• Tue. Nov 29th, 2022

Employee bonus/commission deductible from business income: ITAT

ByChad J. Johnson

Oct 29, 2022

The Income Tax Appeal Tribunal (ITAT), Delhi Bench, in an appeal filed before it, recently ruled that bonuses/commissions payable to employees are deductible from business income.

The above observation was made by the Tribunal, when an appeal was filed before it by an assessee against the order dated 05.02.2019, of the Learned Commissioner of Income Tax (Appeals)-15, Delhi , for the 2013-14 tax year. .

The facts of the case being that the assessed person was a resident person who for the tax year in dispute had filed his tax return on 28.09.2013 declaring an income of Rs.13,50,327/, he was found by the appraiser during the appraisal process while verifying the tax return and financial statement that the appraisee was engaged in the business of providing job placement and contract labor services, as well as providing manpower solutions as needed.

Further going through the audit report, he found that the assessee had claimed a deduction of Rs.27,26,550/-, being a bonus paid to the employees of the assessee.

And believing that this payment is in violation of the provisions of section 36(1)(ii) of the Act, the valuation officer had refused the amount, this refusal having also been confirmed by the learned commissioner (appeals ), leaving the aggrieved assessee to prefer the present appeal to the Tribunal.

The ground for the assessee’s appeal being the disallowance of Rs.27,26,550/-, which was a deduction claimed under Section 36(1)(ii) of the Income Tax Act 1961 income, for bonuses paid to employees and workers, it was submitted by counsel for the assessee that departmental authorities had erroneously concluded that said deduction should be claimed in violation of section 36(1)( ii) of the Act, and further that in the auditor’s report, the auditor in column 16(1)( ) had incorrectly stated that these same sums were otherwise payable to the employees in the form of profits and dividends.

Although he further submitted for assessment that it was by clinging to this inadvertent error that the disallowance was made by the department and that

the payment of a bonus to the employees cannot be equated with profits or a dividend to be paid, the Department’s representative relied heavily on the observations of the evaluating officer and the commissioner (appeals).

Hearing the opposing arguments of both parties and reviewing the documents available in the file, Saktijit Dey, the judicial member of the Tribunal, observed:

“It is observed, in column no. 16(a) of the auditor’s report, that the auditor mentioned the amount of Rs.27,26,550/- as otherwise payable to him as profits or dividends. And it was on the basis of this note from the Auditor that the Assessing Officer refused the deduction claimed by the assessee in respect of the employee bonus.

“On reading the challenged order of the learned commissioner (appeals), it is observed that although the assessee maintained that it was an error made by the auditor in mentioning the deduction claimed in column no. 16(a) of the auditor’s report instead of para. the mistake. However, before me, the assessee provided a certificate dated February 15, 2019 issued by the same auditor acknowledging the error in reporting the bonus paid to the employee, and of course the assessee filed the document aforementioned as additional evidence,” he added. added.

And concluding his observation, he commented:

“In the case of M/s. Dalal Broacha Stock Broking Pvt. Ltd., the Special Division of the Tribunal, after analyzing the provisions of section 36(1)(ii) of the Act, held that any amount paid to an employee as a bonus or commission for services rendered must be allowed as a deduction because the reasonableness of the payment or the adequacy of the services rendered by the employee are not relevant factors in deciding the eligibility of the deduction.

Thus, finally accepting the claim of the assessee, the Tribunal ruled:

“In the above-mentioned case, the bench had held that the invalidating provision of section 36(1)(ii), which provides that ‘if the sum so paid is in lieu of profit or dividend’, only applies ‘to employees who are partners or shareholders In the facts of this appeal, there is no finding that the employees are partners or shareholders of the assessee, and that being the case, the assessee’s claim must be welcomed.”

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Sh. Karam Singh Malik v Income Tax Officer

Counsel for the Appellant: Sh. Suresh Anand

Counsel for the Respondent: Sh. Om Parkash