The Delhi ITAT, in a significant ruling, held that the remuneration paid to Director of company in commensuration with his experience which has no bearing on his shareholding, cannot be construed as ‘dividend’ under the Income Tax Act.
The assessee company engaged in the business of Management Consultancy Services, filed its return for relevant AY. During assessment, the AO observed that assessee company had paid salary and other allowances to its Directors as per the Board Resolutions. It was found that the amount was paid as bonus to the Director who is also a major share holder of more than 10%.
The AO further noted that as per provisions of section 36(1)(ii), profit or dividend should not be paid in the form of bonus. He further observed that the assessee company had not justified as to what extra ordinary services had been given by the Director for which bonus had been claimed and the same had resulted to the assessee company into less taxable income by this amount. Accordingly, the AO disallowed Rs. 1,77,79,000/- on account of ‘bonus’ and added the same to the income of the assessee.
Referring the relevant judicial pronouncements, the Tribunal noted that there are certain limitations and restrictions in the matter of payment of dividend and discretion of the company either to pay or not to pay dividend cannot be assumed.
“The AO has not brought any material on record to substantiate this allegation that the amount in question was actually payable as dividend. In fact, Mr. Sanjay Mehta was having only 11% shareholding in the assessee company and if Rs.1.78 crores had been paid as dividend (and not as bonus) to him, the assessee would have had to distribute dividends to tune of Rs. 16.16 crores, whereas it was having loss of Rs. 1.17 crores during the year and accumulated profits of Rs.6 crores only. This is because, shareholding of Mr. Sanjay Mehta was 11% only and all the equity shareholders have equal rights. Mr. Sanjay Mehta is stated to be a Chartered Accountant by profession and a senior consultant with many years of experience. Assessee further submitted that bonus was a variable remuneration for professional services rendered and amount of bonus was decided by the Board prior to the commencement of the financial year i.e. vide Board Resolution dated 10th March, 2010. We further find that it was actually paid during the year, on 31st August, 2010 and 30th November, 2010 and not post closing of the year. No bonus / dividend was paid to the remaining major shareholders holding 89% equity,” the Tribunal said.
