2014 (1) TMI 1496 - AT - Income Tax

Disallowance u/s 40A(2)(b) of the Act Directors remuneration Held that - The AO has to form an opinion having regard to the fair market value of the goods and services but the AO has simply disallowed on the basis that the hike in remuneration is excessive and unreasonable the CIT(A) has also not given a proper finding with regard to the fair market value of the services rendered by the employees and how it can be termed as excessive or unreasonable Relying upon CIT vs. NEPC India Ltd 2006 (12) TMI 129 - MADRAS HIGH COURT what section 40A(2)(a) contemplates is that there should be some material available before the AO for invoking section 40A(2)(a) to initiate action to disallow or refuse to deduct the excessive or unreasonable expenditure mentioned thereunder - But at the same time before taking any final decision by invoking the power under section 40A(2)(a) either allowing or disallowing such expenditure incurred as excessive or unreasonable such decision of the Assessing Officer should be based on reasons well- founded which is judiciously acceptable and in which event the finding or decision arrived at stating that the expenditure is excessive or unreasonable and the same cannot be allowed or deducted. Both the authorities below have not given any finding with regard to the fair market value of the services rendered by Shri Vipul J.Ray - In the absence of such finding the contention of revenue cannot accepted that the hike in remuneration is excessive or unreasonable - the authorities below ought to have given a clear-cut finding about the fair market value of the services rendered by the Director prevalent during the year under consideration - the assessee brought to notice the orders of the CIT(A) passed in respective assessment years 2007-08 & 2008-09 the CIT(A) had accepted the remuneration even higher than Rs.24 lacs as claimed by the assessee-company the AO was not justified in disallowing the remuneration as claimed by the Director of the assessee without giving a finding in respect of the fair market value prevalent for the services rendered by the assessee thus the AO is directed to delete the disallowance as made u/s.40A(2)(b) of the Act Decided in favour of Assessee.

Summary

Issues:
Challenge to disallowance of Director's remuneration under Sec.40A(2)(b) of the Act.

Analysis:
The appeal contested the order of the Ld. Commissioner of Income Tax(Appeals) regarding the disallowance of Rs.4,80,000 from Director's Remuneration under Sec.40A(2)(b) of the Act for AY 2006-07. The Assessee argued that the remuneration was not excessive or unreasonable, citing the qualifications and market value of the Director's services. The AO disallowed the amount based on a substantial raise in remuneration without justifying the excess. The CIT(A) confirmed the disallowance, linking it to fair market value. The Assessee presented cases supporting their stance on reasonableness. The Sr. DR supported the authorities' decisions, emphasizing the Assessee's burden to prove reasonableness. The Tribunal noted the lack of assessment on fair market value and duties performed, rejecting the excessive claim. The Tribunal directed the AO to delete the disallowance, citing inconsistency and lack of clear findings on fair market value.

This case highlights the importance of substantiating remuneration reasonableness under Sec.40A(2)(b) with market value assessments. The Tribunal emphasized the need for concrete findings on fair market value to justify disallowances, rejecting arbitrary decisions. The Assessee's successful appeal underscores the necessity for thorough assessments and clear justifications in tax disputes.