2016 (9) TMI 257 - AT - Income Tax

Disallowance of Salary to Director - Held that - The Hon ble Gujarat High Court in the case of CIT v. Prayashvin B. Patel, 1999 (10) TMI 60 - GUJARAT High Court as well as ACIT v. JNG Builders P. Ltd. 2013 (8) TMI 1016 - ITAT DELHI have held that there are certain expenses such as audit fees, salaries, professional fee , insurance , printing and stationary, bank charges, house keeping charges , repairs and maintenance etc which are necessary to maintain the corporate entity and are allowable expenses and it is not necessary that every year the assessee must have earned income from business or profession and the assessee may be required to spend the amount for carrying on its activities . The assessee company incurred expenses of ₹ 17,866/- towards legal expenses, audit fees, bank charges and miscellaneous expenses which had been allowed by the ld. CIT(A). However as per the facts emerging from the records, there were no efforts or contributions made by the Directors to carry on the business of the company as in-fact no business was carried on by the assessee company during the entire previous year, hence in our considered view , the remuneration of ₹ 1,38,000/- paid to Directors was rightly disallowed by the A.O. and confirmed by the ld. CIT(A)

Summary

Issues:
1. Disallowance of salary paid to Director
2. Charging of Interest u/s 234B of the Act

Issue 1: Disallowance of salary paid to Director
The assessee company, engaged in trading and export of garments, received interest income during the relevant year. The Assessing Officer (AO) disallowed the expenditure of salary paid to the Director as there was no business activity conducted. The AO held that the interest income should be taxed under 'income from other sources' and only certain expenses were allowable under section 57 of the Act. The Commissioner of Income Tax (Appeals) upheld the disallowance of Director's Remuneration but allowed statutory expenses. The Tribunal observed that the company had no business activity and earned interest income from surplus funds, which should be taxed separately. The Tribunal agreed with the AO and CIT(A) that the Director's Remuneration was rightly disallowed as it had no direct nexus with the interest income earned.

Issue 2: Charging of Interest u/s 234B of the Act
The AO charged interest u/s 234B of the Act on the assessee for the relevant assessment year. The CIT(A) confirmed this decision. The Tribunal did not specifically address this issue in the judgment summary provided.

In conclusion, the Tribunal dismissed the appeal filed by the assessee for the assessment year 2012-13, upholding the disallowance of Director's Remuneration and the charging of interest u/s 234B. The judgment emphasized the need for expenses to be directly related to income earned and highlighted the distinction between business income and income from other sources.