ITAT allows Rs. 96 lakh bonus deduction to promoter directors citing active involvement and company performance growth

ITAT Mumbai allowed deduction u/s 36(1)(ii) for bonus payments of Rs. 96 lakh each to two promoter directors. The assessee successfully demonstrated that directors with 35 years IT experience were actively involved in day-to-day operations, and bonus was justified by company's 44% turnover increase and 55% sales growth. The tribunal distinguished the case from Dalal Broacha precedent, noting different business circumstances and that performance improvement resulted from directors' dedicated efforts rather than market conditions. The disallowance was deleted and appeal allowed.

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Issues Involved:
1. Disallowance of bonus paid to directors u/s 36(1)(ii).
2. Non-compliance with CBDT instructions regarding scope of scrutiny assessment.
3. Initiation of penalty u/s 271(1)(c) and charging interest u/s 234A, 234B, 234C, and 234D.
4. Denial of physical hearing through video conferencing by learned CIT(A).

Summary:

Issue 1: Disallowance of Bonus Paid to Directors u/s 36(1)(ii)
The assessee challenged the disallowance of Rs. 1,92,00,000/- paid as a bonus to two directors, arguing that the directors had already paid taxes on the bonus, thus disallowance would result in double taxation. The AO disallowed the bonus, reasoning that it should have been paid as dividends, thus treating the bonus as a "colourable device" to avoid tax. However, the Tribunal found that the bonus was paid for services rendered and was not in lieu of dividends, citing the jurisdictional High Court's decision in Loyal Motors Service Co Ltd. The Tribunal concluded that the assessee is entitled to claim the deduction u/s 36(1)(ii) and deleted the disallowance.

Issue 2: Non-Compliance with CBDT Instructions on Scope of Scrutiny Assessment
The assessee claimed that the AO wrongly converted a limited scrutiny into a full scrutiny without appropriate approval, exceeding the scope of limited scrutiny. The Tribunal, in light of the relief granted under Issue 1, left this issue open as per the submission of the learned AR.

Issue 3: Initiation of Penalty u/s 271(1)(c) and Charging Interest u/s 234A, 234B, 234C, and 234D
The Tribunal noted that the levy of penalty u/s 271(1)(c) is premature and the charging of interest u/s 234B and 234C is consequential. Therefore, no separate adjudication was needed for this issue.

Issue 4: Denial of Physical Hearing through Video Conferencing by Learned CIT(A)
Given the Tribunal's findings in respect of Issue 1, this issue was rendered academic.

Conclusion:
The appeal by the assessee was allowed, with the Tribunal deleting the disallowance of the bonus paid to directors and leaving other issues either open or as academic.

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