2018 (11) TMI 1113 - AT - Income Tax

Penalty u/s 271(1)(c) - disallowance made u/s 40A(2)(a) - higher salary paid to Directors - Related party transactions - Held that - Undisputedly, the assessee had been paying remuneration to the concerned directors from past several years. Moreover, from the shareholding pattern of the company, it appears that the total share holding of the aforesaid three directors combined together constitutes only 15%. Therefore, it cannot be said that for escaping the rigors of section 2(22)(e) the assessee has paid remuneration to the directors. The object behind introduction of section 40A(2) is for preventing evasion of tax through shifting of profit by making payment to related parties. Therefore, it is of paramount importance to examine whether the assessee has made payment for evading tax through shifting of profit. In the facts of the present case, it is evident that the assessee had been showing loss continuously for past several years and the Assessing Officer has also accepted loss shown by the assessee. That being the case, there cannot be any intention on the part of the assessee to evade tax by shifting profit. It is equally important to note that the remuneration paid to the directors have been offered by them to tax while filing their individual tax returns for the respective assessment years. This fact is evident from the copies of the income tax returns of the concerned directors filed before us by the learned Sr. Counsel. It is also not disputed that the concerned directors are assessed to tax at the maximum rate of 30% - the provisions of section 40A(2) are not attracted to the payment made to the directors - we are of the view that the disallowance made under section 40A(2)(a) of the Act in the impugned assessment years are unsustainable. Accordingly, we deleted the disallowances made in all the assessment years under appeal. - Decided in favour of assessee.

Issues Involved:
1. Disallowance under section 40A(2)(a) of the Income Tax Act, 1961, on account of payment of remuneration to whole-time directors.
2. Deletion of penalty imposed under section 271(1)(c) of the Act for the assessment year 2008-09.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(2)(a) of the Income Tax Act, 1961:

The primary issue in the appeals by the assessee concerns the disallowance made under section 40A(2)(a) of the Income Tax Act, 1961, due to the payment of remuneration to whole-time directors. The assessee argued that the remuneration paid was not excessive or unreasonable. The facts revealed that the assessee had been paying remuneration to the directors for several years, irrespective of profit or loss. The remuneration had increased incrementally over the years, and in the past, the Assessing Officer had accepted the remuneration in scrutiny assessments. The assessee contended that the remuneration paid was justified by the directors' experience and was comparable to market rates.

The Assessing Officer, however, found the remuneration excessive and unreasonable, especially since the assessee showed losses in the relevant financial years. The AO used the remuneration paid in the financial year 2003-04 as a base and determined the reasonable remuneration payable, leading to significant disallowances.

The Tribunal examined the provisions of section 40A(2)(a) and concluded that the Assessing Officer must bring material on record to demonstrate that the payment was excessive or unreasonable compared to market rates, business needs, or benefits derived. The Tribunal found that the AO's disallowance was based on estimates without substantial evidence. The Tribunal noted that the assessee had consistently paid remuneration to the directors, which had been accepted in earlier assessments. Additionally, the directors had paid taxes on the remuneration at the maximum rate, indicating no tax evasion intent.

The Tribunal ruled that the disallowance under section 40A(2)(a) was unsustainable and deleted the disallowances for all assessment years under appeal.

2. Deletion of Penalty Imposed under Section 271(1)(c) of the Act for the Assessment Year 2008-09:

The Revenue's appeal was against the deletion of a penalty imposed under section 271(1)(c) of the Act. The penalty was based on the disallowance of remuneration paid to directors under section 40A(2)(a). The assessee argued that the disallowance was merely a difference in the deduction claimed and did not amount to concealment of income.

The Commissioner (Appeals) had deleted the penalty, concluding that it was a case of disallowance of deduction rather than concealment of income. The Tribunal upheld this decision, noting that the genuineness of the payment was not in doubt, and the disallowance was based on an estimate. The Tribunal also referenced its decision to delete the disallowance in the quantum appeal, affirming that the penalty could not survive.

The Tribunal dismissed the Revenue's appeal, confirming that the penalty under section 271(1)(c) was not applicable.

Conclusion:

The Tribunal allowed all the appeals of the assessee, deleting the disallowances made under section 40A(2)(a) for the assessment years 2007-08, 2008-09, 2009-10, and 2010-11. The Tribunal also dismissed the Revenue's appeal, upholding the deletion of the penalty imposed under section 271(1)(c) for the assessment year 2008-09.

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