Bonus / Commission to Employee Deductible from Business Income: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has recently in an appeal filed before it, held that bonus/commission payable to employees are deductible from business income.

The aforesaid observation was made by the Tribunal, when an appeal was preferred before it by an assessee as against order dated 05.02.2019, of the learned Commissioner of Income-tax (Appeals)-15, Delhi, for the assessment year 2013-14.

The facts of the case being that the assessee was a resident individual, who, for the assessment year under dispute, had filed his return of income on 28.09.2013 declaring income of Rs.13,50,327/, it was found by the assessing officer in the course of the assessment proceedings while verifying the return of income and the financial statement  that the assessee was engaged in the business of providing placement and contract labour services, as well as providing manpower solutions as per requirement.

Further on perusing the Audit Report, he found that the assessee had claimed deduction of Rs.27,26,550/-, being bonus paid to the assessee’s employees.

And holding the view that such payment is in violation of the provisions contained under section 36(1)(ii) of the Act, the Assessing Officer had disallowed the amount, wherein such disallowance made, was also sustained by learned Commissioner (Appeals), leaving the assesse aggrieved to prefer the instant appeal before the Tribunal.

The ground of the assessee’s appeal being the disallowance of Rs.27,26,550/-, which was deduction claimed under section 36(1)(ii) of the Income-tax Act, 1961, for bonus paid to employees and workers, it was submitted by the counsel for the assessee that the Departmental Authorities had erroneously concluded the said deduction to be claimed in violation of section 36(1)(ii) of the Act, and further that in the Audit Report, the Auditor in column 16(1) had erroneously mentioned  the said same to be otherwise payable to the employees as profits and dividends.

While he further submitted for the assesse that it was by latching on to this inadvertent mistake that the disallowance had been made by the department and that

the payment of bonus to employees cannot be equated with profits or dividend payable, the Departmental Representative strongly relied upon the observations of the Assessing Officer and the Commissioner (Appeals).

Hearing the opposing contentions of both the sides and perusing the materials available of record, Saktijit Dey, the Judicial Member of the Tribunal observed:

“It is observed, in column no. 16(a) of the Audit Report, that the Auditor has mentioned the amount of Rs.27,26,550/- as otherwise payable to him as profits or dividend. And it is by relying upon this note of the Auditor, that the Assessing Officer has disallowed the deduction claimed by the assessee on account of bonus to employees.”

 “On a perusal of the impugned order of learned Commissioner (Appeals), it is observed that though the assessee contended that it is a mistake committed by the Auditor in mentioning the deduction claimed at column no. 16(a) of the Audit Report instead of clause 21(b), the learned Commissioner (Appeals) declined the claim of the assessee on the reasoning that the assessee failed to obtain a certificate from the Auditor acknowledging the mistake. However, before me, the assessee has furnished certificate dated 15th February, 2019 issued by the same Auditor acknowledging the mistake in reporting the bonus paid to the employee, and of course, the assessee has filed the aforesaid document as additional evidence”, he further added.

 And concluding his observation he commented:

“In the case of M/s. Dalal Broacha Stock Broking Pvt. Ltd., the Special Bench of the Tribunal, after analyzing the provisions of section 36(1)(ii) of the Act, has held that any sum paid to an employee as bonus or commission for services rendered, has to be allowed as deduction as the reasonableness of the payment or adequacy of services rendered by the employee are not relevant factors in deciding the allowability of deduction.”

Thus finally allowing the assessee’s claim the Tribunal ruled:

“In the aforesaid case the Bench had held that the disabling provision of section 36(1)(ii), which provides that “if the sum so paid is in lieu of profit or dividend”, applies only to employees who are partners or shareholders. In the facts of the present appeal, there is no finding that the employees are either partners or shareholders of the assesse, and that being the case, the assessee’s claim has to be allowed.”

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