ITAT Jaipur on Section 36(1)(ii): Statutory Worker Bonus Is Not Dividend in Disguise
1. Overview of the Ruling
In Prithvi Iron Mills Pvt. Ltd. Vs ACIT (ITAT Jaipur), the Jaipur Bench of the Income Tax Appellate Tribunal examined whether statutory bonus paid to workers could be disallowed under Section 36(1)(ii) of the Income Tax Act 1961 on the footing that it represented a distribution of profits in lieu of dividend.
The Tribunal held that:
- Statutory bonus paid to ordinary employees/workers who are not shareholders cannot be treated as dividend in disguise.
- Disclosure in Form 3CD under clause 20(a) relating to
Section 36(1)(ii)does not, by itself, justify a disallowance. - Where bonus is paid at the statutory minimum rate prescribed under the
Payment of Bonus Act, 1965, and the assessee produces employee-wise details and books of account, the requirement ofSection 36(1)(ii)is fully satisfied.
The assessee’s appeal was allowed, and the disallowance of ₹2,07,438 was deleted in full.
2. Factual Background
2.1 Business of the assessee and return filing
- The assessee,
Prithvi Iron Mills Pvt. Ltd., is a private limited company engaged in manufacturing MS angles, channels and steel. - For Assessment Year 2021-22, the assessee filed its return of income on 01.02.2022 declaring total income of ₹1,70,57,350.
2.2 CPC adjustment under Section 143(1)
- The Centralized Processing Centre (CPC), Bengaluru processed the return under
Section 143(1). - CPC noticed a mismatch between the bonus claimed as deduction in the return and the amount reported by the tax auditor in Form 3CD under clause 20(a) referring to
Section 36(1)(ii). - Based on this discrepancy, CPC disallowed ₹2,07,438 claimed as bonus to employees.
- As a result, the assessed income was increased to ₹1,72,64,790 and a demand of ₹82,550 was raised.
2.3 Nature and timing of bonus payment
The assessee contended that:
- The amount of ₹2,07,438 represented minimum bonus @ 8.33% of wages, as mandated by the
Payment of Bonus Act, 1965. - The bonus was paid to workers/employees on 02.11.2021.
- This date fell before the due date for filing the return of income under
Section 139(1)for the relevant assessment year.
3. First Appeal Before JCIT(A) and Adverse Findings
3.1 Auditor’s reporting and presumption by JCIT(A)
During appellate proceedings, the JCIT(A) took note that:
- The tax auditor had reported a sum of ₹3,37,632 under clause 20(a) of Form 3CD, which deals with bonus or commission to employees with reference to
Section 36(1)(ii).
From this, the JCIT(A) inferred:
- The disclosure in this clause leads to a presumption that the payment was made to persons who could otherwise have received the amount as “profits or dividend”, thereby attracting the restrictive limb of
Section 36(1)(ii).
3.2 Alleged lack of evidence
The JCIT(A) further recorded that:
- The assessee had not submitted computation sheets, employee-wise bonus details, or supporting material to show a statutory liability under the
Payment of Bonus Act, 1965. - According to the appellate authority, in the absence of such evidence, the true nature of the payment remained unestablished and therefore fell within the mischief of
Section 36(1)(ii).
Relying on:
Dalal Broacha Stock Broking (P.) Ltd. v. Addl. CIT [2011] 131 ITD 36 (Mum.) (SB)SRC Aviation (P.) Ltd. v. ACIT [2022] 445 ITR 40 (Delhi)
the JCIT(A) sustained the disallowance of ₹2,07,438 and rejected the appeal.
4. Arguments Before ITAT Jaipur
4.1 Submissions of the assessee
Before the Tribunal, the assessee placed on record written submissions dated 14.09.2026 along with a paper book (48 pages). Key submissions were:
- The finding of the
JCIT(A)that no evidence was filed was factually incorrect. - The assessee had already furnished:
- Employee-wise bonus payment sheet;
- Relevant pages of the cash book showing cash payments;
- Relevant pages of the bank book showing payments through the HDFC Bank cash credit account.
- All these were submitted during the first appeal itself, as certified in the paper book.
On merits, the assessee argued:
- The recipients were workers and employees who had rendered services to the company.
- The bonus was statutory in nature, computed strictly at 8.33% of wages as per the
Payment of Bonus Act, 1965. - The payment was not made in substitution of dividend and therefore
Section 36(1)(ii)was not attracted.
The assessee relied on:
DCIT v. Mount Kellett Capital Management India (P.) Ltd. (ITAT Mumbai) – ITA No. 269/Mum/2015, dated 27.11.2018AMD Metplast (P.) Ltd. v. DCIT [2012] 341 ITR 563 (Delhi)