Facts of the Case

The appellant (Revenue) challenged the ITAT order dated 25.02.2020 for AY 2015–16, contending that the respondent company paid a substantial bonus to a specified person (director) without adequate justification or correlation to business performance.

The Revenue argued that such payments lacked business expediency and were not supported by evidence of services rendered. It further relied on distinctions between corporate entities and their directors and questioned compliance with statutory provisions governing bonus payments.

Issues Involved

  1. Whether bonus paid to directors qualifies as allowable deduction under Section 36(1)(ii)?
  2. Whether such payment falls within disallowance under Section 40A(2)(b) due to lack of justification?
  3. Whether consistency in prior assessment years binds the Revenue?

Petitioner’s Arguments (Revenue)

  • The assessee failed to justify the nature of services rendered for such high bonus payments.
  • No correlation between business growth/output and bonus paid was established.
  • Bonus to directors could effectively be a disguised distribution of profits.
  • Reliance on Section 36(1)(ii) – deduction allowed only when payment is genuinely for services rendered.
  • The ITAT erred by relying on prior orders without independent evaluation.

Respondent’s Arguments (Assessee)

  • Similar bonus payments in earlier assessment years (2013–14 & 2014–15) were accepted by Revenue authorities.
  • The payments were made in the ordinary course of business and for services rendered.
  • No statutory prohibition exists on payment of bonus to directors.
  • Consistency in tax treatment must be maintained unless material changes exist.

Court’s Findings / Order

  • The Court noted that identical disallowances in earlier years had been deleted and accepted by the Revenue.
  • Though res judicata does not strictly apply in tax matters, consistency and uniformity must be maintained.
  • Interpretation of Section 36(1)(ii) is settled: bonus is allowable if paid for services and not merely as profit distribution.
  • Judicial precedents confirm that bonus to directors is not prohibited per se.
  • No evidence showed that the bonus endangered the company or violated statutory provisions.

Final Order:
The appeal was dismissed, holding that no substantial question of law arose.

Important Clarifications by Court

  • Bonus to directors is not barred under law.
  • Determination of allowability is a question of fact, depending on services rendered.
  • Tax authorities must follow consistency across assessment years unless distinguishing factors exist.
  • Payments cannot be disallowed merely on suspicion of being profit distribution without concrete evidence.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:1344-DB/MMH11042022ITA822022_195059.pdf

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