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2021 (1) TMI 841 - HC - Income TaxAddition u/s 40A(2) - remuneration paid to the Managing Director nearly 90% of the returned income of the assessee company - MD s physical presence was only 15 days in the year and when the Managing Director was not aware of the existence and termination of agreement in favour of SEL wherein huge payments were made by the assessee company - CIT-A and Tribunal deleted addition on the ground that the Managing Director is directly responsible for the business of the company an in fact, has brought the sale from Italy and other European countries and therefore, is entitled to remuneration - HELD THAT - CIT (Appeals) as well as the Tribunal have completely failed to establish that no material was produced by the assessee to demonstrate that the Managing Director had secured the business of the company from Italy and other European countries. The provisions of Section 40A(2) which are applicable to the fact situation of the case have also not been taken into account by the CIT (Appeals) as well as the tribunal. We deem it appropriate to quash the order passed by the Commissioner of Income Tax (Appeals) and the tribunal and remit the matter to the CIT (Appeals) to decide the appeal afresh by taking into account the provisions of Section 40A(2) of the Act and the fact that the assessee had failed to adduce any material to show that the Director of the company had procured business for the company from Italy and other European countries. Decided in favour of revenue by way of remand.
Issues:
- Whether remuneration paid to the Managing Director was allowable under Section 40A(2) of the Income Tax Act, 1961? - Whether the Managing Director's services were commensurate with the remuneration paid to him? - Whether the burden of proof lies on the assessee to establish the reasonableness of the expenditure under Section 40A(2)(a) of the Act? Analysis: 1. The appeal concerned the allowance of remuneration paid to the Managing Director, which was nearly 90% of the returned income of the assessee company, for the Assessment Year 2006-07. The Assessing Officer disallowed this amount, stating lack of evidence of services rendered by the Director. However, the Commissioner of Income Tax (Appeals) and the tribunal allowed the remuneration, emphasizing the Director's role in bringing sales from European countries. 2. The revenue contended that the findings were based on conjectures and that the burden of proof lies on the assessee to show the reasonableness of the payment. They argued that no evidence was presented to prove the Director's contribution to global orders. The revenue relied on the Supreme Court decision in 'GANAPATHY & CO. VS. COMMISSIONER OF INCOME-TAX, BANGALORE' to support their stance. 3. Conversely, the assessee argued that the remuneration was taxed in the Director's hands and that disallowing it would result in double deduction. They highlighted the Director's role in sales and marketing, stating that the payment was proportionate to the sales. They cited various court decisions in support of their position. 4. The Court noted that under Section 37(1) of the Act, expenses wholly and exclusively for business purposes are allowed. However, Section 40A(2)(a) empowers the Assessing Officer to disallow excessive or unreasonable expenditures. The burden of proof lies on the assessee to demonstrate the business purpose of the expenditure. 5. The Court found that the Assessing Officer's decision was solely based on the Director's short stay in India, which was overturned by the Commissioner and tribunal without proper evidence of the Director's contribution. The provisions of Section 40A(2) were not adequately considered. Therefore, the Court set aside the previous orders and remitted the matter to the Commissioner for a fresh decision, considering the relevant provisions and lack of evidence regarding the Director's contribution to global orders. 6. In conclusion, the Court disposed of the appeal, emphasizing the need for proper assessment under Section 40A(2) and the requirement for the assessee to establish the reasonableness of expenditures for business purposes.
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