2021 (4) TMI 570 - AT - Income Tax

Disallowance being 35% of the remuneration paid to one of the director Ms. Pallavi Luthra of the assessee u/s 40A(2)(b) - HELD THAT - Referring to submissions made by the assessee highlighting qualifications and work assigned to her, it is surprising to note that the Revenue has accepted working of Ms. Pallavi Luthura as a Director and allowed 65% of the amount paid to her but it is beyond comprehension as to how they had reached the conclusion that out of the 100% of the work assigned to Ms. Pallavi Luthura by the assessee company, 35% of the same was found ingenuine. The entire disallowance is on the basis of conjectures and surmises. AO also brought on record the fact that Ms. Pallavi Luthura was Director having 50% of the shareholding in another company called Cloud Cuckoo Farm during the year under assessment but assessee stated that Cloud Cuckoo Farm s profit is nil and brought on record its balance sheet in additional evidence. Again, it is surprising to disallow 35% of the remuneration, particularly when genuineness of the job profile has not been questioned, merely on the ground that Ms. Pallavi Luthura was a Director in Cloud Cuckoo Farm. It is also a matter of fact on record that Ms. Pallavi Luthura was a whole time director in the assessee company and was paid remuneration for the work assigned to her during the year under assessment. Merely on the basis of conjectures and surmises, provisions contained u/s 40A(2)(b) cannot be allowed to be invoked particularly when genuineness of the services rendered are not in dispute. So, we are of the considered view that AO as well as ld. CIT (A) have erred in disallowing the remuneration to the tune of 35% paid to Ms. Pallavi Luthura by the assessee company, hence ordered to be deleted. Appeal filed by the assessee is allowed.

Summary

Issues:
Disallowance of remuneration paid to director's daughter under section 40A(2)(b) of the Income-tax Act, 1961.

The judgment revolves around the challenge by M/s. VLCC Health Care (P) Ltd. against the disallowance of an amount of &8377; 6,73,933, being 35% of the remuneration paid to Ms. Pallavi Luthra, daughter of one of the directors of the assessee, under section 40A(2)(b) of the Income-tax Act, 1961. The appellant contended that the disallowance should be deleted as the Assessing Officer (AO) had ignored the qualifications and responsibilities of Ms. Pallavi Luthra in the business. The Commissioner of Income-tax (Appeals) confirmed the disallowance partially, leading the assessee to appeal before the Tribunal.

Upon review, the Tribunal observed that neither the AO nor the CIT (A) disputed the qualifications and duties assigned to Ms. Pallavi Luthra by the company. It was noted that no comparable case was examined to assess her functional profile. The Tribunal found it perplexing that while 65% of the remuneration paid to Ms. Pallavi Luthra was accepted, the disallowance of 35% was solely based on conjectures and surmises, lacking substantial evidence.

Furthermore, it was highlighted that Ms. Pallavi Luthra's role as a director in another company with nil profits was used as a basis for disallowance, despite her being a whole-time director in the assessee company and receiving remuneration for her work. The Tribunal concluded that invoking section 40A(2)(b) based on conjectures without questioning the genuineness of services rendered was unwarranted. Consequently, the Tribunal held that the disallowance of 35% of the remuneration to Ms. Pallavi Luthra was unjustified and ordered it to be deleted, thereby allowing the appeal filed by the assessee.

In conclusion, the Tribunal's decision provided a detailed analysis of the facts and circumstances, emphasizing the importance of substantiated evidence over conjectures in matters of disallowance under section 40A(2)(b) of the Income-tax Act, 1961.

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