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Whether the amounts paid to directors in form of Bonus and Commission is an
allowable expenditure to the company?

FACTS OF THE CASE

Assessee: Hamilton & Co. Ltd

Opponent: Deputy Commissioner of Income Tax (DCIT), CIT(A)-4, Kolkata

Assessment year: 2014-15

Assessee have made payments in form of bonus and commission amounting
Rs. 15,00,000/- and Rs. 99,169/-respectively, to the directors namely Mrs. Rekha Jalan and Mr. S.K. Jalan. The payments were made pursuant to agreements and were within the limit that is prescribed law under Companies Act. The Assessing Officer, while making assessment, has disallowed this expenditure amounting to Rs 15,99,169/-.

BASIS OF DISALLOWANCE

The Assessing Officer has disallowed the bonus and commission expenditure specifying that the agreements are generally worked. Hence the Assessing Officer has disallowed the expenditure under section 36(1)(ii) of Income tax act,1961

ISSUE

Whether the amounts paid to directors in form of Bonus and Commission is an
allowable expenditure to the company?


WHAT SOLUTION CAN WE DERIVE REGARDING THIS ISSUE FROM THE COMPANIES ACT, 2013 AND INCOME TAX ACT, 1961?

As per section 197 of Companies Act, 2013, in any financial year, the total managerial remuneration payable by a public company to its directors shouldn’t exceed 11% of net profits of the company for that financial year as computed in the manner specified under section 198 if remuneration to directors shall not be deducted from gross profits. 

However, a public company can pay managerial remuneration more than 11% by passing a special resolution approved by the shareholders and subject to the compliance of schedule V conditions

According to section 36(1)(ii), any sum paid to an employee in the form of bonus or commission for services rendered, provided that such amount would not have been payable to him as profits or dividend if it had not been paid as bonus or commission shall be allowed as deduction under the Income Tax Act, 1961

After referring to the above provisions, the assessee has paid the bonus and commission to the directors within the prescribed limit under law and as per the agreement. It is also noted that the profit and dividend of the company is not being distributed in form of bonus and commission.

JUDGEMENT

The Tribunal was pleased to allow the claim of the assessee on this issue vide order dated 05-05-2021: –

We note that the payments in question was made to Mrs. Rekha Jalan and Mr. S.K. Jalan, who were directors of the assessee company. These payments were made pursuant to agreements for payment of bonus and commission copies of which were furnished to the Revenue. The payments were made within the limit prescribed by law. The CIT(A) upheld the disallowance on the ground that the agreements are generally worked. In our view, this is not a valid ground to make this disallowance. Agreements are to be understood in such a way in which both the parties to the agreement, desired and understood. Section 36(1)(ii) does not apply in this case. Hence, we allow the grounds of the assessee.”

Note: Section 197 is applicable only on Public Limited Companies. Private Limited Companies are out of preview of this section. There is no limit on remuneration for Private Limited Companies, they can pay any amount of remuneration without complying with the provision of Section 197 and Schedule V of the Companies Act, 2013.

Disclaimer: “The information contained herein is only for informational purpose and should not be considered for any particular instance or individual or entity. We have obtained information from publicly available sources, there can be no guarantee that such information is accurate as of the date it is received, or it will continue to be accurate in future.


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