2025 (8) TMI 1171 - AT - Income Tax

Tax authority allows performance bonuses to director-shareholders as deductible business expenses linked to services generating new orders

M/s. Arun Tech Industrial – Services Pvt. Ltd. Versus The ITO, Corporate Ward-1 (1), Chennai.

M/s. Arun Tech Industrial – Services Pvt. Ltd. Versus The ITO, Corporate Ward-1 (1), Chennai. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether payments made to whole-time director-shareholders as 'performance bonus' (Rs. 2 lakhs each) are allowable as business expenditure under the Income Tax Act or are to be disallowed under section 36(1)(ii) as deemed dividends/withdrawals or otherwise non-deductible. 2. Whether the Board resolution (dated 16.08.2016) creating a contingent entitlement to bonus upon achievement of a turnover target is sufficient nexus/evidence to treat the payments as genuine remuneration connected with duties rendered. 3. Whether consequential interest under sections 234B and 234C requires separate adjudication where the primary addition is deleted. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowability of performance bonus paid to whole-time director-shareholders vs. disallowance under section 36(1)(ii) Legal framework: Deductibility of business expenditures requires that payments be for the purpose of business and have a proximate nexus to services rendered. Section 36(1)(ii) (as invoked by the assessing authority) was treated as the statutory provision under which the AO denied the deduction (AO characterised the payments as unacceptable). Precedent treatment: No earlier judicial authorities were cited or relied upon by the Tribunal or parties in the text of the decision. Interpretation and reasoning: The Tribunal examined the corporate records (Board resolution of 16.08.2016), the employment status of the payees (whole-time director-employees holding 50% each), the company's turnover for the relevant year (Rs. 1,26,44,204 for FY 2017-18), the modest monthly remunerations actually drawn by the directors (Rs. 22,000 each), and the factual role of the directors as main technical and administrative resources whose efforts led to new orders and attainment of the turnover target. The Tribunal found a direct link between the declared entitlement (performance bonus contingent upon achieving the turnover target) and the duties performed by the directors, noting that the resolution pre-dated the triggering event and that the attainment of the target followed from services rendered by the directors. Ratio vs. Obiter: Ratio - where a bona fide Board resolution creates a contingent performance-based entitlement and the payees are whole-time directors who materially perform services that effect achievement of the target, payments made pursuant thereto constitute genuine remuneration deductible as business expenditure. Obiter - no general pronouncement was made regarding different factual patterns (e.g., payments without antecedent resolution, or payments to non-executive shareholders). Conclusion: The Tribunal reversed the disallowance and directed deletion of the Rs. 4 lakhs addition, holding the performance bonus allowable because it was directly linked to duties performed and supported by the Board resolution and relevant facts. Issue 2 - Sufficiency of Board resolution and contemporaneous evidence to establish genuineness of contingent bonus Legal framework: Corporate governance records (Board resolutions) can substantiate entitlement to remuneration; deductibility requires evidence of genuineness, antecedent corporate authorization, and nexus to services rendered. Precedent treatment: Not cited; Tribunal relied on documentary and factual matrix. Interpretation and reasoning: The Tribunal placed weight on (a) the Board resolution dated 16.08.2016 which specified the turnover target and bonus quantum, (b) the fact that the resolution pre-existed the relevant financial year and the triggering event, (c) the modest regular remuneration of the directors indicating that the bonus was an additional, performance-linked payment, and (d) factual material showing the directors' active role in obtaining new orders. The temporal gap (15 months) between the resolution and attainment of the target did not undermine genuineness; rather, it evidenced a bona fide conditional scheme that crystallised on achievement of the target. Ratio vs. Obiter: Ratio - an antecedent Board resolution specifying conditions for bonus, coupled with evidence of director involvement in achieving those conditions, is sufficient to treat the subsequent payment as genuine remuneration. Obiter - the Tribunal did not delineate exhaustive documentary standards for all scenarios where resolutions are silent or post-facto. Conclusion: The Board resolution, together with factual evidence of performance and modest base pay, sufficed to establish genuineness of the bonus; therefore, the payment was allowable. Issue 3 - Treatment of consequential interest under sections 234B and 234C after deletion of addition Legal framework: Interest under sections 234B and 234C arises on shortfall/deferral of advance tax and related defaults; such interest is consequential upon assessment additions or adjustments affecting tax liability. Precedent treatment: None cited or considered. Interpretation and reasoning: The Tribunal treated charging of interest under sections 234B and 234C as consequential to the primary assessment figure. Having deleted the primary addition (Rs. 4 lakhs), there was no separate adjudication required on the interest provisions within the scope of the present appeal; the interest calculation follows the revised taxable income as directed. Ratio vs. Obiter: Ratio - where the primary addition is deleted, any interest charged under sections 234B and 234C consequent to that addition is to be recalculated and does not require separate adjudication in the absence of distinct issues. Obiter - the Tribunal did not opine on detailed methodology for recalculation. Conclusion: Interest under sections 234B and 234C is consequential; no separate adjudication was required once the addition was deleted, and interest is to be adjusted accordingly. Aggregate Conclusion / Disposition The Tribunal allowed the appeal, deleted the addition of Rs. 4 lakhs treating the performance bonus as allowable business expenditure linked to duties performed and authorised by a prior Board resolution, and directed consequential adjustment of interest under sections 234B and 234C. The decision rests on the factual nexus between the resolution, services rendered by whole-time director-employees, and attainment of the turnover target; no precedential authorities were applied or overruled.