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2019 (4) TMI 560

rement in Section 36 (1) (ii) of 1961 Act and hence, judgments noted by the AO are not applicable. Therefore, we decide the issue in favour of the assessee because this is not the case of the revenue that the amount in dispute paid by the assessee to its director as bonus was otherwise payable to the director as dividend and therefore, the provisions of section 36 (1) (ii) are not helping the revenue in the facts of the present case. See ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1 (1) , MANGALORE VERSUS MANDOVI MOTORS PVT. LTD. [2010 (11) TMI 960 - ITAT BANGALORE] - Decided against revenue - ITA No. 1652/Bang/2018 - 5-4-2019 - Shri Arun Kumar Garodia, Accountant Member And Shri Pavan Kumar Gadale, Judicial Member For the Appellant : Shri K. R. Girish, C. A. For the Respondent : Shri T. N. Prakash, Addl.CIT (DR) ORDER PER 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 i .....

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dividends out of the profits of the FY 2013-14 In light of the above facts we wish to submit as follows: Section 36(1)(ii) the Act provides that any sum paid to the employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission is deductible This provision is an enabling provision allowing deduction on account of bonus or commission paid to employees. The said payment is to be made out of profits subject to the conditions mentioned in the section. Any expenditure incurred on account of payment of commission or bonus to a person other than an employee is not covered by this provision. The bonus paid is a part of the salary/remuneration to the Managing/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 .....

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It is a term of employment on the basis of which he had rendered service. Accordingly. he was entitled to the said amount. Commission was treated as a part and parcel of salary and TDS has been deducted. Ashok Gupta was liable to pay tax on both the salary component and the commission. Payment of dividend is made in terms of the Companies Act. 1956. Dividend has to be paid to all shareholders equally. This position cannot be disputed by the Revenue. Dividend is a return on investment and not salary or part thereof. Herein the consideration in the form of commission which was paid to Ashok Gupta was for services rendered by him as per terms of appointment as a Managing Director. In view of the aforesaid position, we answer the question 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 divid .....

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. v. CIT. (1946) 14 ITR 647 opined that the commission, if found to be paid for services rendered by the director as per the terms of the appointment, cannot be said to be distribution of dividend or profits in the guise of commission. It was noticed that while commission was paid as a form of remuneration for actual services rendered, dividend is a return of investment and is paid to all its shareholders equally. It was thus held that if the commission is paid for actual services rendered, section 36(1)(ii) will not apply. In case the Directors who have a substantial/dominant shareholding in the company and who do not hold any executive position in the company but are paid bonus. In such a situation, 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. I .....

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. Sesa Goa Ltd. [2009] 316 ITR 399 (Bom.). 4.6 Let us have a glimpse of section 36(1)(ii) as under:- "Section 36(1) - The deductions provided for the following clauses shall be allowed in respect of the matters dealt with herein, in computing the income referred to in section 28 - (i)** ** ** (ia)** ** ** (ib)** ** ** (ii) any sum paid to an employee as bonus or commission for the services rendered where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission." [Emphasis supplied]. 4.7 From 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 conte .....

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