The Delhi High Court has ruled against the Assessee in a case involving the payment of bonuses by a private limited company to its directors. The company had paid a bonus of Rs. 1 Cr. each to its two directors, who held 50% of the equity shares each, during the assessment years 2011-12 and 2014-15. The Revenue disallowed the bonuses on the grounds that they were paid to avoid payment of dividend distribution tax. This decision was confirmed by the CIT(A) and the ITAT.
The Assessee submitted to the High Court that the bonuses were paid to the directors in addition to their remuneration and that the amount was declared under “income from salary” by the directors in their tax returns and taxed at the highest rate. The company also argued that the remuneration, including the bonuses, was paid based on a board resolution for the services rendered by the directors. The Assessee claimed that the disallowance of the bonuses would result in double taxation since the recipient directors had already paid taxes on the bonuses at the highest slab rate.
The Revenue, on the other hand, submitted that in this case, there were only two directors and shareholders, and therefore, the bonuses were paid solely to avoid taxes and reduce profits.
The High Court noted that it should be slow to interfere with the ITAT’s findings unless a substantial question of law arose or there was evidence of illegality or perversity. The court referred to the Bombay High Court ruling in Loyal Motor Service Company Ltd. v. CIT and noted that the test to determine whether a payment is a bonus or commission is whether, had the payment not been made, it would have added to the profits or dividends of the company. The court also stated that the deduction is only permissible if the payment is made as a bonus or commission for services rendered.
In this case, the court found that there was no evidence that the amount paid was a commission for services rendered or a bonus, nor was there any term of employment or special services provided by the directors. The court distinguished the coordinate bench ruling in CIT v. Career Launcher India Ltd. and noted that in that case, the conclusion was that as long as the bonus or commission was paid for services rendered and as part of the directors’ employment, it was allowable.
The High Court observed that the question of law in this context was settled and that there was no substantial question of law in this case. The court found that the lower authorities had held that the payment of the bonuses or commissions was not allowable as a deduction and, therefore, dismissed the appeals in the absence of any substantial question of law. This decision was in favor of the Revenue.
