2020 (2) TMI 1499 - AT - Income Tax

Disallowance of the business loss on the ground that no business activity was carried on by the assessee - AO in the second round of proceedings has noted that against the rental income assessee had adjusted business loss which mainly constitutes of remuneration of ₹ 36 Lacs paid to the Director As per AO there was no business activity, the AO was of the view that high remuneration paid to the Director was not in connection with the business activity of the assessee but was against rental income offered by the assessee - HELD THAT - The Hon ble Bombay High Court in CIT Vs. Indo Saudi Services (Travel) (P.) Ltd. 2008 (8) TMI 208 - BOMBAY HIGH COURT had laid down the proposition that where the assessee and its subsidiary were in the same tax bracket and paid same rate of tax, there was no question of diversion of funds by paying higher rate to the subsidiary company and hence no disallowance under section 40(A)(2) of the Act. Applying the said proposition to the facts of the case where the Director Shri. Anshul Chawla is assessed to tax and has paid taxes on the said remuneration received by him then it cannot be said that there was diversion of funds by the assessee to its Managing Director for tax avoidance. Hence there is no merit in making any disallowance on account of the said managerial remuneration paid to the Managing Director. Accordingly, we direct the AO to allow expenditure - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of business loss
2. Non-allowance of managerial remuneration

Analysis:

Issue 1: Disallowance of Business Loss
The appeal was filed against the order of CIT(A)-9, New Delhi concerning the disallowance of a business loss of &8377; 39,30,602 on the grounds of no business activity being carried out by the assessee. Additionally, the non-allowance of managerial remuneration of &8377; 36 Lacs paid to the Managing Director was also contested. The AO highlighted that the business loss mainly consisted of the remuneration paid to the Director, Shri. Anshul Chawla, against a minimal transaction activity. The AO concluded that the high remuneration was not related to the business activity but was set against rental income. Consequently, the claim was denied, leading to the current appeal.

Issue 2: Non-Allowance of Managerial Remuneration
Upon review and hearing both representatives, the primary issue was identified as the disallowance of the &8377; 36 Lacs managerial remuneration paid to the Managing Director, Shri. Anshul Chawla. Citing a precedent from the Hon'ble Bombay High Court, it was established that if the assessee and its subsidiary paid the same tax rate, there was no diversion of funds, and hence, no disallowance under section 40(A)(2) of the Act. Applying this principle to the case at hand, where the Managing Director had paid taxes on the remuneration received, it was concluded that there was no diversion of funds for tax avoidance. Consequently, the disallowance of the managerial remuneration was deemed unjustified, and the AO was directed to allow the expenditure of &8377; 36 Lacs. As a result, the grounds of appeal raised by the assessee were upheld, leading to the allowance of the appeal.

In conclusion, the appellate tribunal ruled in favor of the assessee, allowing the appeal and directing the AO to permit the expenditure of &8377; 36 Lacs towards managerial remuneration. The judgment was pronounced on 21st February 2020.