M/s. Candor Business Solutions Private Limited, Bengaluru V. Income Tax Officer, Ward-2(1)(1), Bengaluru

ITA 2607/BANG/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 7181 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 17-09-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D KIRAN JT C IT BENGAL URU
• Keywords: Gift; Condonation of delay; Revised return
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC A BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUN TANT MEMBER ITA NO. 2607/BANG/2018 ASSESSMENT YEAR : 2013 - 14 CANDOR BUSINESS SOLUTIONS P. LTD., UNIT C-2, PENTAABASE, NO.5, BASAPPA ROAD, BENGALURU 560 027. PAN: AACCC 6166C VS. THE INCOME TAX OFFICER, WARD 2(1)(1), BENGALURU. APP ELLANT RESPONDENT APP ELLANT BY : SHRI RAVISH R A O, CA RESPONDENT BY : SHRI D. KIRAN, JT.C IT(DR)(ITAT), BENGAL URU. DATE OF HEARING : 07 . 01.2019 DA TE OF PRONOUNCEMENT : 09 . 01 . 201 9 O R D E R THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDE R OF THE CIT(APPEALS) DATED 23.11.2016 FOR THE ASSESSMENT YE AR 2013-14. 2. THERE IS A DELAY OF 571 DAYS IN FILING THIS APPE AL. ORIGINALLY APPLICATION FOR CONDONATION OF DELAY ALONG WITH AFF IDAVIT HAS BEEN FILED WHEREIN IT WAS STATED THAT THERE WAS A DELAY OF 582 DAYS. THIS WAS POINTED OUT TO THE ASSESSEES COUNSEL. AC CORDINGLY HE REVISED THE CONDONATION PETITION EXPLAINING THE REA SON FOR DELAY IN FILING THIS APPEAL AS FOLLOWS:- ITA NO. 2607/BANG/2018 PAGE 2 OF 15 AFFIDAVIT I SMT. UMADEVI S Y, AGED 49 YEARS, RESIDING AT HAMP I NAGAR, BENGALURU, DO HEREBY SWEAR ON OATH AS UNDER THAT 1. I AM A DIRECTOR OF THE APPELLANT COMPANY, NAMELY , CANDOR BUSINESS SOLUTIONS PRIVATE LIMITED AND AM WELL AWARE OF THE FULL FACTS OF THE CASE. 2. THE APPELLANT COMPANY FILED ITS RETURN OF INCOME UNDER THE PROVISIONS OF INCOME TAX ACT, 1961 (HEREIN REFE RRED TO AS 'ACT') FOR THE ASSESSMENT YEAR 2013-14, PREVIOUS YE AR AND ACCOUNTING YEAR BEING 2012-13, ON 30-09-2013. 3. THE ABOVE RETURN OF INCOME WAS PROCESSED U/S 143 (3) BY THE INCOME TAX OFFICER, WARD 2(1)(1), BENGALURU AND PASSED AN ORDER VIDE ORDER DATED 30-06-2015. 4. IN THE ABOVE ASSESSMENT ORDER THE LEARNED INCOME TAX OFFICER DISALLOWED THE EXPENDITURE CLAIMED UNDER TH E HEAD SALARIES, WHICH INCLUDED BONUS PAID TO DIRECTORS TO THE EXTENT OF RS. 17,00,000/-, UNDER SECTION 36(1)(II) OF THE ACT . 5. THE APPELLANT COMPANY CHALLENGED THE ABOVE DISALLOWANCE BEFORE THE COMMISSIONER OF INCOME TAX APPEALS-2, BENGALURU WHO DISMISSED THE APPEAL VIDE ORDER DATED 23-11- 2016. 6. THIS HAS RESULTED IN TAXATION OF RS. 17,00,000/- AT 30% IN THE HANDS OF THE COMPANY AND BY VIRTUE OF THIS, THE REFUND AVAILABLE TO THE COMPANY WAS REDUCED BY RS 5,25,368 /-. 7. THE DIRECTORS OF THE COMPANY, ON THE OTHER HAND, HAD INCLUDED THE BONUS AMOUNT OF RS. 17, 00,000/- IN TH EIR RESPECTIVE INCOME TAX RETURNS DURING THE ASSESSMENT YEAR 2014- 15 AND PAID TAXES @30%. 8. THE ABOVE SITUATION RESULTED IN TAXATION OF THE BONUS AMOUNT OF RS. 17, 00,000/- TWICE, ONCE, IN THE HAND S OF THE COMPANY BY DISALLOWANCE AND SECONDLY IN THE HANDS O F THE DIRECTORS, AS BONUS UNDER THE HEAD SALARY. ITA NO. 2607/BANG/2018 PAGE 3 OF 15 9. AT THIS STAGE, THE DIRECTORS WERE GUIDED THAT, A N AMOUNT THAT HAS ALREADY BEEN TAXED IN THE HANDS OF THE COM PANY, BY DISALLOWING THAT, AN ITEM, NOT AN ALLOWABLE EXPENDI TURE, THE SAME CANNOT BE TAXED IN THE HANDS OF THE DIRECTORS AS 'B ONUS'. IT IS A WELL SETTLED PROPOSITION OF LAW THAT AN AMOUNT CAN BE TAXED, ONLY, ONCE AND NOT TWICE. THE ABOVE VIEW WAS SUPPORTED BY THE FOLLOWING JUDGMENTS: MRS. BAKHTAWAR B DUBASH V DCIT, CENTRAL MUMBAI 2009 - TIOL-288-ITAT-MUM. SSKI INVESTOR SERVICES PVT LTD V DCIT, CENTRAL MUMB AI [2009] 34 SOT 412 (ITAT [MUM]). 10. IN VIEW OF THE ABOVE GUIDANCE THE DIRECTORS OF THE COMPANY DECIDED THAT THEY SHOULD FILE REVISED RETUR N FOR THE ASSESSMENT YEAR 2014-15 AND CLAIM THE REFUND OF TAX WHAT THEY HAVE PAID AGAINST THE BONUS AMOUNT OF RS. 17,00,000 /-. 11. IN VIEW OF THE ABOVE DECISION, THE COMPANY DECI DED, AT THAT MOMENT, THAT THE COMPANY WILL NOT FILE AN APPE AL AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX APPEALS-2 WHO H AD DISMISSED THE APPEAL. 12. ACCORDINGLY, THE DIRECTORS OF THE COMPANY PREPA RED REVISED RETURN FOR THE ASSESSMENT YEAR 2013-14. SIN CE THE REVISED RETURN BECOMES A DELAYED RETURN AND IT CAN BE ACCEPTED, ONLY, BY THE CONDONATION OF DELAY BY THE PRINCIPAL COMMISSIONER OF INCOME TAX-2, BENGALURU, THE DELAY CONDONATION A PPLICATION WAS ALSO PREPARED. THE ABOVE DOCUMENTS WERE SUBMITT ED BEFORE THE RESPECTIVE AUTHORITIES. 13. THE PRINCIPAL COMMISSIONER OF INCOME TAX-2, BEN GALURU, HOWEVER, DISMISSED THE DELAY CONDONATION APPLICATIO N AS IT IS NOT MAINTAINABLE BEFORE HIM. 14. THE ABOVE SITUATION PUT THE COMPANY IN A DEAD L OCK. THIS MADE THE COMPANY TO REVIEW THE MATTERS, ONCE AGAIN, TO PROCEED FURTHER IN THE MATTER. IN THE REVIEW THE DIRECTORS DECIDED TO FILE AN APPEAL AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX, APPEALS-2, BENGALURU CHALLENGING THE DISALLOWANCE O F BONUS U/S 36(1)(II) OF THE ACT BEFORE THE INCOME TAX APPELLAT E TRIBUNAL. ITA NO. 2607/BANG/2018 PAGE 4 OF 15 15. THE APPELLANT HAS RECEIVED THE ORDER OF PRINCIP AL COMMISSIONER OF INCOME TAX-2, BENGALURU REJECTING T HE DELAY CONDONATION APPLICATION. 16. FILING THE APPEAL BEFORE THE INCOME TAX APPELLA TE TRIBUNAL, NOW, AT THIS STAGE, RESULTS IN A DELAY OF 571 DAYS . 17. THE APPELLANT FAITHFULLY SUBMITS THAT THE DELAY OF 571 DAYS IN FILING THE APPEAL BEFORE TRIBUNAL WAS DUE TO THE REASONS NARRATED IN THE PRECEDING PARAGRAPHS. NO SOONER THE PRINCIPAL COMMISSIONER OF INCOME TAX-2, BENGALURU REJECTED TH E APPLICATION FILED BEFORE HIM U/S 119 OF THE ACT, TH E APPELLANT REVIEWED THE WHOLE MATTER, ONCE AGAIN, AND DECIDED TO COME UP BEFORE THIS HONORABLE COURT, IN APPEAL, WITHOUT DEL AYING FURTHER. 18. THE APPELLANT DID NOT HAVE ANY OTHER MALA FIDE INTENTION IN DELAYING THE APPEAL. 19. THE ISSUE INVOLVED IN THE APPEAL IS OF VERY HIG H IMPORTANCE, 'WHETHER AN INCOME CAN BE TAXED TWICE' 'WHETHER AN INCOME, ALREADY TAXED BY DISALLOWANCE OF EXPENDITUR E, CAN BE TAXED IN THE HANDS OF THE DIRECTORS AS INCOME'. 20. SUBMIT THE ABOVE THE APPELLANT HEREBY HUMBLY PR AYS THIS HONORABLE COURT THE DELAY OF 571 DAYS IN FILING THE APPEAL MAY KINDLY BE CONDONED AND THE APPEAL MAY BE ADMITTED F OR THE HEARING. 3. ACCORDINGLY THE LD. AR REQUESTED FOR CONDONATION OF DELAY OF 571 DAYS IN FILING THE APPEAL BEFORE THIS TRIBUN AL. 4. ON THE OTHER HAND, THE LD. DR HAS NOT PUT FORTH ANY SERIOUS OBJECTION CONDONATION OF DELAY. 5. I HAVE HEARD BOTH THE PARTIES WITH REGARD TO CON DONATION OF DELAY. THERE WAS A DELAY OF 571 DAYS IN FILING THE APPEAL BEFORE THIS TRIBUNAL. THE REASONS STATED BY THE ASSESSEE IN ITS PETITION IS THAT THE ASSESSEE HAS BEEN PURSUING ALTERNATIVE REMEDY TO GET ITA NO. 2607/BANG/2018 PAGE 5 OF 15 RELIEF. ACCORDING TO ASSESSEE, DISALLOWANCE OF RS. 17 LAKHS HAS RESULTED IN TAXATION IN THE HANDS OF ASSESSEE COMPA NY. IN ADDITION TO THIS, THE SAME AMOUNT WAS TAXED IN THE HANDS OF RESPECTIVE DIRECTORS WHICH RESULTED IN TAXATION OF A SUM OF RS.17 LAKHS TWICE I.E., ONCE IN THE HANDS OF THE COMPANY BY WAY OF DISALLOWANCE AND AGAIN IN THE HANDS OF DIRECTORS AS BONUS UNDER THE HEAD OF SALARY. THE ASSESSEE GUIDED BY LEGAL P ROFESSIONAL THAT THE SAID AMOUNT CANNOT BE TAXED TWICE. IN VIE W OF THIS, THE ASSESSEE FILED A REVISED RETURN OF DIRECTORS VIZ., SMT. UMADEVI S.Y. AND MS. NAMRATA SHILPI FOR THE AY 2013-14 ON 1 5.02.2018. THEREAFTER THE ASSESSEE FILED PETITION FOR CONDONAT ION OF DELAY BEFORE THE PR. CIT-II ON 16.02.2017 AND 11.06.2018. HOWEVER, THE PR.CIT-II, BANGALORE HAS NOT CONDONED THE DELAY IN FILING THE REVISED RETURN. IN VIEW OF THIS, THE ASSESSEE DECI DED TO FILE APPEAL AGAINST THE ORDER OF CIT(APPEALS) BEFORE THI S TRIBUNAL AND FILED APPEAL BEFORE THIS TRIBUNAL ON 17.09.2018 WHICH RESULTED IN A DELAY OF 571 DAYS. IN MY OPINION, TH E ASSESSEE PURSUING ALTERNATIVE REMEDY HAS TO BE CONSIDERED AS GOOD AND SUFFICIENT REASON FOR FILING THE APPEAL BELATEDLY B EFORE THIS TRIBUNAL. THE EXPRESSION SUFFICIENT CAUSE SHOULD BE INTERPRETED TO ADVANCE SUBSTANTIAL JUSTICE. THEREF ORE, THE ADVANCEMENT OF SUBSTANTIAL JUSTICE IS PRIME FACTOR WHILE CONSIDERING THE REASONS FOR CONDONATION OF DELAY. IN THIS CASE ON HAND, THE ISSUE THAT ARISES FOR CONSIDERATION ON MERITS IS WITH REGARD TO THE ALLOWABILITY OF BONUS PAID TO THE DIR ECTOR ITA NO. 2607/BANG/2018 PAGE 6 OF 15 SHAREHOLDERS WHILE COMPUTING INCOME OF THE ASSESSEE . ADMITTEDLY, IDENTICAL ISSUE WAS CONSIDERED BY THE H ONBLE DELHI HIGH COURT IN THE CASE OF AMD METPLAST P. LTD. V. DCIT 314 ITR 563 (DEL), CIT V. CAREER LAUNCHER INDIA LTD., 358 ITR 179 (DEL ) ALSO IN CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) P. LTD. V. DCIT, 376 ITR 183 (DEL) , WHEREIN IT WAS HELD THAT BONUS WHICH WAS PAID TO THE DIRECTORS IN THEIR MANAGERIAL CAPACITY IN ACCORDANCE WITH THE EMPLOYMENT TERMS IS TO BE ALLOWED AS A BUS INESS DEDUCTION. THEREFORE, THE ISSUE RAISED BY THE ASSE SSEE ON MERIT STANDS SQUARELY COVERED BY THE ABOVE JUDGMENTS IN F AVOUR OF ASSESSEE. BUT THERE IS A TECHNICAL DEFECT IN THE A PPEAL SINCE THE APPEAL WAS NOT FILED WITHIN THE PERIOD OF LIMITATIO N. 6. THE ASSESSEE FILED AN APPEAL STATING THAT IT WAS PURSUING ALTERNATIVE REMEDY BEFORE THE LOWER AUTHORITIES. I N SUPPORT OF THE SAME, THE ASSESSEE HAS FILED DOCUMENTS IN THE FORM OF CONDONATION PETITION BEFORE PR. CIT-II, BANGALORE D ATED 16.02.2017 AND 11.06.2018, COPY OF REVISED RETURN O F DIRECTORS DATED 15.02.2018. THE REVENUE HAS NOT FILED ANY CO UNTER AFFIDAVIT TO DENY THE FACTS BROUGHT ON RECORD BY TH E ASSESSEE. BEING SO, IN MY OPINION, WHEN SUBSTANTIAL JUSTICE A ND TECHNICAL CONSIDERATION ARE PITTED AGAINST EACH OTHER, THE CA USE OF SUBSTANTIAL JUSTICE DESERVES TO BE PREFERRED, FOR T HE OTHER SIDE CANNOT CLAIM TO HAVE VESTED RIGHT FOR INJUSTICE BEI NG DONE BECAUSE OF NON-DELIBERATE DELAY. IN THE CASE ON HA ND, THE ISSUE ON MERITS OF ALLOWABILITY OF EXPENDITURE TOWARDS BO NUS IN THE ITA NO. 2607/BANG/2018 PAGE 7 OF 15 HANDS OF ASSESSEE IS COVERED IN FAVOUR OF ASSESSEE BY THE JUDGMENTS CITED SUPRA. IT IS NOT THE CASE OF REVEN UE THAT THE ASSESSEE FILED APPEAL BELATEDLY DELIBERATELY. THER EFORE, I HAVE TO PREFER SUBSTANTIAL JUSTICE RATHER THAN TECHNICAL CONSIDERATION IN DECIDING THE ISSUE. THEREFORE, I AM INCLINED TO CO NDONE THE DELAY BY PLACING RELIANCE ON THE JUDGMENT OF THE HO NBLE SUPREME COURT IN THE CASE OF COLLECTOR OF LAND ACQUISITION V. MST. KATIJI, 167 ITR 471 (SC) . ACCORDINGLY, I CONDONE THE DELAY AND ADMIT THE APPEAL FOR ADJUDICATION. 7. COMING TO THE MERITS OF THE CASE, THE ASSESSEE H AS RAISED LENGTHY GROUNDS IN THIS APPEAL WHICH RELATES TO DIS ALLOWANCE OF RS.17 LAKHS PAID BY THE ASSESSEE AS BONUS TO DIRECT OR SHAREHOLDERS OF THE ASSESSEE COMPANY U/S. 36(1)(III ) OF THE ACT. 8. THE LD. AR SUBMITTED THAT THE LOWER AUTHORITIES ERRED IN FACTS IN TREATING THE AFORESAID PAYMENT AS DIVIDEND PAID IN THE GARB OF BONUS WITHOUT APPRECIATING THE FACTS OF THE CASE. THE NATURE OF PAYMENTS TO DIRECTOR SHAREHOLDERS BEING T HE VARIABLE COMPONENT OF SALARIES WAS SUPPORTED BY THE TERMS OF EMPLOYMENT BETWEEN THE ASSESSEE COMPANY AND THE DIR ECTOR SHAREHOLDERS. THE REVENUE AUTHORITIES ERRED IN CON STRUING THAT THE LANGUAGE OF SECTION 36(1)(II) CONTEMPLATES 'PAY MENT OF BONUS OR COMMISSION ONLY TO THOSE WHO WOULD NOT BE IN RECEIPT OF PROFITS OR DIVIDEND HAD IF NOT BEEN PAID AS BONU S OR ITA NO. 2607/BANG/2018 PAGE 8 OF 15 COMMISSION', THEREBY SUGGESTING THAT THE SECTION PR EVENTS PAYMENT OF BONUS TO SHAREHOLDERS WHO ARE RENDERING FULL TIME SERVICE TO A COMPANY. THERE WAS NO GUARANTEE OR RE QUIREMENT FOR THE ASSESSEE COMPANY TO PAY DIVIDENDS FOR THE Y EAR TO THE SHAREHOLDERS, HENCE IT SHOULD NOT BE CLAIMED THAT T HE SAID AMOUNTS WERE PAID AS BONUS INSTEAD OF AS DIVIDENDS. THE REVENUE AUTHORITIES FAILED TO APPRECIATE THAT THE F ACTS OF 2 JUDICIAL PRONOUNCEMENTS SUBODHCHANDRA POPATLAL VS CIT, (1953)24 ITR 566 (BOM) AND LAXMANDAS SEJRAM VS CIT (1964) 54 ITR 763 (GUJ) ARE NOT APPLICABLE TO THE CASE OF THE ASSESSEE. T HE ASSESSEE PAID BONUS TO ITS DIRECTOR SHAREHOLDERS UN DER THE OBLIGATION CAST BY THEIR TERMS OF APPOINTMENT, WHIC H THE LOWER AUTHORITIES CONSTRUED AS BONUS PAID AS 'A GIFT, REW ARD OR PREMIUM GRANTED VOLUNTARILY ........ AS A MATTER OF GRACE AND WITHOUT CONSIDERATION OR OBLIGATION'. THE REVENUE AUTHORITIES ERRED IN EMPHASIZING THAT BONUS HAS BEEN PAID TO PE RSONS DIRECTLY INTERESTED AND CONTROLLING THE INTERESTS O F THE ASSESSEE COMPANY, AS THE PAYMENT OF BONUS WAS IN NO WAY A SH ARING OF PROFITS OF THE COMPANY BUT AN ACKNOWLEDGMENT OF REM UNERATION DUE TOWARDS SERVICES RENDERED TO THE ASSESSEE BY PE RSONS RESPONSIBLE FOR THE GROWTH, PROFITABILITY, BRANDING AND DAY TO DAY FUNCTIONING. IT WAS FURTHER SUBMITTED THAT THE ASS ESSEE DEDUCTED TAXES AT SOURCE OF RS, 2,62,652/- FROM THE AMOUNTS PAID TO THE DIRECTOR SHAREHOLDERS AT THE RATE OF 30.9% AND THAT SUCH BONUS HAS ALSO BEEN INCLUDED AS INCOME IN THE HANDS OF TH E RECIPIENTS ITA NO. 2607/BANG/2018 PAGE 9 OF 15 IN THEIR PERSONAL TAX ASSESSMENT. THERE WAS THEREFO RE NO INTENTION ON THE PART OF THE ASSESSEE OR THE DIRECT OR SHAREHOLDERS TO EVADE TAX. SINCE THE AMOUNT HAS A LREADY BEEN TAXED IN THE HANDS OF THE COMPANY, BY DISALLOWING T HE SAME AS NOT AN ALLOWABLE EXPENDITURE, THE SAME CANNOT BE AD DED IN THE HANDS OF THE DIRECTOR. RELIANCE WAS PLACED ON THE D ECISION OF THE ITAT MUMBAI IN THE CASE OF MRS BAKHTAWAR B DUBASH V DCIT, CENTRAL MUMBAI 2009-TIOL-288-ITAT-MUM . IT IS WELL-SETTLED LEGAL PROPOSITION OF TAXATION THAT NO INCOME SHOULD BE TAX DOUBLED THOUGH THE RECIPIENT IS CHANGED AS HELD BY THE ITAT MUMBAI BENCH IN THE CASE OF SSKI INVESTOR SERVICES PVT LTD V DCIT, CENTRAL MUMBAI 120091 34 SOT 412 (ITAT[MUM]) . THE LD. AR FURTHER RELIED ON THE FOLLOWING DECISIONS:- - CIT V. CAREER LAUNCHER INDIA LTD., 358 ITR 179 (DEL) - CIT VS. CONVERTECH EQUIPMENTS (P) LTD., (2013) 081 DTR 0409 - CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) P. LTD. V. DCIT, 376 ITR 183 (DEL) - AMD METPLAST P. LTD. V. DCIT 314 ITR 563 (DEL) 9. THE LD. AR THUS SUBMITTED THAT PAYMENT OF BONUS TO DIRECTOR SHAREHOLDERS HAS BEEN MADE ACCORDING TO TE RMS OF APPOINTMENT OF DIRECTORS DULY SUPPORTED BY BOARD RE SOLUTION AND THE PAYMENT OF REMUNERATION ALONG WITH BONUS PA ID TO DIRECTOR SHAREHOLDERS IS COMMENSURATE WITH THE QUAL IFICATION AND EXPERIENCE OF THE DIRECTORS VIZ., MS. NAMRATA SHILP I AND MS. UMADEVI S.Y. IT WAS SUBMITTED THAT THESE TWO PERSO NS ACTIVELY ITA NO. 2607/BANG/2018 PAGE 10 OF 15 PARTICIPATED IN THE MANAGEMENT OF THE COMPANY AND F ACILITATED THE RUNNING OF BUSINESS OF ASSESSEE FIRM ON PROFITA BLE LINE. 10. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT TH E AO HAS CLEARLY BROUGHT ON RECORD THAT THE 2 DIRECTORS TO W HOM THE BONUS HAS BEEN PAID ARE THE SHARE HOLDERS OF THE ASSESSEE COMPANY WHO HOLD THE ENTIRE SHARE HOLDING OF THE COMPANY BE TWEEN THEM IN EQUAL RATIO. ALSO, THE ASSESSEE COMPANY HAS SUB STANTIAL PROFITS. NO SPECIFIC CASE OF PAYMENT OF BONUS IN RE LATION TO ANY SERVICES RENDERED BY THE SAID DIRECTORS HAS BEEN BR OUGHT ON RECORD EVEN DURING THE COURSE OF APPEAL. THE AO HAS BROUGHT ON RECORD THAT OUT OF RS.18,65,605/- DISTRIBUTED AS BO NUS, RS.17,00,000/- CONSTITUTES THE AMOUNT DISBURSED TO THE SAID 2 SHARE HOLDER DIRECTORS, WHO IN TURN, CONSTITUTE THE ENTIRE SHARE HOLDING OF THE COMPANY AND A PALTRY SUM OF RS.1,65, 605/- HAS BEEN DISTRIBUTED AMONG 10 OTHER EMPLOYEES, SHOWING THAT THIS AMOUNT IS COVERED BY THE PROVISION OF SECTION 36(1) (II) AND NOT ALLOWABLE. THE CLAIM OF THE ASSESSEE THAT TAXES HAV E BEEN PAID BY THE SHARE HOLDERS TREATING THE SAID PAYMENT AS R EMUNERATION WILL NOT SATISFY THE DEFAULT POINTED OUT AS THE ASS ESSEE WOULD HAVE PAID 30% TAX PLUS SURCHARGE ETC., PLUS DIVIDEN D DISTRIBUTION TAX @ 15% U/S 115-O, (AS THE SAID AMOUNT IS SIMPLY A DISTRIBUTION OF PROFITS IN THE NATURE OF DIVIDEND). WHEREAS, THE INDIVIDUAL DIRECTORS HAVE PAID TAX ONLY AT THE SLAB RATES APPLICABLE. ITA NO. 2607/BANG/2018 PAGE 11 OF 15 11. THE LD. DR RELIED ON THE ORDER OF THE SPECIAL B ENCH OF ITAT MUMBAI, IN THE CASE OF DALAL & BROACHA STOCK BROKING (P) LTD VIDE ORDER IN ITA NO.5792/MUM/2009 DATED 22/6/2011 , HAS HELD THAT SUCH PAYMENTS ARE NOT ALLOWABLE U/S 36(1) (II) READ WITH SECTION 37(1). 12. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, BONUS TO THE TUNE OF RS.1 7 LAKHS HAS BEEN PAID TO TWO DIRECTOR SHAREHOLDERS, VIZ., MS. N AMRATA SHILPI AND MS. UMADEVI S.Y., AT RS.8.5 LAKHS EACH. THIS I S AUTHORIZED BY THE BOARD RESOLUTION DATED 12.04.2012 WHICH IS P LACED ON RECORD AT PAGE 33 OF THE PB. THESE TWO PERSONS ARE DULY QUALIFIED AND EXPERIENCED AS FOLLOWS:- DIRECTORS' PROFILE (REFER WWW.ECANDOR.COM) UMADEVI S Y IS A PIONEER IN THE PAYROLL OUTSOURCIN G SPACE AND HAS OVER 23 YEARS OF EXPERIENCE IN SETTING UP AND R UNNING HR & ACCOUNTING FUNCTIONS WITH A STRONG FOCUS ON PAYROLL & STATUTORY COMPLIANCE. HAVING SPENT OVER 10 YEARS IN THE COMPL EX ENVIRONMENT OF BPL LTD. HER STRONG ENTREPRENEURIAL SPIRIT AND DEEP INSIGHT ON THE POTENTIAL OPPORTUNITY ENCOURAGE D HER TO SET UP HER OWN FIRM IN THIS SPACE. SHE HAS BEEN A PART OF THE TRANSITION PERIOD OF HANDLING MANUAL TO COMPUTERIZED PROCESSES AND IS SOUGHT OUT BY MULTIPLE PAYROLL SOFTWARE COMPANIES T O PROVIDE THOUGHT LEADERSHIP IN THIS SPACE. UMA HAS DONE HER M.COM. & IS A 1ST RANK HOLDER AND GOLD MEDALIST IN BUSINESS TAXATION FROM MYSORE UNIVERSIT Y N. SHILPI BRINGS OVER 21 YEARS OF CROSS FUNCTIONAL EXPERIENCE IN BUSINESS PROCESS MANAGEMENT, QUALITY CONTROL, KNOWL EDGE MANAGEMENT, BUSINESS DEVELOPMENT AND WEB SOLUTIONS ACROSS COMPANIES LIKE LG, STAR AND INDIAINFO. WITH HER PRE VIOUS EXPERIENCE AS MANAGEMENT REPRESENTATIVE RESPONSIBLE FOR ISO ITA NO. 2607/BANG/2018 PAGE 12 OF 15 9001 FOR INDIA INFO SHE BRINGS A STRONG PROCESS FOC US TO THE ORGANIZATION, AND HAS CREATED A ROBUST AND CONSISTE NT SERVICE DELIVERY FRAMEWORK. NAMRATA HAS GRADUATED FROM LADY SHRI RAM, DELHI UNI VERSITY, HAS DONE HER MBA FROM SPICER MEMORIAL COLLEGE PUNE, ANDREWS UNIVERSITY, MICHIGAN. 13. THERE IS NO DISPUTE THAT THESE TWO DIRECTORS PA RTICIPATED IN THE DAY TO DAY AFFAIRS OF ASSESSEE COMPANY. AS PER BOARD RESOLUTION, THESE DIRECTORS ARE ENTITLED FOR SALARY OF RS.7,87,500 PER YEAR IN ADDITION TO RS.8.5 LAKHS BONUS. THE SA LARY WAS PAID MONTHLY AND THE BONUS WAS PAID AT THE END OF THE YE AR WHICH IS SUBJECT TO TAX. IT WAS DECIDED IN THE BOARD MEETIN G THAT BY ADOPTING THAT MODE OF PAYMENT, THERE WOULD BE NO LI QUIDITY PROBLEM TO THE ASSESSEE COMPANY. THE LOWER AUTHORI TIES DISALLOWED THE SAID AMOUNT ON THE REASON THAT THESE PAYMENTS ARE NOT ALLOWABLE U/S. 36(1)(II) R.W.S. 37(1) OF TH E ACT, WHICH WAS ALSO SUPPORTED BY THE ORDER OF MUMBAI SPECIAL BENCH IN THE CASE OF DALAL & BROACHA STOCK BROKING (P) LTD. (SUPRA) . 14. HOWEVER, THERE ARE HIGH COURT DECISIONS IN THE CASE OF CIT V. CAREER LAUNCHER INDIA LTD. (SUPRA), CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) P. LTD. (SUPRA) AND AMD METPLAST P. LTD. (SUPRA) WHEREIN IT WAS HELD AS FOLLOWS:- CAREER LAUNCHER INDIA LTD. (SUPRA) HELD, THAT IT WAS NOT DISPUTED REGARDING BONUS (A) THAT THE PAYMENT WAS SUPPORTED BY BOARD RESOLUTIONS, AND (B) THAT NONE OF THE DIRECTORS WOULD HAVE RECEIVED A LESSER AMOUNT O F DIVIDEND THAN THE BONUS PAID TO THEM, HAVING REGARD TO THEIR SHAREHOLDING. ITA NO. 2607/BANG/2018 PAGE 13 OF 15 FURTHER, THE DIRECTORS ARE FULL-TIME EMPLOYEES OF T HE 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 T HE SALARY PAID TO THEM AND WAS IN NO WAY RELATED TO THEIR SHAREHOL DING. IT WAS DEDUCTIBLE UNDER SECTION 36(1)(II). CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) P. LTD. (SUPRA) HELD, THAT THE BONUSES PAID TO THE TWO SHAREHOLDER DIRECTORS IN THE PRECEDING TWO FINANCIAL YEARS WERE IN THE RATIO OF 60-65 PER CENT : 40-35 PER CENT EVEN THOUGH THEIR SHAREHOLDIN G WAS 1:1. THE BALANCE-SHEET OF THE ASSESSEE PLACED ON RECORD ALSO INDICATED THAT THE TWO SHAREHOLDERS ALSO HELD DIRECTORIAL POSITION S IN THE ASSESSEE. THE DEDUCTIONS CLAIMED BY THE ASSESSEE U NDER SECTION 36(1)(III) OF THE ACT IN RESPECT OF THE BONUSES PAI D TO ITS SHAREHOLDER-EMPLOYEES WAS ALLOWABLE. AMD METPLAST P. LTD. (SUPRA) HELD, ALLOWING THE APPEAL, THAT A WAS THE MANAGING DIRECTOR AND IN TERMS OF THE BOARD RESOLUTION WAS ENTITLED TO RE CEIVE COMMISSION FOR SERVICES RENDERED TO THE COMPANY. I T WAS A TERM OF EMPLOYMENT ON THE BASIS OF WHICH HE HAD RENDERED SERVICE. ACCORDINGLY, HE WAS ENTITLED TO THE AMOUNT. COMMIS SION WAS TREATED AS A PART AND PARCEL OF SALARY AND TAX HAD BEEN DEDUCTED AT SOURCE. A WAS LIABLE TO PAY TAX ON BOTH THE SALARY COMPONENT AND THE COMMISSION. THE PAYMENT OF DIVIDEND WAS MADE I N TERMS OF THE COMPANIES ACT, 1956. THE DIVIDEND HAD TO BE PA ID TO ALL SHAREHOLDERS EQUALLY. THIS POSITION COULD NOT BE D ISPUTED BY THE REVENUE. DIVIDEND WAS A RETURN ON INVESTMENT AND N OT SALARY OR PART THEREOF. 15. IN THE PRESENT CASE, AS DISCUSSED EARLIER, THE PARTNERS ARE DULY QUALIFIED AND THEY HAVE PARTICIPATED IN THE DA Y TO DAY AFFAIRS OF THE ASSESSEE COMPANY AND PAYMENT OF BONUS IS DUL Y AUTHORIZED BY THE BOARD RESOLUTION. TAKING ALL THE SE FACTS INTO CONSIDERATION, THE BONUS WAS PAID IN ADDITION TO SA LARY AS A ITA NO. 2607/BANG/2018 PAGE 14 OF 15 REWARD FOR SERVICES RENDERED BY THE TWO DIRECTORS T O THE ASSESSEE COMPANY AND IT WAS IN NO WAY RELATED TO TH EIR SHARE HOLDINGS IN THE ASSESSEE COMPANY. FURTHER, IT ALSO CANNOT BE CONSIDERED AS A DIVIDEND PAYMENT IN DISGUISE. HAVI NG REGARD TO THEIR QUALIFICATION & EXPERIENCE AND PARTICIPATION IN THE MANAGEMENT OF THE ASSESSEE COMPANY, THE PAYMENT OF BONUS HAS BEEN MADE AS PART OF SALARY IN TERMS OF BOARD R ESOLUTION WHICH WAS LINKED TO THE SERVICES RENDERED BY THEM. ACCORDINGLY, IN MY OPINION, IT SHOULD BE ALLOWED AS A DEDUCTION WHILE COMPUTING THE INCOME OF THE ASSESSEE. THIS ISSUE W AS CONSIDERED BY THE JUDGMENTS CITED SUPRA AS PER WHICH, WHEN BONUS HAS BEEN PAID TO THE DIRECTORS FOR THE SERVIC ES RENDERED AND AS PART OF A PAYMENT OF EMPLOYMENT WHICH IS TO BE ALLOWED U/S. 36(1)(II) OF THE ACT. THAT BEING SO, I FIND M ERIT IN THE ARGUMENT OF THE LD. AR AND ACCORDINGLY I DIRECT THE AO TO ALLOW THE CLAIM OF ASSESSEE FOR PAYMENT OF BONUS AS DEDUC TION WHILE COMPUTING THE INCOME OF ASSESSEE. 16. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS 9 TH DAY OF JANUARY, 2019. SD/- ( CHANDRA POOJARI ) A CCOUNTANT MEMBER BANGALORE, DATED, THE 09 TH JANUARY, 2019. / D ESAI S MURTHY / ITA NO. 2607/BANG/2018 PAGE 15 OF 15 COPY TO: 1. APPELLANT 2. RE SPONDENT 3. CIT 4 . CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.