2011 (2) TMI 195 - AT - Income Tax

Disallowance - Salary paid to the Director - the assessee submitted that Smt Samina Vohra is overall In-charge of the company and looks after all the activities of the company - This aspect has not been proved to be false or untrue - Therefore, merely because the remuneration of the lady director is more than that of the Managing Director, the same, cannot be held as excessive or unreasonable - No part of the salary should be disallowed u/s 40(2)(b) of the Act especially under the given facts and circumstances of the case - Hence, set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition - Held that, the ground raised by the assessee is accordingly allowed - Hence, the appeal filed by the assessee is allowed.

Summary

Issues:
Challenge to disallowance of salary paid to the Director under Section 40A(2)(b) of the IT Act.

Analysis:
1. The appeal was filed against the order of the CIT(A) confirming the disallowance of Rs. 96,380/- on account of salary paid to the Director for assessment year 2006-07.
2. The Assessing Officer questioned the reasonableness of the substantial salary paid to the Director, especially in comparison to the Managing Director's salary. He found the amount excessive and unreasonable, leading to the disallowance under Section 40A(2)(b) of the IT Act.
3. The Assessing Officer observed that the Director did not contribute significantly to the business, mainly engaging in routine administrative tasks like correspondence with banks. He concluded that the remuneration diverted substantial profits and was unreasonable.
4. Before the CIT(A), the assessee argued that the Director was overall in charge of the company and cited a Supreme Court decision emphasizing the legitimate business needs and benefits derived from the Director's role.
5. However, the CIT(A) upheld the Assessing Officer's decision, stating that the Director's tasks were administrative and did not justify the high salary, leading to the disallowance under Section 40A(2)(b).
6. The Tribunal, upon review, found that the Director's responsibilities included attending office, corresponding with various parties, and banks, indicating active involvement in the company's affairs. The Tribunal referenced the Supreme Court decision and emphasized that the salary should not be considered excessive or unreasonable if it meets legitimate business needs.
7. The Tribunal disagreed with the CIT(A)'s reasoning and directed the Assessing Officer to delete the addition, stating that the salary disallowance was unwarranted under the circumstances, and the Director's role was essential for the business.
8. Consequently, the Tribunal allowed the appeal, overturning the CIT(A)'s decision and ordering the deletion of the disallowed amount from the Director's salary.