2012 (11) TMI 711 - AT - Income Tax

Administrative Expenditure - Director s Remuneration - commercial expediency - In case of CIT Vs. New Savan Sugar and Gur Refining Co. Ltd., 1989 (4) TMI 12 - CALCUTTA HIGH COURT high court has held that even if a particular expenditure is un-remunerative, such expenditure is nonetheless is proper deduction, if such expenditure is made wholly and exclusively for the purpose of making or earning such income. Director s Remuneration - Conscious selection of a director, who has to be paid extraordinary remuneration in order to avail of his services has been made by the company as a policy decision. The expenditure is for the purpose of earning income the amount paid as remuneration is deductible. Therefore, order of the CIT(A) is set aside and deleted the addition of Rs. 49,66,499/- made by the Assessing Officer on account of remuneration paid to director and administrative expenses - In the result, appeal of the assessee is allowed.

Summary

Issues:
Disallowance of expenditure on administration for a company with no business activity during the assessment year.

Analysis:
1. The Assessing Officer (AO) disallowed the entire expenditure of Rs. 49,66,499/- claimed by the assessee company engaged in trading, as there was no business activity during the year and no trading receipts. The AO specifically noted the significant increase in remuneration paid to the Director compared to the previous year, without justification for the abnormal increase.

2. The assessee contended before the CIT(A) that the remuneration paid to the Director had already been offered to tax by the Director himself, and taxing it again would result in double taxation. The company argued that the remuneration was in line with a resolution passed in a board meeting and was essential for managing the business effectively.

3. The CIT(A) upheld the AO's decision, emphasizing that expenditure must be incurred for the purpose of the company's business to be allowable. The CIT(A) highlighted the lack of business activity, trading receipts, or efforts to demonstrate income generation, questioning the necessity and justification for the increased remuneration to the Director.

4. The company further appealed to the ITAT, presenting arguments based on commercial expediency and the necessity of appointing a dynamic Director like Shri Y.S. Chowdary to revive the business. Citing relevant case laws, including the Eastern Investment Ltd. case, the company justified the expenditure as necessary for earning income, even if unremunerative.

5. The ITAT accepted the company's arguments, noting that the remuneration had been offered to tax by the Director, TDS was deducted, and a conscious decision was made to appoint a high-quality Director for business revival. Relying on the principle of expenditure being deductible if made wholly and exclusively for earning income, the ITAT allowed the appeal, deleting the addition of Rs. 49,66,499/- for remuneration and administrative expenses.

6. Ultimately, the ITAT allowed the appeal, emphasizing the necessity and commercial justification for the increased remuneration paid to the Director in the absence of business activity, overturning the CIT(A)'s decision and deleting the disallowed expenditure.

This comprehensive analysis outlines the progression of the case from the AO's disallowance to the final decision by the ITAT, highlighting the key arguments, legal principles, and judgments involved in the matter.