2016 (12) TMI 1575 - AT - Income Tax

Addition of Remuneration to Directors u/s 40A(2) - whether the payment made is reasonable vis- -vis the market conditions and having regard to the qualification, experience of the Directors, the exigencies of the business and benefit accruing to the appellant? - Held that - We have seen that while making the disallowance, the onus is on the AO and the AO has not brought any material on record as to how the remuneration paid to two Directors are excessive, no comparable on the basis of region cum industry was referred by the AO or by the ld. CIT(A) while restricting the disallowance. Considering the fact that the order of ld. CIT(A) is of non-speaking order, we restore this ground of appeal to the file of ld. CIT(A) to decide the issue afresh. Needless to say that the ld. CIT(A) will grant adequate and sufficient opportunity to the assessee before deciding the issue in accordance with law.

Summary

Issues:

1. Disallowance of remuneration to Directors u/s 40A(2) - Reasonableness of payment vis-à-vis market conditions, qualification, experience, business exigencies, and benefit accruing to the appellant.

Analysis:

The appeal under section 253 of the Income-tax Act was directed by the assessee against the order of the Commissioner of Income-tax (Appeals) for Assessment Year 2010-11. The assessee challenged the partial disallowance of the addition of remuneration to Directors under section 40A(2), arguing that the payment made was reasonable considering market conditions, Directors' qualifications, experience, business exigencies, and benefits to the appellant.

The assessee, a company engaged in textile processing, filed its income tax return for the relevant assessment year declaring total income as Nil. The Assessing Officer completed the assessment under section 143(3) of the Act, making various additions and disallowances, including a disallowance of remuneration paid to Directors under section 40A(2) amounting to Rs. 22,00,000. On appeal, the disallowance was reduced to Rs. 10,00,000. Dissatisfied with this decision, the assessee filed the present appeal before the Appellate Tribunal.

Despite the service of notice, the assessee did not appear before the Tribunal, leading to the Tribunal hearing the Departmental Representative for Revenue. The Revenue argued that the remuneration claimed by the assessee for two Directors was excessive, resulting in the disallowance. The Revenue requested the dismissal of the appeal.

After considering the contentions of both parties and reviewing the orders of the authorities below, the Tribunal noted that the Assessing Officer had not provided sufficient evidence to justify the disallowance of remuneration to the Directors. The Tribunal observed a significant increase in remuneration from the previous year without proper justification. The Tribunal also highlighted that the order of the Commissioner of Income Tax (Appeals) was non-speaking and lacked necessary details for the decision. Therefore, the Tribunal remanded the issue back to the Commissioner of Income Tax (Appeals) for a fresh decision, emphasizing the need for a thorough examination and granting adequate opportunity to the assessee to present their case.

In conclusion, the Tribunal allowed the appeal of the assessee for statistical purposes, directing the Commissioner of Income Tax (Appeals) to re-examine the issue with proper consideration and opportunity for the assessee to provide necessary information and documents.