The Assessing Officer disallowed bonus paid to my directors under s.36(1)(ii) only because the company declared no dividend. Is non-declaration of dividend enough?
No. The Delhi High Court held that s.36(1)(ii) is not attracted merely because no dividend was declared; the Revenue must show the bonus would otherwise have been payable as profit or dividend. Where each director would have received MORE as dividend on his shareholding than he was paid as bonus, the payment was not related to shareholding, there was no tax avoidance motive, and the bonus could not be characterised as a dividend payment in disguise.
Decided by the High Court (Sanjiv Khanna J and R.V. Easwar J) on 2012-04-19, reported as ITA No.939/2010, ITA No.911/2011 and ITA No.926/2011, High Court of Delhi; assessment years 2004-05, 2005-06 and 2006-07. It bears on section 36(1)(ii), section 260A of the Income Tax Act 1961, in Deductions & Disallowances and Assessment & Scrutiny matters.
This is the taxpayer's answer to the Mumbai Special Bench in Dalal & Broacha (also in this library), and it is an arithmetical answer rather than a rhetorical one. The Court did not dispute that s.36(1)(ii) applies to shareholder-employees; it held that on the facts found — board resolutions, full-time employment, salary in addition to bonus, bonus quantum linked to services, and shareholding that would have generated a larger dividend — the disabling limb was simply not made out. So the two decisions are not squarely in conflict: the pivot in each is whether the bonus tracks shareholding or tracks work. Practitioners should also note the Court endorsed AMD Metplast Pvt Ltd v DCIT (2012) 341 ITR 563 (Del) for the proposition that so long as bonus or commission is paid to directors for services rendered and as part of their terms of employment, s.36(1)(ii) does not apply.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For AY 2005-06 the assessee company paid bonus of Rs 32,22,000 to its directors and for AY 2006-07 Rs 37,44,000. The Assessing Officer held s.36(1)(ii) applied because the amounts would have been payable to the directors as dividends had they not been paid as bonus. The assessee explained that the payments were supported by board resolutions, that the directors were full-time employees drawing salary, that they were management graduates from IIM Bangalore, and that the bonus paid to each was in no way related to his shareholding, and it furnished the shareholding and bonus figures for each director. The Assessing Officer rejected this, holding that if a company could have declared dividend on the shareholding but did not, any bonus or commission to the directors was hit by the section; he noted no dividend was declared despite substantial profits and estimated tax avoided at about 20 per cent, and disallowed the whole bonus in both years. The Commissioner (Appeals) upheld the disallowance. The Tribunal allowed the assessee's appeals, finding that having regard to their shareholding two of the directors would have been entitled to much higher amounts as dividend than the bonus paid, that none of the directors would have received the bonus as dividend if bonus had not been paid, and that the payment was supported by a board resolution. The Revenue appealed under s.260A.
The substantial questions of law on s.36(1)(ii) were answered in the affirmative, against the Revenue and in favour of the assessee, for both years (para 21). The bonus payment could not be characterised as a dividend payment in disguise; taking into account that the directors were full-time employees receiving salary, that the payment was supported by board resolutions, that the bonus was in no way related to their shareholding and that each would have received a larger amount as dividend than as bonus, it could not be said that the bonus would not have been payable to the directors as profits or dividend had it not been paid as bonus or commission (para 19). The appeals were disposed of accordingly (para 50).
The Court proceeded on the undisputed facts that the payments were supported by board resolutions and that none of the directors would have received a lesser amount of dividend than the bonus paid to them, having regard to their shareholding. Adding that the directors were full-time employees receiving salary, the Court held the bonus appeared to be a reward for their work, in addition to salary, and in no way related to shareholding, and that the quantum of the bonus was linked to the services rendered. The Tribunal's findings that the directors would have got much higher amounts as dividend than as bonus and that there was no tax avoidance motive were accepted (para 19). The Court then noted that the issue had been considered by the same Court in AMD Metplast Pvt. Ltd. v. DCIT (2012) 341 ITR 563 in the light of the Bombay High Court's decision in Loyal Motor Service Co. Ltd. v. CIT (1946) 14 ITR 647, where it was observed that the Bombay decision does not assist the Revenue and that so long as the bonus or commission is paid to the directors for services rendered and as part of their terms of employment it has to be allowed and s.36(1)(ii) does not apply (para 20). Having regard to that legal position and the Tribunal's factual findings, the Court was unable to say the Tribunal had erred (para 21).
The bonus payment cannot be characterised as a dividend payment in disguise.
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Handle my notice → Ask a CA on WhatsAppNo. The Delhi High Court held that s.36(1)(ii) is not attracted merely because no dividend was declared; the Revenue must show the bonus would otherwise have been payable as profit or dividend. Where each director would have received MORE as dividend on his shareholding than he was paid as bonus, the payment was not related to shareholding, there was no tax avoidance motive, and the bonus could not be characterised as a dividend payment in disguise. This was decided by the High Court (Sanjiv Khanna J and R.V. Easwar J) and bears on section 36(1)(ii), section 260A of the Income Tax Act 1961. It is reported as ITA No.939/2010, ITA No.911/2011 and ITA No.926/2011, High Court of Delhi; assessment years 2004-05, 2005-06 and 2006-07. This is the taxpayer's answer to the Mumbai Special Bench in Dalal & Broacha (also in this library), and it is an arithmetical answer rather than a rhetorical one. The Court did not dispute that s.36(1)(ii) applies to shareholder-employees; it held that on the facts found — board resolutions, full-time employment, salary in addition to bonus, bonus quantum linked to services, and shareholding that would have generated a larger dividend — the disabling limb was simply not made out. So the two decisions are not squarely in conflict: the pivot in each is whether the bonus tracks shareholding or tracks work. Practitioners should also note the Court endorsed AMD Metplast Pvt Ltd v DCIT (2012) 341 ITR 563 (Del) for the proposition that so long as bonus or commission is paid to directors for services rendered and as part of their terms of employment, s.36(1)(ii) does not apply. If it applies to you, the first step is this: Tabulate, director by director, the shareholding, the dividend that would have been payable on it, and the bonus actually paid — this comparison is what won the case.
For AY 2005-06 the assessee company paid bonus of Rs 32,22,000 to its directors and for AY 2006-07 Rs 37,44,000. The Assessing Officer held s.36(1)(ii) applied because the amounts would have been payable to the directors as dividends had they not been paid as bonus. The assessee explained that the payments were supported by board resolutions, that the directors were full-time employees drawing salary, that they were management graduates from IIM Bangalore, and that the bonus paid to each was in no way related to his shareholding, and it furnished the shareholding and bonus figures for each director. The Assessing Officer rejected this, holding that if a company could have declared dividend on the shareholding but did not, any bonus or commission to the directors was hit by the section; he noted no dividend was declared despite substantial profits and estimated tax avoided at about 20 per cent, and disallowed the whole bonus in both years. The Commissioner (Appeals) upheld the disallowance. The Tribunal allowed the assessee's appeals, finding that having regard to their shareholding two of the directors would have been entitled to much higher amounts as dividend than the bonus paid, that none of the directors would have received the bonus as dividend if bonus had not been paid, and that the payment was supported by a board resolution. The Revenue appealed under s.260A. The matter was decided on 2012-04-19 by the High Court (Sanjiv Khanna J and R.V. Easwar J). On those facts the High Court held as follows. The substantial questions of law on s.36(1)(ii) were answered in the affirmative, against the Revenue and in favour of the assessee, for both years (para 21). The bonus payment could not be characterised as a dividend payment in disguise; taking into account that the directors were full-time employees receiving salary, that the payment was supported by board resolutions, that the bonus was in no way related to their shareholding and that each would have received a larger amount as dividend than as bonus, it could not be said that the bonus would not have been payable to the directors as profits or dividend had it not been paid as bonus or commission (para 19). The appeals were disposed of accordingly (para 50).
The Court proceeded on the undisputed facts that the payments were supported by board resolutions and that none of the directors would have received a lesser amount of dividend than the bonus paid to them, having regard to their shareholding. Adding that the directors were full-time employees receiving salary, the Court held the bonus appeared to be a reward for their work, in addition to salary, and in no way related to shareholding, and that the quantum of the bonus was linked to the services rendered. The Tribunal's findings that the directors would have got much higher amounts as dividend than as bonus and that there was no tax avoidance motive were accepted (para 19). The Court then noted that the issue had been considered by the same Court in AMD Metplast Pvt. Ltd. v. DCIT (2012) 341 ITR 563 in the light of the Bombay High Court's decision in Loyal Motor Service Co. Ltd. v. CIT (1946) 14 ITR 647, where it was observed that the Bombay decision does not assist the Revenue and that so long as the bonus or commission is paid to the directors for services rendered and as part of their terms of employment it has to be allowed and s.36(1)(ii) does not apply (para 20). Having regard to that legal position and the Tribunal's factual findings, the Court was unable to say the Tribunal had erred (para 21). In the words reproduced by the source cited on this page: "The bonus payment cannot be characterised as a dividend payment in disguise." The decision followed or applied AMD Metplast Pvt. Ltd. v. DCIT (2012) 341 ITR 563 (Del) — followed; Loyal Motor Service Co. Ltd. v. CIT (1946) 14 ITR 647 (Bom.) — distinguished, as explained in AMD Metplast.
It was decided by the High Court on 2012-04-19 and is reported as ITA No.939/2010, ITA No.911/2011 and ITA No.926/2011, High Court of Delhi; assessment years 2004-05, 2005-06 and 2006-07. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 36(1)(ii), section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The substantial questions of law on s.36(1)(ii) were answered in the affirmative, against the Revenue and in favour of the assessee, for both years (para 21). The bonus payment could not be characterised as a dividend payment in disguise; taking into account that the directors were full-time employees receiving salary, that the payment was supported by board resolutions, that the bonus was in no way related to their shareholding and that each would have received a larger amount as dividend than as bonus, it could not be said that the bonus would not have been payable to the directors as profits or dividend had it not been paid as bonus or commission (para 19). The appeals were disposed of accordingly (para 50). It arises in Deductions & Disallowances and Assessment & Scrutiny matters, on section 36(1)(ii), section 260A of the Income Tax Act 1961, and was decided by Sanjiv Khanna J and R.V. Easwar J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show the bonus is not proportionate to shareholding: if bonus splits in the same ratio as shares, expect the Dalal & Broacha analysis instead. Produce the board resolution sanctioning the bonus and the employment terms, and establish that the directors are full-time employees drawing salary separately. Meet the tax-avoidance point head on with numbers: the Court relied on the finding that there was no tax avoidance motive. If the Assessing Officer's only reason is 'no dividend was declared', say so in terms in the objections — that reason alone was held insufficient.
Still good law. A citator search returns five citing decisions. The Delhi High Court applied this judgment in Pr. CIT-1 v. BMO Advisors Pvt. Ltd., ITA 82/2022, 11 April 2022, which was read: at paragraph 8 the Division Bench relied on it, with AMD Metplast, as this Court's own authority that bonus paid by a company to its directors is allowable, and dismissed the Revenue's appeal. Nothing overruling or doubting it was found. One qualification must be carried forward. A Supreme Court record of proceedings dated 29 April 2014 in SLP (Civil) CC 3093/2013, C.I.T. v. M/s Career Launcher (India) Ltd., arising from this judgment in ITA No. 926/2011, records only that counsel for the petitioner prayed that no additional documents were required and directs the matter to be listed in due course. The special leave petition was therefore undisposed of as at that order and its outcome has not been established; what is known is that the Delhi High Court was still applying the judgment as good authority in 2022. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment disposes of three appeals for AYs 2004-05, 2005-06 and 2006-07 covering s.194C/40(a)(ia), s.36(1)(iii) interest to the Noida Authority, non-compete fee and s.36(1)(ii); only the s.36(1)(ii) issue is summarised here. The judgment as transcribed runs to 50 numbered paragraphs ending with the disposal at para 50, which was read in full. Paragraph 20 records the Court's approval of AMD Metplast Pvt Ltd v DCIT (2012) 341 ITR 563 (Del) and of the treatment there of the Bombay High Court decision in Loyal Motor Service Co. Ltd v. CIT (1946) 14 ITR 647; AMD Metplast itself could not be located on indiankanoon (a title search returned only an excise appeal and a district court suit), so its reasoning has NOT been read for this entry and is reported here only as the Delhi High Court records it. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The substantial questions of law on s.36(1)(ii) were answered in the affirmative, against the Revenue and in favour of the assessee, for both years (para 21). The bonus payment could not be characterised as a dividend payment in disguise; taking into account that the directors were full-time employees receiving salary, that the payment was supported by board resolutions, that the bonus was in no way related to their shareholding and that each would have received a larger amount as dividend than as bonus, it could not be said that the bonus would not have been payable to the directors as profits or dividend had it not been paid as bonus or commission (para 19). The appeals were disposed of accordingly (para 50).
TaxSphere, “CIT v Career Launcher India Ltd”, https://taxnotice.vittsphere.com/caselaw/case/career-launcher-bonus-to-directors-not-dividend-in-disguise/ (validity last checked 2026-09-16)
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