2017 (5) TMI 1106 - AT - Income Tax

Disallowance on account of salary and bonus paid to the Director - Held that - After the appointment of Mr. Abhinav Kumar due to his tremendous efforts and business generating capability the turnover of the company in the A Y in question grew by more than 18 times as compare to last FY. Further the total receipts of the assessee company rose from 42.81 Lacs in FY 2007- 08 to 831.73 Lacs in FY 2008-09. Further the personnel expenses reduced from 34.71 % of the total turnover in FY 2007-08 to 19.37% the provisions of section. Therefore to appreciate the efforts of Mr. Abhinav Kumar Director of the Company and for above mentioned reasons the Bonus was decided by the Board of Directors of the assessee company vide Resolution dated 16.3.2009 at 50, 00, 000/- lacs which within the provisions of the Companies Act 1956 read with Income Tax Act 1961 which was reasonable and justified. We find considerable cogency in submission of the Ld. Counsel of the assessee that Section 40A(2)(a) cannot be invoked and have no application unless it is first concluded that the expenditure was excessive or unreasonable. We further note that the AO in the assessment order as well as Ld. CIT(A) in enhancement notice erred in deciding the amount of salary and bonus of Mr. Abhinav Kumar as the reasonableness of the remuneration has to be considered from the point of view of a Company and it was not open to the Assessing Officers as well as Ld. CIT(A) to adopt a subjective standard with regard to the proper remuneration which should be paid to its Directors. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the CIT(A)'s order.
2. Disallowance of ?27,50,000/- as remuneration paid to the director.
3. Enhancement of the assessee's income by ?61,25,000/- by the CIT(A).
4. Disallowance of ?88,75,000/- on account of salary and bonus paid to the director.
5. Compliance with Section 40A(2) of the Income Tax Act.
6. Violation of statutory provisions of Section 142(3) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Legality of the CIT(A)'s Order:
The assessee challenged the order passed by the CIT(A) as being bad in law and on facts. The Tribunal examined whether the CIT(A) had correctly applied the law and facts in enhancing the income of the assessee by making additional disallowances.

2. Disallowance of ?27,50,000/- as Remuneration Paid to the Director:
The Assessing Officer (AO) disallowed ?27,50,000/- out of the total remuneration of ?95,00,000/- paid to the director, citing that the remuneration was excessive and unreasonable under Section 40A(2)(b). The AO noted that the director's salary should have been ?45,00,000/- (?5,00,000 x 9 months) plus perquisites not exceeding 50% of the salary, totaling ?67,50,000/-.

3. Enhancement of the Assessee's Income by ?61,25,000/- by the CIT(A):
The CIT(A) enhanced the income of the assessee by ?61,25,000/- in addition to confirming the AO's disallowance of ?27,50,000/-, resulting in a total disallowance of ?88,75,000/-. The CIT(A) based this enhancement on the assessment that the remuneration paid was excessive.

4. Disallowance of ?88,75,000/- on Account of Salary and Bonus Paid to the Director:
The Tribunal reviewed the disallowance of ?88,75,000/- made by the CIT(A). The assessee argued that the remuneration was within the provisions of the Companies Act, 1956, and the Income Tax Act, 1961. The Board of Directors had passed a resolution approving the remuneration, and it was justified based on the director's significant contributions to the company's growth.

5. Compliance with Section 40A(2) of the Income Tax Act:
The Tribunal noted that Section 40A(2)(a) could not be invoked unless it was first concluded that the expenditure was excessive or unreasonable. The reasonableness of the remuneration should be considered from the point of view of a businessman, not the AO. The Tribunal cited several judgments supporting this view, including decisions from the Calcutta High Court, Bombay High Court, and Delhi High Court.

6. Violation of Statutory Provisions of Section 142(3) of the Income Tax Act:
The assessee contended that the disallowance was made based on material collected at the back of the assessee without giving an opportunity to rebut the same, violating Section 142(3). The Tribunal found that the AO and CIT(A) had erred by not considering the legitimate business needs and benefits derived by the company from the director's remuneration.

Conclusion:
The Tribunal concluded that the remuneration paid to the director was not excessive or unreasonable and was justified based on the director's contributions to the company's growth. The disallowance of ?88,75,000/- was deleted, and the orders of the revenue authorities were canceled. The appeal filed by the assessee was allowed.