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April 21, 2022

Expense on payment of bonus to Directors allowed by HC

by Admin in Income Tax

Expense on payment of bonus to Directors allowed by HC

Facts and Issue of the case

Present appeal has been filed challenging the order dated 25th February, 2020 passed in ITA No. 9626/Del/2019 for the Assessment Year 2015-16.

Learned counsel for the Appellant states that no justification was given by the Respondent/assessee regarding the kind of services rendered to earn such a huge amount of bonus to a person specified under Section 40A(2)(b) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’). He states that no business correlation in terms of business output or growth of business relating to the payment was shown by the Respondent/assessee. He emphasizes that there is a distinction between a corporate entity and its directors. He states that if a huge amount is paid as a bonus to the Directors of a company, the corporate entity itself may not survive. He submits that The Payment of Bonus Act, 1965 prohibits grant of bonus.

Learned counsel for the appellant further states that in view of provisions of Section 36(1)(ii) of the Act, the sum paid to an employee as bonus is allowable only when such bonus or commission has been paid for the services rendered. He states that the ITAT has erred in not appreciating that CIT(A) in its order had distinguished the findings of DRP for the Assessment Year 2013- 14 and observed that “the direction of the DRP has given no finding either from the angle of Bonus Act or section 40A or section 36(1)(ii) nor regarding any correlation between business output and huge payment of bonus. No finding has been given even regarding exigency of making this huge payment in the name of business expenditure. Similar is the case with the CIT(A) ‘s order for A.Y. 2014-15 which has not given any finding as above. It has simply relied on the direction of DRP in earlier years. Therefore, the reliance on these two orders is not sufficient. “

Observation of the court

Having perused the paper book, this Court finds that the disallowances made for similar reasons for the Assessment Years 2013-14 and 2014-15 were directed to be deleted by the DRP as well as CIT(A) and the Appellant had accepted the said decisions.

Undoubtedly, the principles of res-judicata and estoppel are not applicable in taxation matters. However, it has been held that a departure from a finding during the past years would result in a contradictory finding. (See: Commissioner of Income Tax vs. Sridev Enterprises (1991) 192 ITR 165). In fact, in Commissioner of Income Tax vs Excel Industries Ltd (2014) 13 SCC 457, the Court had observed that it was not appropriate to allow reconsideration of an issue for a subsequent assessment year if the same “fundamental aspect” permeates in different assessment years. In any event, the interpretation of Section 36(1)(ii) is fairly well settled.

This Court in AMD Metplast Pvt. Ltd. V. DCIT, (2012) 341 ITR 0563 as well as in CIT v. Career Launcher India Ltd., (2013) 358 ITR 0179 (Delhi) has upheld grant of bonus by companies to its directors. Consequently, this Court is of the view that there is no bar on payment of bonus and the issue whether bonus is to be granted or not is essentially a question of fact.

In the present case, none of the authorities have opined that grant of bonus to the Directors would either endanger the existence of the corporate entity or was prohibited under The Payment of Bonus Act, 1965 or was not proportionate to the services rendered by the respondent-Director.

In fact in the previous assessment years similar payment of bonus to the respondent-Director has been upheld. Consequently, this Court is of the view that consistency of approach, uniformity and certainty must be maintained. Accordingly, this Court is in agreement with the Tribunal’s decision that as no distinguishing feature had been brought to its notice, the direction to delete the disallowance in the previous Assessment Years must be followed.


No substantial question of law arises for consideration in the present appeal and the same is dismissed by the court.


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