2012 (10) TMI 533 - AT - Income Tax

Disallowance of provision for remuneration of whole time directors Enhanced directors remuneration Assessee shown enhanced amount as payable to three directors Remuneration payable to were enhanced by way of resolution and approved by CG AO argued that any provision for increase in remuneration of Directors would be void, if it was not approved by the CG u/s 198, 309, 310 and 314 of Company Act. 1956 - Held that - There is no finding by the Revenue that remuneration claimed by assessee was not commensurate with the service rendered by the said persons. Especially so since assessee had received the approval from Central Government on 19.04.05. Admittedly assessee had finalized its account only thereafter. Directors concerned had worked for the assessee and remuneration was indeed payable and it became a crystallized liability. Since such approval clearly mentioned that it had retrospective effect viz. from the date of expiry of the earlier approval, it will relate to back to the date of expiry of the earlier approval. We are of the opinion that claim of assessee was allowable. Issue decides in favour of assessee Disallowance of provision of PF on enhanced remuneration of directors Held that - The issue requires a fresh look by the AO, since the date on which the amount was remitted has not been verified. Issue remand back to AO.

Summary

Issues:
1. Disallowance of provision made for remuneration of whole-time directors.
2. Sustenance of disallowance of Provident Fund remittance related to the above remuneration.

Analysis:
1. The appellant, engaged in civil engineering contracts, filed its return for the Assessment Year declaring income. The Assessing Officer noted a difference in remuneration claimed and approved for the Chairman and two Directors. The appellant argued that the remuneration was enhanced with Central Government approval, making it an ascertained liability. However, the AO disallowed the claim citing Companies Act provisions and a Supreme Court decision. The CIT(A) upheld the disallowance, stating the approval expired before the relevant year. The appellant contended that the liability crystallized during the year and should be allowed. The Tribunal agreed, noting the approval received post-balance sheet date.

2. The AO disallowed the enhanced remuneration and Provident Fund contribution, stating the liability crystallized later. The Tribunal found the enhanced remuneration justified post-approval and allowed the claim. However, it remitted the Provident Fund issue for verification of remittance date by the AO. Overall, the appeal was allowed partially, with the remuneration claim upheld and the Provident Fund issue remitted for fresh consideration.