2016 (9) TMI 955 - AT - Income Tax

Disallowance of salary paid to the Director by applying the provisions of Section 40A(2) - Held that - Assessing Officer has disallowed the salary increase in the salary by invoking the provisions of Section 40A(2) which mandates that in case the Assessing Officer of the opinion that an expenditure is excessive or unreasonable having regard to Fair Market Value of goods; services or facilities for which the payment is made or legitimate need of the business or profession so much of the expenditure as was considered excessive or unreasonable salary shall not be allowed as a deduction. Thus once the Assessing Officer has to form an opinion that a particular expenditure is excessive or unreasonable. The formation of opinion should be based on having regard to the fair market value of the services or goods. However the Assessing Officer has not conducted such enquiry but disallowed the salary of the same director in the earlier year. It is pertinent to note that when the salary paid to the Director is still less than the salary paid to the other Directors during the year under consideration then the provisions of Section 40A(2) cannot be invoked. It may be a case that this particular Director was under paid in earlier year and just to bring the parity of the salary with the other Directors the salary of the Director was increased during this year. In view of the above facts as well as decision of this Tribunal in assessee s own case (supra), the disallowance made by the Assessing Officer is not justified and the same is deleted. Addition made on account of difference between the balances in the accounts of M/s. Kayen Print Services Pvt. Ltd. and M/s. UPM Kymmene India Pvt. Ltd. - Held that - It is manifest from the record that the assessee failed to explain the differences in the balance outstanding in the accounts of these two parties as per the confirmation of accounts by these parties. Before the Tribunal the assessee has explained the differences due to certain investments that were not taken into consideration by these parties however in the absence of the relevant evidence produced before the authorities below for their examination and verification this explanation of the assessee cannot be accepted at this stage

Summary

Issues Involved:
1. Disallowance of salary paid to the Director under Section 40A(2) of the Income Tax Act, 1961.
2. Addition made on account of difference between the balances in the accounts of M/s. Kayen Print Services Pvt. Ltd. and M/s. UPM Kymmene India Pvt. Ltd.

Issue 1: Disallowance of Salary Paid to the Director under Section 40A(2) of the Income Tax Act, 1961:
The appellant challenged the disallowance of a portion of the Director's salary under Section 40A(2) of the Act. The Assessing Officer noted a significant increase in the Director's salary from the previous year and disallowed a portion of it. The Tribunal referred to a previous decision in the appellant's case for the Assessment Year 2007-08 where it was held that the Assessing Officer must determine if the remuneration paid to directors is excessive based on fair market value. The Tribunal emphasized that without establishing fair market value, disallowance under Section 40A(2) cannot be justified. The Tribunal highlighted that the Assessing Officer failed to conduct a proper enquiry into the reasonableness of the salary increase. It was noted that if a director's salary increase is to align with other directors' salaries, invoking Section 40A(2) may not be appropriate. Consequently, the disallowance of the Director's salary increase was deemed unjustified and deleted.

Issue 2: Addition Made on Account of Difference Between Balances in Accounts:
The Assessing Officer disallowed discrepancies in the balances of two parties' accounts, M/s. Kayen Print Services Pvt. Ltd. and M/s. UPM Kymmene India Pvt. Ltd. The CIT (Appeals) upheld the disallowance due to the appellant's failure to provide relevant reconciliation and details. The appellant explained the differences as related to investments not considered by the parties, but this explanation lacked supporting evidence. Despite the appellant's explanation before the Tribunal, the absence of evidence provided to the authorities earlier led to the dismissal of the grounds related to the discrepancies in the account balances. Consequently, the appeal was partly allowed, with the disallowance on this ground sustained.

In conclusion, the judgment addressed the issues of disallowance of the Director's salary under Section 40A(2) and the addition made on account of discrepancies in account balances. The Tribunal emphasized the importance of establishing fair market value in determining the reasonableness of director's remuneration and highlighted the necessity of providing concrete evidence to support explanations for discrepancies in account balances to avoid disallowances.