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2015 (5) TMI 581 - AT - Income TaxDisallowance u/s 40A(2)(b) - excessive remuneration to Directors - Held that - In the present case, it is noticed that one of the Directors, namely, Ms. Dilpreet Singh is a Chartered Accountant and also qualified CPA from the USA. She was earlier employed with Febindia Overseas Private Ltd. as a Chief Financial Officer and another Director, Mr. Prakash Tripathi is a commerce Graduate, he started his career with the Indian Institute of Management, Ahmedabad as a Research Investigator in various projects. Later on, he joined the Desert Artisans Handcrafts Pvt. Ltd., Jodhpur in 1991 and grown to Managing Director in the said company by 2007, therefore, both the Directors were well qualified and having the requisite experience in finance and community managed company. It is also noticed that Ms. Dilpreet Singh was getting a remuneration of ₹ 29,54,990/- when she was earlier employed with M/s Fabindia Overseas Pvt. Ltd. and Mr. Prakash Tripathi was getting a remuneration of ₹ 13,02,471/- from M/s Desert Artisans Handicrafts Pvt. Ltd. Jodhpur wherein he was earlier employed. Therefore, the remuneration amounting to ₹ 11,40,000/- and ₹ 15,68,050/- respectively received by them from the assessee cannot be said to be excessive by keeping in view, their previous experiences and earlier employment. Moreover, the AO had not brought any material on record to substantiate that as to how and in what manner the remuneration paid to the Directors was excessive. He had also not given any basis for allowing the remuneration @ 20% of the total receipts. Thus the disallowance made by the AO and sustained by the Ld. CIT(A) was not justified. Accordingly, the same is deleted. - Decided in favour of assessee.
Issues Involved:
1. Disallowance of Rs. 14,93,657/- by restricting the remuneration to 20% of gross receipts. 2. Invocation of Section 40A(2)(b) of the Income Tax Act, 1961. 3. Consideration of legitimate business needs and qualifications of the Directors. 4. Confirmation of the order by the CIT(A) without considering the submissions and documents produced. Issue-wise Detailed Analysis: 1. Disallowance of Rs. 14,93,657/- by restricting the remuneration to 20% of gross receipts: The assessee's appeal contested the disallowance of Rs. 14,93,657/- made by the Assessing Officer (AO) by restricting the remuneration paid to the Directors to 20% of the gross receipts. The AO observed that the salary paid to the Directors was 56.57% of the total salary expenses and 44.60% of the total receipts of Rs. 60,71,967/-. The AO deemed this ratio unreasonable and excessive, restricting the remuneration to 20% of the receipts, thereby allowing only Rs. 12,14,393/- and disallowing the remaining Rs. 14,93,657/-. 2. Invocation of Section 40A(2)(b) of the Income Tax Act, 1961: The AO invoked Section 40A(2)(b) of the Income Tax Act, 1961, which deals with excessive or unreasonable payments to related parties. The AO justified the disallowance by stating that the remuneration paid to the Directors was excessive given the company's loss-making status and the ratio of remuneration to total income. However, the assessee argued that the remuneration was justified based on the Directors' previous higher salaries and their qualifications and experience. 3. Consideration of legitimate business needs and qualifications of the Directors: The assessee provided detailed qualifications and previous employment details of the two Directors, Ms. Dilpreet Singh and Mr. Prakash Tripathi, to justify the remuneration. Ms. Singh, a Chartered Accountant and CPA, previously earned Rs. 29,54,990/- at Fabindia Overseas Pvt. Ltd., while Mr. Tripathi, a Commerce Graduate with extensive experience, earned Rs. 13,02,471/- at Desert Artisans Handicrafts Pvt. Ltd. The assessee argued that the remuneration was not excessive considering their qualifications and contributions to the company's growth, as evidenced by the increase in turnover in subsequent years. 4. Confirmation of the order by the CIT(A) without considering the submissions and documents produced: The CIT(A) confirmed the AO's disallowance, stating that the remuneration did not satisfy the test of human probability given the company's loss-making status. The CIT(A) emphasized that the remuneration should be reasonable with the business needs and not simply to defraud revenue. However, the assessee contended that the CIT(A) did not adequately consider the detailed submissions and documents provided, which demonstrated the legitimacy and reasonableness of the remuneration. Conclusion: The Tribunal, after considering the rival submissions and material on record, found that the Directors were well-qualified and their remuneration was not excessive given their previous salaries and contributions to the company's growth. The Tribunal noted that the AO did not provide a basis for restricting the remuneration to 20% of the receipts and had not substantiated how the remuneration was excessive. Consequently, the Tribunal held that the disallowance made by the AO and sustained by the CIT(A) was not justified and deleted the disallowance, allowing the appeal filed by the assessee. Result: The appeal filed by the assessee was allowed, and the decision was pronounced in the open Court on 17th April, 2015.
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