact that the Appellant company has also declared dividend out of the profits of the year under question. leave no doubt, that, no tax avoidance motive could be attached from the payment of bonus. The learned AO has only relied on the provisions of section 36(1)(ii) of the Act and stated that the expenses in question were hit by section 36(1)(ii) of the Act. There is no basis or material or evidence brought on record by the learned AO to support the contention that the bonus would have been paid as dividend to the shareholder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion of law in negative and in favour of the assessee and against the Revenue. The appeal is accordingly allowed. Further, in case of CIT v. Career Launcher India Ltd8 the Honourable High Court held as follows: 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 characterized as a dividend payment in disguise. The Tribunal has found 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. Having regard to the above legal position and the factual findings recorded by the Tribunal we are unable to say that the Tribunal erred in holding that the bonus payment was allowable under section 36(1)(ii) of the Act. The substantial questions of law are answ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a case can be made out for the lifting of the corporate veil and for the invocation of section 36(1)(ii) However, where, the managerial personnel occupying an executive position resulting in an employer-employee relationship, irrespective of their level of shareholding in the company and when remuneration is structured as a combination of salary, commission and other perquisites/benefits, In such cases. there is a direct correlation between the commission paid and services rendered. In such cases the commission paid only represents a manner of structuring managerial remuneration, so as to incorporate an element of variable result-oriented incentives in the process of structuring executive remuneration. Accordingly, in such a situation there does not seem any scope for the provisions of section 36(1)(ii) of the Act to come into play or for making a corresponding disallowance. The above makes it clear that a blanket disallowance of bonus paid to persons who are also substantial shareholders cannot be made by applying the provisions of section 36(1)(ii) of the Act. An informed and rational decision should be made after a realistic and detailed appraisal of the underlying facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the above, it is clear that the bonus will not be allowed only if such sum paid to him or her is otherwise payable to him or her as profits or dividends. In the present case, the bonus is paid for the services of the working directors and the same cannot be disallowed just because they hold a few shares in the assessee company. They will not be entitled to such sum in entirety as dividends or profits in case such sum is not paid as bonus to them. Whatever dividend if any, payable to them will be only a fraction of such sum. 6. Various judgments noted by the AO in the assessment order are very old and these judgments are in context of Section 10 (2) (x) of 1922 Act and not in the context of Section 36 (1) (ii) of 1961 Act. Section 10 (2) (x) of 1922 Act required that the payment of bonus commissions should be reasonable but there is no such requirement in Section 36 (1) (ii) of 1961 Act and hence, these judgments noted by the AO are not applicable. Therefore, respectfully following this tribunal order and various judgments cited before CIT (A) as noted above in Para 8.2 of the order of CIT (A) reproduced above, we decide the issue in favour of the assessee because this is not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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