2015 (3) TMI 1194 - HC - Income Tax

Disallowance of remuneration paid to four Directors - Held that - Appeal admitted on following question of law Whether on the facts and in the circumstances of the case the Tribunal was right in law and in overlooking the fact that the entire exercise was revenue neutral in nature because the company as well as its Directors were taxable at the same rate and that the Directors had paid off the taxes and taking into consideration it ought not to have confirmed any part of the disallowance made by the authorities?

Summary

Issues:
1. Disallowance of Directors' remuneration by the Income Tax Appellate Tribunal.
2. Justification of disallowance and revenue neutrality of the exercise.

Analysis:
1. The appellant challenged the Income Tax Appellate Tribunal's decision partially allowing the appeal regarding the disallowance of Directors' remuneration. The Tribunal confirmed the disallowance of Rs. 47,90,178 out of the total remuneration paid to four Directors amounting to Rs. 80,30,178 for the Assessment Year 2010-11. The appellant raised substantial questions of law regarding the Tribunal's decision on the disallowance (i) amount and (ii) revenue-neutral nature of the exercise.

2. The Tribunal considered the increase in turnover to 3.6 times of the preceding year, amounting to Rs. 32,40,000, as a justification for allowing a portion of the remuneration. The appellant contended that the increase in profit should have been considered instead. The Tribunal accepted the submissions that the rise in remuneration was due to the Directors' efforts leading to increased sales. The appellant relied on a previous court decision but the Tribunal found it inapplicable to the present case and dismissed the appeal on the first proposed question of law.

3. Regarding the second question of law, the appellant argued that the entire exercise of disallowance was revenue-neutral as the company and its Directors were taxable at the same or higher rate. The Assessing Officer initially disallowed Rs. 99,80,414, which was reduced to Rs. 47,90,178 by the Tribunal. The appellant cited a Bombay High Court decision to support their case. The High Court found the second question required further consideration and issued a notice for final disposal.

In conclusion, the High Court dismissed the appeal on the first question but scheduled a hearing to consider the revenue-neutral aspect of the disallowance of Directors' remuneration as raised in the second question.