2014 (1) TMI 763 - HC - Income Tax

Disallowance under section 40A(2) - Held that - Disallowance was made by invoking the provisions of 40A(2)(b) of the Income Tax Act on estimate basis for which no reason was given - No reason was given for reduction in the salary by the authorities concerned - Following New Plaza Restaurant vs. ITO 2008 (7) TMI 260 - HIMACHAL PRADESH HIGH COURT - Estimation is a question of fact - Decided against assessee.

Summary

Issues:
1. Deduction towards directors' salary
2. Disallowance of travelling and telephone expenditure
3. Disallowance under section 40A(2)

Deduction towards directors' salary:
The case involved the deduction towards the salary paid by the appellant to its directors, Dr. Amar Singh and Smt. Anita Singh, for the assessment year 2005-06. The Assessing Officer (A.O.) initially found the salaries drawn by the directors to be on the higher side and allowed only a reduced amount. However, the Commissioner of Income Tax (CIT) (A) provided full relief to the assessee by allowing the entire amount related to the directors' salaries. The Tribunal, in the Cross Appeals, observed that the salary of the last year would be allowed, and during the current assessment year, only a 30% hike would be permitted. The Court noted that the disallowance was made under section 40A(2)(b) of the Income Tax Act on an 'estimate basis' without providing reasons for the estimation or the reduction in salary by the authorities concerned. The Court emphasized that estimation is a question of fact, citing various legal precedents. As no substantial question of law emerged from the impugned order, the appeals on this issue were dismissed.

Disallowance of travelling and telephone expenditure:
The issue of disallowance of travelling and telephone expenditure was raised in the appeal. The appellant contested the disallowance made by the Income Tax authorities, arguing that no material was presented, and the authorities did not specify which expenditure was not verified or vouched in the books of accounts. However, the Court did not find any substantial question of law arising from this issue and declined to provide an answer, stating that it would be addressed in an appropriate case. Consequently, the appeals on this matter were dismissed.

Disallowance under section 40A(2):
The case also involved a dispute regarding the disallowance under section 40A(2) of the Income Tax Act. The Tribunal restricted the disallowance to a certain amount, differing from the Assessing Officer's initial disallowance. The Tribunal's decision was challenged, arguing that the salaries paid to the directors were considered highly excessive and unreasonable compared to fair market value. The Court noted that no substantial question of law arose from this issue as well and declined to provide an answer, indicating it would be addressed in a suitable case. Consequently, the appeals on this matter were also dismissed.

In conclusion, the High Court dismissed both the Cross Appeals filed by the assessee and the Department concerning the issues of deduction towards directors' salary, disallowance of travelling and telephone expenditure, and disallowance under section 40A(2) for the assessment year 2005-06. The Court emphasized the factual nature of estimation and disallowance decisions, citing relevant legal precedents, and declined to address the substantial questions of law raised in the appeals, leaving them for consideration in future cases.