2018 (10) TMI 188 - AT - Income Tax

Disallowing the professional fee considering the same as prior period expenditure - crytalisation of liability - Held that - Assessee relied on the bill raised by advocate and solicitor Shri T. Pooran, wherein professional charges from 01.01.2010 to 31.03.2011 was charged by a consolidated bill dated 21.07.2011 for an amount of ₹ 3,12,501/-. There is no dispute in the facts that the amount of ₹ 62,500/- pertains to the period of 01.01.2010 to 31.03.2010 relevant to AY 2010-11 i.e. prior period. But it is to be noted that the liability for this demand has been crystalized only on raising of bills by the concerned advocate cum solicitor vide bill dated 21.07.2011. Hence, these expenses are to be allowed because as the AO has never doubted the genuineness of the expenses. As the liability has been crystalized during the AY 2011-12 and assessee has rightly claimed the same. - Decided in favour of assessee Disallowance of remuneration paid to director - payment of higher remuneration - Held that - There is no tax evasion and there is reasonableness of managerial remuneration. Now no approval is required from the Central Government for making payment of higher remuneration even in case of loss in the case of unlisted public company. In view of these facts, we are of the view that this is allowable expenditure and we allow the same accordingly. Orders of the lower authorities are reversed and this issue of assessee s appeal is allowed.

Summary

Issues:
1. Disallowance of professional fee as prior period expenditure.
2. Disallowance of remuneration paid to director.

Issue 1 - Disallowance of Professional Fee:
The appeal concerns the disallowance of professional fees of ?62,500 by the AO, treating it as prior period expenditure. The CIT(A) upheld the disallowance, considering it capital in nature. However, the Tribunal found that the liability crystallized during the relevant assessment year, making it a current year charge. The advocate raised the invoice in July 2011 for services provided in 2010, and the payment was made in 2011. As the AO did not question the genuineness of the expense and the liability arose in the current year, the Tribunal allowed the claim, setting aside lower authorities' orders.

Issue 2 - Disallowance of Director's Remuneration:
The second issue involves the disallowance of part of the remuneration paid to the managing director under section 40A(2) of the Act. The AO disallowed ?8,41,528, stating it exceeded limits without Central Government permission. The CIT(A) affirmed this decision. However, the Tribunal noted that the managing director had no equity shares in the company and the company was taxed at the highest slab rate due to substantial losses. Citing a CBDT Circular and industry norms, the Tribunal found no tax evasion and reasonableness in the remuneration. Additionally, a Ministry of Corporate Affairs notification exempted unlisted companies from approval requirements for higher remuneration in cases of losses. As a result, the Tribunal allowed the expenditure, overturning the lower authorities' decisions.

In conclusion, the Tribunal allowed the appeal of the assessee, ruling in favor of both issues presented before it. The judgments of the lower authorities were reversed, and the expenses in question were deemed allowable.