Facts of the Case

The assessee, SRC Aviation Pvt. Ltd., filed appeals under Section 260A challenging the order of the Income Tax Appellate Tribunal (ITAT) for Assessment Years 2011–12 and 2014–15.

The company had two directors and shareholders, each holding 50% shares. During the relevant assessment years:

  • Bonus of ₹1 crore each (AY 2011–12) and
  • Bonus of ₹1.5 crore each (AY 2014–15)

was paid to both directors.

The Assessing Officer disallowed the bonus under Section 36(1)(ii), holding that the payment was made to avoid dividend distribution tax. This disallowance was upheld by CIT(A) and ITAT.

Issues Involved

  1. Whether bonus paid to shareholder-directors is allowable as deduction under Section 36(1)(ii)?
  2. Whether such payment is actually a distribution of profits (dividend) in disguise?
  3. Whether the High Court can interfere under Section 260A in absence of substantial question of law?

Petitioner’s Arguments (Assessee)

  • Bonus was paid for services rendered and approved via Board resolution.
  • Similar payments were allowed in earlier years, thus consistency should be maintained.
  • Directors declared such bonus as salary income and paid tax at maximum rates.
  • Disallowance leads to double taxation (company + directors).
  • Reliance placed on:
    • CIT v. Career Launcher India Ltd.
    • AMD Metplast Pvt. Ltd. v. DCIT
    • Controls & Switchgears Contractors Ltd. v. DCIT
    • CIT v. Bony Polymers (P) Ltd.

Respondent’s Arguments (Revenue)

  • Bonus paid to the only two shareholder-directors is effectively dividend in disguise.
  • Payment aimed at reducing taxable profits and avoiding dividend distribution tax.
  • Section 36(1)(ii) prohibits such deductions.
  • No substantial question of law arises for High Court interference.

Court Findings / Judgment

The Delhi High Court dismissed the appeals and upheld the disallowance.

Key findings:

  • Section 36(1)(ii) intends to prevent tax avoidance by disguising dividends as bonus.
  • The test:

If bonus had not been paid, would it have been distributed as dividend?

  • In this case:
    • Only two shareholders/directors existed.
    • Entire amount was paid to them.
    • No evidence of employment terms or specific services rendered.

Thus, the payment was held to be profit distribution in the guise of bonus, hence not allowable deduction.

Further, the Court held:

  • ITAT is final fact-finding authority.
  • No substantial question of law arose under Section 260A.

Important Clarifications

  • Bonus to directors is allowable only when linked to services rendered and employment terms.
  • Payments resembling profit distribution will be disallowed under Section 36(1)(ii).
  • Mere taxation in directors’ hands does not validate deduction at company level.
  • Consistency principle does not apply where facts indicate tax avoidance.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:1342-DB/DIS13042022ITA4922019_193903.pdf


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