2014 (9) TMI 722 - HC - Income Tax

Invocation of section 40A(2)(b) - Salary paid to the Directors Held that - Assessee was setting up hotels in Gurgaon and Hyderabad under the guidance of the Director and expenditure as on 31.03.2009 on the capital work in progress was of ₹ 36.70 Crores and due to the efforts of the Director funds of ₹ 49.99 Crores had been raised by the assessee - The amount paid to the director had resulted in deduction of tax at source and income tax paid by the said director was at the maximum marginal rate the findings are factual and effectively and positively deal with the question of reasonableness of the payment the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
1. Disallowance of director's salary under Section 40A(2)(b) of the Income Tax Act, 1961.

Analysis:
The assessment year under consideration is 2009-10, where the respondent assessee, a company, declared a net taxable profit of Rs. 4,46,22,010. The Assessing Officer disallowed a payment of Rs. 48,30,000 out of Rs. 60,00,000 made to the Director, invoking Section 40A(2)(b) of the Income Tax Act. The AO found the salary paid to the Director to be unreasonable and excessive, holding it as hit by the provisions of Section 40A(2)(b). The AO considered the nature and quantum of business income and concluded that the salary was manifestly disproportionate, thereby allowing only Rs. 12,00,000 and disallowing the rest. This disallowance led to an addition of Rs. 48,30,000 to the director's salary, with penalty proceedings initiated under section 271(1)(c) for furnishing inaccurate particulars of income.

In the earlier years, similar disallowances were made but were subsequently deleted in the appellate proceedings due to low tax effect. The Commissioner of Income Tax (Appeals) in the present case deleted the disallowance after considering the Director's educational qualifications and practical experience. The Director, with a background of IIT Delhi and IIM-Kolkata, along with 15 years of experience in renowned positions, was found to be instrumental in the substantial growth of the company's business and profits.

The Commissioner observed the significant increase in the company's business and profits over the years, attributing it to the Director's guidance in setting up hotels and raising substantial funds. The company's financials showed a clear correlation between interest income earned and net profit, indicating the positive impact of the Director's involvement. The Director's efforts resulted in significant capital work in progress and raising funds, leading to tax deductions and payments at the maximum marginal rate.

The Court found the Commissioner's findings factual and conclusive in establishing the reasonableness of the director's payment. Consequently, the appeal was dismissed, upholding the Commissioner's decision to delete the disallowance of the director's salary under Section 40A(2)(b) of the Income Tax Act.