TaxTMI 
TaxTMI 
2019 (1) TMI 1081
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.... the bonus paid was in connection with his employment and not in respect of shares held by Shri Suresh Prabhala and also wrongly distinguishing the decision of Special Bench of ITAT, Mumbai int eh case of Dalal Broacha Stock Broking Ltd". 2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in deleting the disallowance made by the AO, on account of bonus paid by the assessee to Mr. Suresh Prabhala, holding that there were no profits available with the assessee company ignoring the fact that assessee company has offered Rs. 11,92,23,908/- as business profit for AY. 2009-10". 3. Brief facts of the case are that the AO during the course of assessment proceedings noticed that assessee-company has made payment of bonus apart from salary to the Executive Chairman and Director of the company, Shri Suresh Prabhala amounting to Rs.6,66,50,000/-. According to the AO, during the year under consideration, 50% of shares of the assesseecompany were held by Shri Suresh Prabhala, which was transferred to Mount Kellett Capital Management (Mauritius) Ltd. According to AO, the Director's commission/bonus is not allowable expense as per th....
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....er employee i.e., Mr. Prabhala. Initially, even Mr. Raman Sharma held 50% of the share capital which was ultimately transferred by Mr. Prabhala and Mr. Raman Sharma to MK Mauritius and Mount Kellett Holdings LLC, both nonresidential employees. At the time of the bonus was paid to Mr. Prabhala, he was not a shareholder of the Appellant. 2. All shareholder employees to whom commission was paid were relatives. Mr. Prabhala was nowhere connected/related to any of the other shareholders. 3. Payment of commission was linked to the profits earned by the Company. The Company had earned substantial profits in the year in which the commission was paid. Thus, the company had no justifiable reason as to why it had not paid dividend to its shareheloders. The year under consideration, AY. 2009-10 was the first year of business. The Appellant had no distributable profits for the year to enable it to pay dividend. There was no possibility that the Appellant would have distributed dividend in the absence of distributable profits. Further, the bonus amount was determined on the basis of various parameters such as qualifications and experience of employees, industry trends, ro....
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....contentions before us also was that the provisions of Section 36(1)(ii) will not be applicable in the present case in the given facts and circumstances. 4.1. We have gone through the provisions of Companies Act, 1956 cited by Ld. Counsel i.e., Section 371, 372 and 205 which states that the dividend is to be paid only out of profits. We also find that the assessee being the first year of business recruited employees from other organisations based on educational qualifications, past experience of such employees and the relevant details are as under: Name of the employee and date of joining Date of joining and position Qualification Job/sector focus Mr. Prabhala Prabhala Managing Director MBA, IIM Calcutta, Major in Finance He is the Managing Director of the Company. He is responsible for overlooking the overall activities of the company. Shiv Nandan Negi Associate Director MBA, IIM Ahmedabad Delhi Institute of Technology, Delhi University He focuses on retail, cement education and industrial appliances sectors. Nikhil Banerjee Associate Director MBA, IIM Calcutta, Major in Finance Shriram College of Commerce (SRCC) Delhi University H....
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.... Vs. Addl. CIT(supra), decided the issue vide para 18 to 23 as under: "18. Under the provisions of section 36(1)(ii) of the Act, it is provided that the bonus or commission paid would be allowed as deduction without any restriction subject to the provisions of section 43B of the Act, wherein it is provided that the said amount would be allowed as deduction in the year of payment. There is another restriction to the said allowability of deduction that in case unreasonably excessive payments are made to relatives or connected persons, the same could be disallowed under the provisions of section 40A(2) of the Act. It may be put on record that the CIT(A) had disallowed the claim of the assessee on the premise that where dividend was to be paid out of the profits of the assessee company, the payment of commission to the directors was hit by the provisions of section 36(1)(ii) of the Act. The CIT(A) has not held the payment made to the directors to be excessive in view of the provisions of section 40A(2) of the Act, which is a safeguard for controlling the payment to relatives or connected persons. Under the amended provisions of section 36(1)(ii) of the Act, there is no restric....
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....td. v. Dy. CIT [2015] 232 Taxman 20/56 taxmann.com 417, wherein similar issue arose in respect of payment of commission and its allowability as deduction under section 36(1)(ii) of the Act and its denial on the premise that the same was paid to the shareholders in view of dividend with the objective of avoiding taxes. The Hon'ble Delhi High Court held as under:- "43. The final question that arises for this Court's determination in the present appeal is the assessee's claim for deduction under Section 36(1)(ii) of the Act in respect of the bonus paid by it to its two shareholders - Ashish Dhawan and Kunal Shroff. The lower authorities denied such claim, holding that the bonus was paid to the shareholders in lieu of dividend with the objective of avoiding tax. Such inference was drawn from two facts: a) the bonus paid was in proportion of their shareholding in the assessee company, i.e. 2:1; and b) no dividend had been declared by the assessee. However, a perusal of an excerpt from the DRP's order dated 21.09.2012 quoted by the AO in his order dated 19.10.2012 contradicts both these facts: a) bonus was not paid in the ratio of 2:1 and b) the assessee....
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....equally. It was thus, held that if the commission was paid for actual services rendered, provisions of section 36(1)(ii) of the Act would not apply. 21. Another aspect to be kept in mind while allowing the claim of the assessee is that where the commission has been paid to the directors and the taxes have been paid by the said directors on its income, then no disallowance is warranted in the hands of the assessee company. The Hon'ble Bombay High Court in Indo Saudi Services (Travel) (P.) Ltd's. case (supra) have laid down the proposition that where the payee has been paid incentive commission, then there is no tax avoidance and hence, no disallowance under section 40A(2)(b) of the Act. Applying the same simili to the facts of the present case, the assessee company had paid the commission to the directors, who in turn had declared the same in their individual return of income, on which taxes have been paid and applying the simili laid down by the Hon'ble Bombay High Court in such circumstances, no disallowance was warranted in the hands of payer as there was no attempt to avoid tax. 22. The CIT(A) while disallowing the claim of assessee had fou....
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....he shareholders viz: a. Mr. P. Dalal b. Mr. N. Dalal c. Mr. V. Dalal Employees who wee not shareholders at time of payment of bonus, viz: a. Mr. Suresh Bhabhala b. Mr. Shiv Nandan Negi c. Mr. Nikhil Banerjee d. Mr. N. Venkitraman 3. Whether sufficient profits were available at the time of payment of bonus/commission: Yes. Therefore assessee was able to declare dividend No (Loss of Rs. 13,52,63,768/- as per draft accounts as of January 2009 - Pg No. 28 of FPB) and therefore assessee was not able to declare dividend 4. Relationship of employees/directors inter-se to whom bonus/commission was paid All directors were relatives Mr. Suresh Prabhala was not related other directors or connected to other shareholders 5. Period of holding shares All three shareholders held the entire share capital throughout the year (i.e. at the time of payment of commission as well) Mr. Suresh Prabhala (promoter director) held shares only for a period of 11.08.08 to 16.09.08 (37 days only) and not at the time of payment of bonus. 6. Relevant time of payment of bonus/commission Commission was paid after the year end profits were determined Bonus was paid du....
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....eturn of income for the AY. 2009-10. 8. The AO during the course of assessment proceedings has not allowed the credit for TDS amounting to Rs.1,33,45,316/-, but allowed credit only for an amount of Rs. 2,23,19,530/-. Therefore, short credit for TDS was granted by AO amounting to Rs. 1,31,32,184/-. Aggrieved, assessee preferred an appeal before the CIT(A). CIT(A) also directed the AO to grant correct credit for TDS after due verification, vide para 5.4.2 as under: "5.4.2. Having regard to the facts and circumstances of the case, the AO is directed to grant correct credit for TDS to the appellant after due verification in accordance with CBDT Instruction No. 01/2012 dated 02.02.2012 and CBDT Instruction No. 04/2012 dated 25.05.2012 read with CBDT Instruction No. 05/2013 dated 08.07.2013 issued vide F.No. 275/03/2013 - IT(B). Ground of Appeal No. 3 is accordingly disposed off". Aggrieved, assessee preferred second appeal before the Tribunal. 9. We have heard rival contentions and gone through the facts and circumstances of the case. Before us, Ld. Counsel filed reconciliation with accounts and return of income and also summary of TDS credit, which is as under: FPB....
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....e assessees who do not do it should follow Section 199 and Rule 37BA, retain the TDS certificates and claim credit in the assessment year in which such income is returned for assessment. 12. The finding of the Tribunal that there is no provision in the Income Tax Act or Rules to defer credit of tax in assessments based on TDS certificates obtained is really incorrect because sub-sections (1) and (3) of Section 199 read with Rule 37BA of the Income Tax Rules specifically authorise the assessee to retain TDS certificates and to produce it and claim credit in the year in which income on which recovery of tax made is returned for assessment. As of now, the Act does not provide that assessees should return the income for assessment in the assessment year following the previous year in which tax is recovered at source and TDS certificate is issued by the payer and if so provided assessment and credit of tax will go together which will avoid botheration for the assessees as well as for the Departmental Officers. In our view, the provisions contained in sub-sections (1) and (3) of Section 199 read with Rule 37BA of the Income Tax Rules serve a purpose because if income is not asse....