ITAT Delhi Holds Disallowance Of Directors’ Bonus Under Section 36(1)(ii) Cannot Be Made Through Section 154 Rectification

Background Of The Dispute

The Delhi Bench of the Income Tax Appellate Tribunal in the case of Surlon India Private Limited Vs DCIT examined whether the Assessing Officer was justified in invoking Section 154 of the Income Tax Act 1961 to disallow bonus paid to directors by applying Section 36(1)(ii) for Assessment Year 2017-18.

The matter arose after a regular assessment under Section 143(3) was completed on 12.12.2019. During this original assessment, no disallowance was made in respect of the bonus paid to the directors. Subsequently, based on certain disclosures in the assessee’s Form 3CD tax audit report, the Assessing Officer initiated rectification proceedings under Section 154 with the objective of applying Section 36(1)(ii) and treating the directors’ bonus as inadmissible.

A rectification order was finally passed on 30.03.2024, disallowing the directors’ bonus by invoking Section 36(1)(ii). This rectification was later confirmed by the Commissioner of Income Tax (Appeals) [“CIT(A)”] vide order dated 11.10.2025, prompting the assessee to carry the matter before the Tribunal.

The central legal question before the Tribunal was:

Whether a disallowance under Section 36(1)(ii) in respect of bonus paid to directors can be brought in through rectification proceedings under Section 154, or whether such an issue is outside the narrow scope of “mistake apparent from the record”.

Chronology Of Events

To understand the Tribunal’s conclusion, it is useful to outline the key events:

1. Original assessment

   • Assessment Year: 2017-18
   • Assessment completed under Section 143(3) on 12.12.2019.
   • No disallowance under Section 36(1)(ii) was made at this stage regarding bonus paid to directors.

2. Post-assessment review by the Assessing Officer

   • The Assessing Officer later revisited the material on record, particularly the Form 3CD tax audit report.
   • From these details, the Assessing Officer formed a view that the bonus paid to directors ought to have been disallowed by applying Section 36(1)(ii).

3. Initiation of rectification under Section 154

   • The Assessing Officer issued notice under Section 154 proposing rectification on the ground that there was a “mistake apparent from the record” in allowing directors’ bonus as a deduction.
   • The rectification proceedings were specifically directed towards disallowance of bonus to directors using Section 36(1)(ii).

4. Rectification order

   • Rectification order under Section 154 was passed on 30.03.2024.
   • In this order, the Assessing Officer disallowed the bonus paid to directors and enhanced the income accordingly.

5. Appeal before CIT(A)

   • The assessee challenged the rectification order before the CIT(A), contending that:
     • The issue of disallowance under Section 36(1)(ii) is debatable and cannot be rectified under Section 154.
     • The original assessment had been completed after due consideration, and any subsequent change of opinion cannot be brought in through rectification.
   • The CIT(A), by order dated 11.10.2025, however, upheld the rectification, agreeing with the Assessing Officer’s approach.

6. Appeal before ITAT

   • Aggrieved with the order of the CIT(A), the assessee preferred an appeal before the ITAT Delhi.
   • The assessee raised a legal ground challenging the very jurisdiction and validity of Section 154 proceedings, apart from grounds on the merits of the disallowance.