2024 (8) TMI 342 - AT - Income Tax

Disallowance of consultancy charges paid to one of the directors - Addition invoking Section 40A (2) - said payment was justified considering the expertise and experience of the said director and it was commensurate and reasonable compared to the size of the assessee s business - HELD THAT - AO could not sit on the armchair of the businessman so as to judge the reasonableness of the expenditure to the incurred by the assessee for its business purposes unless it is shown that the said expenditure was excessive having regard to the market price of the goods or services so procured by the assessee. The Hon ble High Court of Madras in the case of Computer Graphics Pvt. Ltd 2006 (2) TMI 117 - MADRAS HIGH COURT held that the reasonableness of the expenditure for the purpose of business had to be adjudged from the view point of a businessman and not that of the Revenue while invoking Section 40A (2). Unless there is proof of excessive / unreasonable payment, no disallowance could be made u/s 40A (2) of the Act. During this year, the project of the assessee has started generating revenues and the payee director has been involved in day to day affairs of the assessee-company which quite justify the increased payment in this year. The payment so made is stated to be in conformity with the provisions of the Companies Act. Another fact brought to our knowledge by Ld. AR is that the assessee has deducted due TDS against such payments and the payments so received by the assessee has ultimately been offered to tax by that director in his return of income. AO has not brought on record any material to demonstrate that the payment is actually excessive or unreasonable having regard to the market rates of services so procured by the assessee or the business need of the assessee or benefits derived by the assessee there-from. AO has merely disallowed differential of remuneration in two years without establishing the reasonableness of the payment. In the absence of such an exercise, no case of excessive expenditure could be made out against the assessee. Thus the impugned disallowance stand deleted. Decided in favour of assessee.

Summary

Issues: Disallowance of salary to directors u/s 40A (2)(b)

Analysis:
1. The appeal pertains to the disallowance of salary to directors under section 40A (2)(b) for Assessment Year 2018-19.
2. The assessee paid consultancy charges to a director who acted as a resident director, justifying the payment based on his expertise and role in the company's day-to-day affairs.
3. The Assessing Officer (AO) proposed disallowance of a portion of the consultancy charges, citing lack of significant change in responsibilities or permissions obtained for the project.
4. The AO disallowed the increased payment under section 40A (2)(b), which was upheld by the Commissioner of Income Tax (Appeals).
5. However, the Tribunal held that the reasonableness of expenditure for business purposes should be judged from a businessman's viewpoint, not the Revenue's, as per the Madras High Court ruling in Computer Graphics Pvt. Ltd.
6. It was noted that the payment to the director was justified due to the substantial increase in revenue generated in the relevant year and the director's pivotal role as the sole resident director.
7. The Tribunal found no evidence of excessive or unreasonable payment, especially considering the director's involvement in day-to-day affairs and the adherence to Companies Act provisions.
8. As the AO failed to establish the excessive nature of the payment or its unreasonableness, the Tribunal deleted the disallowance and directed the AO to re-compute the assessee's income.
9. The appeal was allowed, and the order was pronounced on 10th June 2024.