2015 (5) TMI 503 - AT - Income Tax

Excessive salary paid to Directors - Disallowance under section 40A(2)(b) - CIT(A) deleted addition - Held that - CIT(A) has made a finding of fact and has rightly held that the tax avoidance was never intended by assessee company and, therefore, we are in agreement with his finding. - Decided against revenue. Penalty/ fine imposed by ICICI Bank - CIT(A) deleted addition - Held that - The nature of expenses is not in the nature of penalty but are expenses in the normal cause of business and we are in agreement with the findings of Ld. CIT(A) and, therefore ground of Revenue s appeal is also dismissed.- Decided against revenue. Disallowance of advertisement expenses - Addition on account of capital expenditure - CIT(A) deleted addition - Held that - In the case of CIT vs. liberty Group Marketing Division 2008 (4) TMI 219 - PUNJAB AND HARYANA HIGH COURT in which it was held that the expenditure of glow sign board did not bring into existence any assets and enduring benefit for the business. Similarly, reliance was placed on Delhi Tribunal in the case of ITO vs. Spice Communications ltd. 2009 (10) TMI 648 - ITAT DELHI in which it was held that by incurring expenditure on advertisement and sales promotion, assessee does not acquire any fixed capital assets.- Decided against revenue. Rent paid by director of the company in her individual capacity - Held that - As per section 291 of the Act, 1956 provides for general powers of the board to its directors and directors serve as agents of the company and therefore, any transaction carried out by the directors on behalf of the company is a valid transaction. Keeping in view the fact that the company had used this premises for carrying out its business in Mumbai, which was undisputed by the Ld. AO, thus hold that the disallowance made by the Ld. A.O. on this ground was unjustified. - Decided against revenue.

Summary

Issues Involved:
1. Excessive salary paid to directors.
2. Penalty/fine imposed by ICICI Bank.
3. Capital expenditure on advertisement and publicity.
4. Rent paid by a director in her individual capacity.

Issue-wise Detailed Analysis:

1. Excessive Salary Paid to Directors:
The Revenue contended that the salary paid to the directors was excessive and unreasonable under Section 40A(2)(b) of the Act, arguing that the company already had competent staff. The Appellate Tribunal found that the directors were highly qualified, had significant experience, and played a crucial role in securing contracts for the company. The directors were taxed at a higher rate than the company, indicating no tax evasion. The Tribunal upheld the CIT(A)'s decision, agreeing that the salary was justified given the directors' contributions and qualifications, and dismissed the Revenue's appeal on this ground.

2. Penalty/Fine Imposed by ICICI Bank:
The Revenue argued that the penalty imposed by ICICI Bank should be added back to the assessee's income. The Tribunal found that the charges were administrative costs incurred due to technical faults in the company's portal, not penalties for any legal breach. The CIT(A) had correctly classified these expenses as normal business expenses under Section 37. The Tribunal agreed with this assessment and dismissed the Revenue's appeal on this ground.

3. Capital Expenditure on Advertisement and Publicity:
The Revenue claimed that the advertisement expenses were capital in nature, providing enduring benefits. The Tribunal found that the advertisements were for specific events and lasted only for short periods (5-10 days), thus not providing enduring benefits. The CIT(A) had rightly classified these expenses as revenue in nature. The Tribunal upheld this finding and dismissed the Revenue's appeal on this ground.

4. Rent Paid by a Director in Her Individual Capacity:
The Revenue argued that the rent paid by the director was not authorized by the company and was for residential purposes. The Tribunal found that the director acted as an agent of the company, and the premises were used for business purposes. The CIT(A) had correctly allowed the expense under Section 37, considering the director's role and the business use of the premises. The Tribunal agreed with this finding and dismissed the Revenue's appeal on this ground.

Conclusion:
The Appellate Tribunal dismissed the Revenue's appeal on all grounds, upholding the CIT(A)'s decision to delete the additions made by the Assessing Officer. The Tribunal found that the expenses in question were justified and incurred in the normal course of business. The order was pronounced on 16th April 2015.