Facts of the Case

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

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

  • Bonus of ₹1 crore each was paid in AY 2011–12
  • Bonus of ₹1.5 crore each was paid in AY 2014–15

The Assessing Officer disallowed the bonus under Section 36(1)(ii), holding that the payments were made to avoid dividend distribution tax and were effectively dividends in disguise.

The CIT(A) and ITAT upheld the disallowance, leading to the present appeal before the Delhi High Court.

Issues Involved

  1. Whether bonus paid to shareholder-directors is allowable as a deduction under Section 36(1)(ii) of the Income Tax Act.
  2. Whether such bonus payments constitute disguised dividends intended to avoid tax liability.
  3. Whether consistency in earlier years’ allowance binds the Revenue authorities.

Petitioner’s Arguments

  • The bonus was paid as part of remuneration for services rendered and was duly approved by board resolutions.
  • Similar payments had been allowed in previous years; hence, consistency should be maintained.
  • The directors declared the bonus as salary under Section 15 and paid tax at the highest slab.
  • Disallowance results in double taxation—once in the hands of the company and again in the hands of the directors.
  • Reliance was placed on judicial precedents including:
    • CIT v. Career Launcher India Ltd.
    • AMD Metplast Pvt. Ltd. v. DCIT
    • Controls & Switchgears Contractors Ltd.
    • CIT v. Bony Polymers (P) Ltd.

Respondent’s Arguments

  • The company had only two shareholders-directors; hence, payments to them were essentially distribution of profits.
  • The bonus was a device to reduce taxable profits and avoid dividend distribution tax.
  • The issue is settled in law, and no substantial question of law arises.

Court’s Findings / Order

  • Section 36(1)(ii) prohibits deduction where bonus/commission would otherwise have been paid as dividend.
  • The test is:
    If the payment had not been made as bonus, would it have been distributed as profit/dividend?
  • The company had only two directors/shareholders receiving the entire amount.
  • No evidence of employment terms or special services justifying such bonus payments.
  • The payments were effectively in lieu of dividends.
  • The judgments in AMD Metplast Pvt. Ltd. and Career Launcher India Ltd. were distinguishable on facts.
  • No substantial question of law arose under Section 260A.

Final Order: Appeals dismissed; disallowance of bonus upheld.

Important Clarification

  • Bonus/commission to directors is allowable only when it is genuinely linked to services rendered under employment terms.
  • Where such payments are a substitute for dividend distribution, Section 36(1)(ii) disallows deduction.
  • The case reinforces the anti-tax avoidance intent of the provision.

Sections Involved

  • Section 36(1)(ii) – Deduction of bonus/commission
  • Section 28 – Profits and gains of business
  • Section 15 – Income from salary
  • Section 260A – Appeal to High Court

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


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