Disallowance u/s 40A(2) for unreasonable increase in directors remuneration deleted

Disallowance u/s 40A(2) for unreasonable increase in directors remuneration deleted as AO not carried out exercise to determine fair remuneration in the similar line and scale of business.

ABCAUS Case Law Citation:
ABCAUS 3072 (2019) (07) ITAT

Important Case Laws Cited/relied upon by the parties:
Commissioner of Income Tax Vs. Indo Saudi Services (Travel) (P.) Ltd. 219 CTR 562

Disallowance u/s 40A(2) for unreasonable increase in directors remuneration

The appeal of the assessee was directed against the order of Commissioner of Income Tax (Appeals) against disallowance of remuneration paid to Directors u/s 40A(2) of the Income Tax Act, 1961 (the Act).

The assessee company was having four Directors. In the relevant assessment year, the remuneration to the directors was increased by around 128%. In scrutiny assessment proceedings, the Assessing Officer held that the increase in the remuneration paid to the Directors was not commensurate to the turnover of company.

Considering the increase in remuneration to the Directors as unreasonable high, the Assessing Officer restricted the increment in the salary of Directors to 10% and disallowed the balance amount.

The assessee filed appeal inter alia challenging the disallowance of increase in remuneration to the Directors u/s. 40A(2) of the Act. However, the Commissioner of Income Tax (Appeals) confirmed the findings of Assessing Officer on this issue.

Before the Tribunal the assessee submitted that while making disallowance u/s. 40A(2) has merely considered the increase in remuneration vis-à-vis increase in turnover. The Assessing Officer had not undertaken any exercise to examine the salary paid to the Directors in the same industry/trade for comparative analysis.

It was also contended that out of four Directors, two Directors were assessed to tax at same rate of tax as that of company. Therefore, there would be no loss of Revenue in respect of the salary paid to the said Directors.

On the other the Department defended the impugned order. It was submitted that there was phenomenal increase of 128% in the remuneration of Directors as compared to immediately preceding assessment year. Whereas, the increase in the turnover of company was merely 4%. The assessee could not justify such a huge increase in the payment of salary to the Directors.

The Tribunal observed that a bare perusal of provisions of section 40A(2) shows that the disallowance u/s. 40A can be made by Assessing Officer if in his opinion the expenditure is excessive or unreasonable having regard to fair market value of the services.

The Tribunal however noted that in the instant case the AO had not carried out any exercise to determine fair remuneration paid to the Directors in the similar line and scale of business. There was no comparative analysis of remuneration paid to the Directors in the similar trade.

The Tribunal opined that it was evident that over succeeding years, increase in increment in payment of remuneration to the Directors had no co-relation to the turnover of business of assessee. Therefore, reasons for making disallowance of remuneration u/s. 40A(2) by the authorities below were not sustainable.

Consequently, the Tribunal set aside the order of the Commissioner of Income Tax (Appeals) and allowed the appeal of the assessee.

Download Full Judgment Click Here >>

read latest abcaus posts

----------- Similar Posts: -----------

Leave a Reply

Subscribe to ABCAUS Newsletter

Get reliable, authentic and latest updates on taxation/corporate and other laws in your mail box free.



After subscribing, please check your email (including spam or junk folder) and activate the subscription link by clicking it.