2012 (7) TMI 552 - AT - Income Tax

Disallowance of salary Held that - Smt. Belwal (director) was an educated lady and after she left the assessee, she got employment at a hefty amount so therefore her working abilities cannot be doubted. Moreover, in the preceding year also, she was paid salary by assessee and no disallowance was made. Deduction of TDS on payment made to her also goes in favour of the assessee as far as genuineness of the expenses is concerned - person who receives salary as a Director cannot be expected to be involved in day today activities. His or her involvement remains at the level of making strategic decisions only and therefore the contention of the Assessing Officer that assessee could not provide proof of any services rendered by her is not correct in view of her role as an art director addition deleted - decided in favour of assessee. Addition was made u/s 41(1) of the Act by treating the old outstanding amounts as deemed income u/s 41(1) of the Act - assessee had claimed during assessment proceedings that these were un-secured loans which were taken by the assessee 15-20 years back and they have been repaid now by crediting the account of Shri Mahesh Belwal and by debiting the respective account of the lenders Held that - Provision of section 41(1) are not attracted as these are attracted only if the liability ceased to exist by way of remission or cessation thereof - assessee has written back this amount and a corresponding credit of an equivalent amount has been given to Mr. Mahesh Belwal and therefore no benefit can be said to have arisen to the assessee In respect of Rs.3,29,748 - assessee has not written back and liability has not ceased to exist only stand taken by the Assessing Officer that the amount is outstanding for long and hence need to be written back - Held that - Assessing Officer directed to delete the addition - appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of salary paid to Smt. Savita Belwal.
2. Addition of squared-up loans amounting to Rs. 10,11,401/- under section 41(1) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Salary Paid to Smt. Savita Belwal:
The first issue concerns the disallowance of Rs. 87,000/- paid as salary to Smt. Savita Belwal, which the Assessing Officer considered excessive and unreasonable under section 40A(2)(b) of the Income Tax Act, 1961. The disallowance was based on the relationship of the payee with the Director/Chairman of the assessee company and the lack of evidence provided by the assessee regarding the actual services rendered by her.

The assessee argued before the CIT(A) that Smt. Belwal was highly educated, and the salary paid was reasonable given her qualifications. It was also pointed out that she later secured employment at a prestigious school, indicating her capabilities. However, the CIT(A) upheld the Assessing Officer's decision, emphasizing the lack of evidence of services rendered by Smt. Belwal.

Upon appeal to the Tribunal, the assessee contended that the salary was paid to Smt. Belwal as a Director's salary, not as an employee's salary, and highlighted that no disallowance was made in the preceding year for the same salary. The Tribunal noted that Smt. Belwal's qualifications and subsequent employment indicated her working abilities. The Tribunal found the salary reasonable and held that the disallowance was not justified, directing the Assessing Officer to delete the addition of Rs. 87,000/-.

2. Addition of Squared-up Loans under Section 41(1):
The second issue involves the addition of Rs. 10,11,401/- under section 41(1) of the Act, which the Assessing Officer treated as deemed income due to the cessation of old outstanding amounts. The Assessing Officer observed that certain amounts credited to the account of Shri Mahesh Belwal were treated as repayment of unsecured loans, which were classified as sundry creditors in the balance sheet.

The assessee claimed that these were old unsecured loans repaid through adjustments and argued that the amounts were wrongly classified as sundry creditors by the Chartered Accountant. The Assessing Officer, however, held that the liabilities had ceased and added the amounts to the income of the assessee.

The CIT(A) upheld the Assessing Officer's decision, stating that the conditions for applying section 41(1) were met, as the liabilities were considered to have ceased, resulting in a benefit to the assessee.

Upon appeal to the Tribunal, the assessee argued that the conditions for section 41(1) were not met, as no benefit had arisen to the company. The Tribunal agreed, noting that the liabilities were adjusted against the assets of the company, and no actual benefit was obtained. The Tribunal also found that the outstanding balance of Rs. 3,29,748/- in respect of Aditya Cottage Industries had not ceased to exist and was still reflected in the books.

The Tribunal concluded that the provisions of section 41(1) were not applicable, as there was no cessation of liability resulting in a benefit to the assessee. Consequently, the Tribunal directed the deletion of the addition of Rs. 10,11,401/-.

Conclusion:
The appeal filed by the assessee was allowed, with the Tribunal directing the deletion of the disallowance of Rs. 87,000/- paid as salary to Smt. Savita Belwal and the addition of Rs. 10,11,401/- under section 41(1) of the Income Tax Act, 1961.