# Section 36(1)(ii) - Bonus or Commission to Employees

## Provision

Bonus or commission paid to employees is allowed as deduction.

## Critical Condition

The amount must not be in lieu of profit or dividend that would otherwise have been payable to the employee (typically a shareholder-employee).
Rationale: Prevents companies from disguising dividend distributions as commission to avoid dividend taxation.

## Section 43B Applicability

Section 43B applies — bonus/commission must be actually paid on or before the due date of filing return u/s 139(1) to be allowed in the year of accrual.
If unpaid by due date → disallowed in current year, allowed in year of actual payment.

Worked example

### Example 1

Example: ABC Pvt Ltd has 2 shareholder-directors. The company declares no dividend but pays 'commission' equal to 50% of profits to these directors who hold all the shares. The AO may disallow this commission under Sec 36(1)(ii) as it represents distribution of profit dressed as commission.

⚠️ Common exam mistakes

Claiming bonus/commission that is essentially a substitute for dividend — disallowed.
Forgetting Section 43B — claiming deduction in year of accrual even when bonus is unpaid by ITR due date.
Allowing bonus to non-employees (e.g., agents) under 36(1)(ii) — they are covered under Sec 37.

Reference: Section 36(1)(ii) — Income Tax Act, 1961

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →