Any company giving bonuses to employees or shareholders should be able to get tax benefits as per the law unless there is a clear finding of tax avoidance or evasion, Mumbai Bench of the Income-tax Appellate Tribunal (ITAT) said Tuesday.

According to the details of the case, a stock broking company in 2011-12 had paid Rs 5 lakh to two directors as bonus and incentives. This was over and above the remuneration they were receiving.

In a normal course the remuneration given to employees and directors is considered as an expense for the company and that can avail tax benefits as per the current regulations. However, the tax department disallowed the bonus payment aggregating to Rs 500,000 on the grounds that the taxpayer had more than Rs 1 crore of profits which could have been distributed amongst the shareholders in the form of dividend.

The tax officer also said that the two directors held shares of the taxpayer and the said amount of Rs 250,000 each, if not paid to them as bonus, was payable as dividend to the two shareholders as per a tax note by Deloitte India.

The ITAT has now settled the issue of whether bonus payment (to the shareholder directors) is allowed and this is set to give clarity in many similar litigation say tax experts.

“This ruling lays down the principle that payment of bonus or commission made to shareholder employees can be disallowed only if there is a case of tax avoidance or evasion,” Deloitte note said.

Team – Intellex Strategic Consulting Private Limited,,,