The Delhi Bench of the Income Tax Appeal Tribunal (ITAT) ruled that any amount paid to an employee as a bonus or commission for services rendered must be deductible.
The bench of Saktijit Dey observed that the reasonableness of the payment or the adequacy of the services rendered by the employee are not relevant factors in deciding the eligibility of a deduction.
The invalidating provision of section 36(1)(ii) provides that “if the amount so paid is in lieu of a profit or dividend”, it applies only to employees who are partners or shareholders.
The caller/assessed is a resident natural person. For the tax year in dispute, the assessee filed his tax return, declaring an income of Rs.13,50,327. During the appraisal process, the appraiser, while reviewing the tax return and financial statements, found that the appraisee was engaged in providing placement and contract labor services and providing workforce solutions as needed.
Going through the audit report, he found that the assessee had claimed a deduction of Rs. 27,26,550 as bonus paid to employees. Believing that such a payment contravenes the provision of paragraph 36(1)(ii) of the Income Tax Act, he disallowed the amount. The disallowance was upheld by the Commissioner (appeals).
The assessee argued that the department erroneously concluded that the deduction claimed violated paragraph 36(1)(ii). In the auditor’s report, the auditor in column 16(1) erroneously mentioned that the amount was otherwise payable to the employees in the form of profits and dividends. Clinging to the inadvertent error, the disavowal was made. The payment of bonuses to employees cannot be equated with profits or dividends payable.
ITAT found that there was no finding that the employees were partners or shareholders of the assessee.
The court granted the assessee’s request.
Case Title: Sh. Karam Singh Malik v ITO
Reference: ITA No. 4614/Del/2019
Counsel for the Appellant: CA Suresh Anand
Counsel for the Respondent: Sr. DR Om Parkash
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