2012 (5) TMI 142 - AT - Income Tax

Disallowance on payment made to directors u/s 40A(2B) - assessee explained that the Directors were well qualified and technically competent and placed at a high level of management and, therefore, the remuneration was consistent and the provisions of the companies Act are not applicable to assessee s case. He further explained that directors are individually assessed to tax and all fall within the highest income-tax rate - Held that CIT(A) gave a categorical finding that the AO had not brought any other fact, evidence or argument while questioning the quantum of remuneration and commission paid to Directors. He further gave a finding that the provisions of section 198 have no application to the assessee, who is a private limited company and not a private company which is subsidiary of a public company - Decided in favor of the assessee Regarding disallowance u/s 40(a)(ia) - TDS u/s 194J - Held that , the assessee deducted tax at source, therefore, the provisions of section 40(a(ia) do not apply to the case of the assessee. Therefore, we do not find any reason to interfere with the order of the CIT(A) on this count and accordingly, the same is hereby upheld dismissing the ground raised by the revenue. - Decided in favor of the assessee

Summary

Issues:
1. Disallowance of remuneration paid to directors under section 40A(2) and section 37 of the Income Tax Act.
2. Disallowance under section 40(a)(ia) for TDS made under the wrong section.

Issue 1: Disallowance of remuneration paid to directors under section 40A(2) and section 37 of the Income Tax Act:
The appeal was filed by the Revenue against the CIT(A)'s order for the assessment year 2007-08, challenging the deletion of disallowance of remuneration paid to directors. The AO disallowed the remuneration, invoking section 198 of the Companies Act, based on a rate of 11% of the net profit. The CIT(A) held that there was no evidence to suggest the remuneration was excessive and section 198 did not apply to the appellant, a private limited company. The CIT(A) deleted the disallowance as there were insufficient facts to invoke section 40A(2) or section 37(1). The Tribunal upheld the CIT(A)'s decision, stating that the AO did not provide any additional facts or arguments to question the remuneration. The Tribunal found no error in the CIT(A)'s order and dismissed the appeal.

Issue 2: Disallowance under section 40(a)(ia) for TDS made under the wrong section:
The second ground of appeal concerned the disallowance under section 40(a)(ia) for TDS made under the wrong section (194C instead of 194J). The AO observed discrepancies in the TDS deductions made by the assessee and calculated the disallowance under section 194J. The CIT(A) directed the AO to restrict the disallowance to specific payments based on the details provided by the assessee. The Tribunal deliberated on whether TDS should have been made under section 194C or 194J. The assessee argued that once TDS is deducted, no disallowance can be made under section 40(a)(ia). Citing a precedent, the Tribunal agreed with the assessee that if TDS is deducted, the provisions of section 40(a)(ia) do not apply. Consequently, the Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal.

In conclusion, the Tribunal upheld the CIT(A)'s decisions in both issues, dismissing the Revenue's appeal in its entirety on March 29, 2012.