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2025 (4) TMI 136 - AT - Income TaxAddition made u/s 37(1) - remuneration paid to the managing director exceeded the permissible limit under the Companies Act 2013 - HELD THAT - As the remuneration paid by the Assessee to the managing director during the relevant previous year false within the ambit of Circular No.07/2015 and therefore there is no violation of the applicable provisions of the Companies Act 1956 and/or the Companies Act 2013. We note that there is nothing on record to show that any proceedings were initiated against the Assessee-Company by the MCA for violating provisions of the Companies Act 1956/2013. No adverse observations for the relevant previous year have been made by the statutory auditors of the Assessee-Company. No infirmity in the order passed by CIT(A) holding that provisions of Explanation 1 to Section 37(1) would not be attracted and the Assessee is entitle to claim deduction for managerial remuneration u/s 37(1) - Decided against revenue. Addition invoking the provisions contained in Section 40A(2)(b) - HELD THAT - There is nothing on record to support the finding returned by the AO that the remuneration paid to the managing director was either excessive or unreasonable in terms of Section 40A(2)(b) -- Decided against revenue.
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment are: 1. Whether the CIT(A) erred in directing the Assessing Officer (AO) to delete the addition made under Section 37(1) of the Income Tax Act, 1961, on the grounds that the remuneration paid to the managing director exceeded the permissible limit under the Companies Act, 2013. 2. Whether the CIT(A) erred in directing the AO to delete the disallowance made under Section 40A(2)(b) of the Income Tax Act, 1961, due to the AO's failure to substantiate that the remuneration was excessive or unreasonable. ISSUE-WISE DETAILED ANALYSIS Issue 1: Section 37(1) Disallowance Relevant legal framework and precedents: The issue revolves around Section 37(1) of the Income Tax Act, 1961, which allows deductions for expenses not being capital or personal in nature, incurred wholly and exclusively for business purposes. The assessment also involves Section 197 and Schedule V of the Companies Act, 2013, which limits managerial remuneration to 11% of net profits. Court's interpretation and reasoning: The Court examined the provisions of the Companies Act, 1956, which were applicable at the time of the managing director's appointment. The remuneration was governed by Section 198 and Schedule XIII of the 1956 Act, particularly Section II of Part II, which applies to companies with inadequate profits. Key evidence and findings: The managing director was appointed by a Special Resolution, and the remuneration exceeded INR 48,00,000 per annum. The Assessee argued that the managing director had no interest in the company's capital and met the qualifications specified in the MCA Notification, exempting the need for Central Government approval. Application of law to facts: The Court agreed with the CIT(A) that the remuneration was in line with the Companies Act, 1956, and the MCA Circular No. 07/2015, which allowed continuation of remuneration terms post-2014. Hence, no violation occurred, and Section 37(1) disallowance was not applicable. Treatment of competing arguments: The Revenue argued that the remuneration exceeded statutory limits, but the Court found the Assessee's compliance with the 1956 Act and MCA guidelines persuasive. Conclusions: The Court upheld the CIT(A)'s decision, dismissing the Revenue's ground on Section 37(1) disallowance. Issue 2: Section 40A(2)(b) Disallowance Relevant legal framework and precedents: Section 40A(2)(b) of the Income Tax Act, 1961, disallows excessive or unreasonable payments to related parties. Court's interpretation and reasoning: The Court noted that the AO failed to provide comparable cases to demonstrate excessiveness or unreasonableness of the remuneration. Key evidence and findings: The AO relied on the qualification of the next highest-paid employee without substantiating the claim with industry comparisons or similar cases. Application of law to facts: The CIT(A) found the AO's approach flawed, as it lacked adequate evidence to justify the disallowance under Section 40A(2)(b). Treatment of competing arguments: The Revenue's argument was unsupported by evidence, while the Assessee's position was backed by legal precedents and factual analysis. Conclusions: The Court concurred with the CIT(A) that the AO's disallowance was unjustified, dismissing the Revenue's ground on Section 40A(2)(b) disallowance. SIGNIFICANT HOLDINGS Preserve verbatim quotes of crucial legal reasoning: "Accordingly, we do not find any infirmity in the order passed by CIT(A) holding that provisions of Explanation 1 to Section 37(1) of the Act would not be attracted and the Assessee is entitled to claim deduction for managerial remuneration under Section 37(1) of the Act." Core principles established: The judgment reinforces the principle that compliance with the Companies Act, 1956, and MCA guidelines is crucial in determining the applicability of disallowances under Section 37(1) and Section 40A(2)(b) of the Income Tax Act. Final determinations on each issue: The Court dismissed the Revenue's appeal on both grounds, affirming the CIT(A)'s order to allow the Assessee's claims for deduction of remuneration paid to the managing director.
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