2011 (1) TMI 1436 - AT - Income Tax

Summary

Issues involved: Challenge to the levy of penalty u/s.271[1][c] for A.Yrs. 1999-2000 and 2001-02 based on disallowed salary payments to Managing Director as per Shareholders Agreement.

Summary:

A.Y 1999-2000 Penalty Amount Discrepancy:
- The appeal challenged the penalty amount of &8377; 6,20,064/- but clarified it as &8377; 4,84,167/- due to deletion of penalty for depreciation on vehicle by CIT(A).

Disallowed Salary Payments to Managing Director:
- The AO disallowed salary paid to Managing Director based on Shareholders Agreement terms.
- CIT(A) confirmed the disallowance and imposed penalty u/s.271[1][c] @ 100%.
- Assessee argued that the Shareholders Agreement mandated the foreign partner to pay Managing Director's salary.
- Assessee appointed its representative as Managing Director due to foreign partner's resignation, with government approval for excess payment.
- Tribunal noted genuine payment to Managing Director, approved by government, and no doubt on services rendered.
- Tribunal emphasized that disallowance of legitimate claim does not warrant penalty, citing relevant case laws.
- Tribunal held that failure to amend Shareholders Agreement due to business necessity does not constitute inaccurate particulars or concealed income.
- Penalty was deleted as it was not a fit case for levy.

Outcome:
- Appeals of the assessee were allowed, and penalty was deleted.