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2008 (10) TMI 280 - AT - Income TaxDisallowance out of Director's remuneration u/s 40A(2)(a) - excessive or unreasonable - difference of opinion between the Members - Third Member Appointment - business of running a Roller Flour Mill - AO noted that the assessee had discontinued its manufacturing activities and instead carried on the job work of its sister concern. It was also noted that Shri Aditya Goel was also working director in M/s. Ind Agro Synergy Ltd., where he was fully engaged in installation and commencement of business of Sponge Iron Unit of the said concern. Therefore, AO was of the view that the increase in the salary to Shri Aditya Goel was excessive. Consequently, disallowance made u/s 40A(2)(a). CIT(A) upheld the order of AO. HELD THAT - The payment to the Director was made as per resolution within the provisions of Companies Act which prevails over Income-tax Act. The revenue cannot be replaced for Board of Directors. It is prerogative of the Board of Directors to run the industry in the national interest keeping in view the social responsibility. Since the increase in the salary was supported by Board of Directors Resolution and there is no embargo under the Companies Act to have Directorship in two companies and the payment made to the Director after having increase in turnover and profitability of the company during the relevant assessment year which is brought on record by the assessee. Therefore, we conclude that the increased payment is due to commercial exigency and not unreasonable. Our view get support from orders in Addl. CIT v. Kuber Singh Bhagwandas 1978 (10) TMI 134 - MADHYA PRADESH HIGH COURT , CIT v. Sinnar Bidi Udyog Ltd. 2002 (6) TMI 33 - BOMBAY HIGH COURT and CIT v. Dalmia Cement (Bharat) Ltd. 2001 (9) TMI 48 - DELHI HIGH COURT . The AO and the CIT has not brought on record any reason for disallowing the higher payment being personal benefit or not for business purpose. Therefore, we are of the definite view that the disallowance made by the AO and confirmed by the CIT(A) in appeal is unjustified and unreasonable, to be set aside. On the other hand, the ld JM was of the view that no disallowance could be made u/s 40A(2)(a) inasmuch as the remuneration paid to Shri Aditya Goel, director of the assessee-company could not be said to be excessive or unreasonable since (i) the appointment of the director was made as per the resolution passed by the Board of Directors in their meeting held on 30-9-2003, (ii) that Shri Goel was to look after the production, sales, administration, finance and legal matters without any perquisites, (iii) that it is the prerogative of the company as how to run and manage the daily affairs of the company and, therefore, the same could not be challenged and (iv) that increase in the salary was supported by the resolution passed by the Board of Directors as usual and there is no embargo under the Companies Act to have directorship in two companies. Third Member order - In the absence of enquiry as contemplated by the provisions of section 40A(2)(a), no disallowance could have been made or sustained. The onus was on the AO to bring the material on record to prove that the payment made by the assessee was excessive or unreasonable having regard to the fair market value of the services rendered. If some material evidence is brought on record to indicate that payment appeared to be excessive or unreasonable then the onus would shift to the assessee to prove that the payment was not excessive or unreasonable. Since no enquiry as contemplated by the aforesaid provisions was made on this account, it cannot be said that the payment was excessive or unreasonable. Therefore, I find myself in agreement with the conclusions arrived at by the Ld JM though for different reasons. The matter may now be placed before the Division Bench for disposal of the appeal.
Issues Involved:
1. Disallowance of Rs. 60,000 from Director's remuneration under section 40A(2)(a). 2. Justification of the increase in Director's remuneration. 3. Applicability of section 40A(2)(a) based on fair market value and business exigency. Detailed Analysis: 1. Disallowance of Rs. 60,000 from Director's remuneration under section 40A(2)(a): The Assessing Officer (AO) disallowed Rs. 60,000 from the Director's remuneration by invoking section 40A(2)(a), citing that the increase in remuneration from Rs. 10,000 to Rs. 20,000 per month was unreasonable. This disallowance was upheld by the CIT(Appeals), who noted that the Director, Mr. Aditya Goel, was also a Director in a sister concern and fully engaged in its business activities. 2. Justification of the increase in Director's remuneration: The assessee argued that the increase in remuneration was justified due to the Director's qualifications (MBA from Pune University) and his contributions to the company's production, sales, administration, finance, and legal compliances. The increase was approved by a Board resolution. The assessee relied on the decision in Abbas Wazir (P.) Ltd. v. CIT [2003] 133 Taxman 702 (All.) to support their claim. 3. Applicability of section 40A(2)(a) based on fair market value and business exigency: The Tribunal noted that section 40A(2)(a) allows the AO to disallow any expenditure deemed excessive or unreasonable when compared to the fair market value of the services rendered. The AO argued that the remuneration was excessive given the Director's involvement in another company and the discontinuation of the assessee's manufacturing activities. Tribunal's Findings: Hemant Sausarkar, Judicial Member: - The Judicial Member emphasized that the payment was made as per the Board's resolution and within the provisions of the Companies Act. - It was noted that the Director's remuneration was justified based on his contributions and the company's increased turnover and profitability. - The Judicial Member concluded that the disallowance was unjustified, as the AO did not provide sufficient evidence that the payment was for personal benefit or not for business purposes. - The Judicial Member relied on precedents such as Addl. CIT v. Kuber Singh Bhagwandas [1979] 118 ITR 379 (MP)(FB) and CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 (Delhi) to support the view that the Board's decision should prevail unless proven otherwise. P.M. Jagtap, Accountant Member: - The Accountant Member agreed that the AO has the authority to assess the reasonableness of payments under section 40A(2)(a). - He argued that the substantial increase in remuneration was not justified solely based on the Director's MBA degree, which he already held in the previous year. - The Accountant Member also highlighted that the Director was fully engaged with another company, which questioned the justification for the increased remuneration. - The Accountant Member upheld the disallowance, emphasizing that the payment was excessive and unreasonable based on the facts. Third Member (K.C. Singhal, Vice President): - The Third Member highlighted that the AO must prove that the payment was excessive or unreasonable by comparing it to the fair market value of the services. - It was noted that the AO did not conduct an appropriate inquiry to determine the fair market value of the services. - The Third Member concluded that without such an inquiry, the disallowance under section 40A(2)(a) was not justified. - The Third Member agreed with the Judicial Member's conclusion, emphasizing the lack of evidence to support the AO's claim of excessiveness. Final Decision: The Tribunal ruled in favor of the assessee, setting aside the disallowance of Rs. 60,000 from the Director's remuneration. The appeal of the assessee was allowed, and the disallowance was deemed unjustified and unreasonable.
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