2011 (11) TMI 47 - HC - Income Tax

Section 40A(2)(b) of the Income Tax Act - disallowance out of the consultancy fees paid to the three Directors - AO made disallowance on grounds that salary paid to the said two Directors was in addition to the consultancy fee; and assessee failed to produce professional degrees and income tax returns (ITRs) of the aforesaid two Directors - it was decided that assessee had paid the salary and consultancy fee to the different Directors - fit case to be remitted back to the Tribunal for afresh adjudication as learned counsel has referred to certain other evidence placed on record, which is not considered by the Tribunal - Appeal disposed off.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal for assessment year 2006-07 regarding disallowance of consultancy fees paid to directors under Section 40A(2)(b) of the Income Tax Act.

Detailed Analysis:

1. Background and Facts:
The appellant, engaged in providing CAE/design services, challenged the order of the Income Tax Appellate Tribunal for the assessment year 2006-07. The company was started by four directors, each with specific qualifications. The remuneration payable to the directors for the financial year 2005-06 was fixed by a Board's resolution.

2. Disallowance of Consultancy Fees:
The Assessing Officer made an ad hoc disallowance of consultancy fees paid to the directors under Section 40A(2)(b) of the Income Tax Act. The disallowance was based on various grounds, including the payment of salary in addition to consultancy fees and lack of documentation regarding professional degrees and income tax returns of the directors.

3. Arguments and Appeals:
The appellant argued before the CIT (A) that different directors received salary and consultancy fees, which was duly reflected in the profit and loss account. The appellant also provided information about the professional qualifications of the directors to the Assessing Officer. Despite the submissions, the CIT (A) upheld the disallowance, leading to further appeal before the Tribunal.

4. Judicial Review and Remittance:
The High Court noted factual errors in the Tribunal's decision and additional evidence not considered. Consequently, the High Court set aside the impugned order and remitted the case back to the Tribunal for fresh adjudication. The High Court clarified that no observations on the merits were made, leaving it to the Tribunal to reconsider the matter based on correct factual positions.

5. Conclusion:
The High Court disposed of the appeal by remitting the case back to the Tribunal for reevaluation, emphasizing the need for a fresh consideration of the matter in light of factual inaccuracies and unconsidered evidence. The decision highlighted the importance of accurate factual findings in tax assessments and the necessity for proper judicial review in such cases.