2008 (10) TMI 282 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Rs. 60,000 out of director's remuneration u/s 40A(2)(b).
2. Justification of the increase in director's remuneration.
3. Examination of the reasonableness and business exigency of the remuneration.

Summary:

Issue 1: Disallowance of Rs. 60,000 out of director's remuneration u/s 40A(2)(b)

The AO made an addition of Rs. 60,000 out of director's remuneration while passing the assessment order u/s 143(3) and directed for charging interest u/s 234B and 234C. The learned CIT(A) sustained the addition and confirmed the finding of AO for disallowance by invoking s. 40A(2)(b) of the Act. The assessee appealed against this decision.

Issue 2: Justification of the increase in director's remuneration

The assessee argued that the director, an MBA from Pune University, was paid Rs. 20,000 per month due to his significant contribution to the company, which was justified by a board resolution. The director's remuneration was increased from Rs. 10,000 to Rs. 20,000 per month due to his contributions. The learned senior Departmental Representative contended that there were no circumstances to justify the increase in salary, and the AO found the payment beyond reasonableness by invoking s. 40A(2)(b).

Issue 3: Examination of the reasonableness and business exigency of the remuneration

The Tribunal noted that the director was appointed as per a board resolution and there was no violation of s. 37 of the Companies Act. The director was responsible for production, sales, administration, finance, and legal compliances without any perquisites. It was emphasized that it is the prerogative of the company to manage its affairs, including the pay of directors, within the provisions of the relevant Act. The Tribunal concluded that the increased payment was due to commercial exigency and not unreasonable, supported by various case laws.

Separate Judgments:

There was a dissenting opinion between the members of the Tribunal. The learned AM upheld the addition made by the AO, emphasizing the AO's power to examine the reasonableness of payments made to persons specified in s. 40A(2)(b). The learned JM, however, found the disallowance unjustified, arguing that the remuneration was not excessive or unreasonable given the director's responsibilities and qualifications. The Vice President, acting as the Third Member, agreed with the JM, stating that no enquiry was made to ascertain whether the payment was excessive or unreasonable having regard to the fair market value of the services rendered.

Conclusion:

The Tribunal concluded that the disallowance made by the AO and confirmed by the learned CIT(A) was unjustified and unreasonable, and thus, the appeal of the assessee was allowed.