2013 (5) TMI 386 - AT - Income Tax

Disallowance of incentive bonus paid to the Directors u/s 40A(2)(b) Assesse claimed deduction for the payment of incentives to the Directors and also for payment of consultancy charges to the related parties. Held that - As the assessee could not furnish any justification for the payment of incentives to the Directors and there was no legitimate requirement of business of the company for the payment of such incentive amount nor there seems to be any justification for the same also there cannot be two separate heads for remuneration for services i.e. one for consultation charges and the other incentives for the services over and above the salary paid for such services. In view of the fact that the assessee company has already paid Rs.3,60,000 as salary and further a sum of Rs.3,60,000 as consultation charges to Mr. Ajay A Sukhwani, the payment of Rs.10 lacs extra as incentive does not seem to be justified. Under such circumstances, the finding of the CIT(A) is hereby upheld. So far as the payment of incentive of Rs. 10 lacs each to other two Directors of the assessee company is concerned, it may be observed that the said Directors neither during the current year nor during the past have ever received any remuneration from the assessee company, whereas they are receiving salary income as well as professional fees etc. from other companies. If they have not received any remuneration in the past it does not mean that they are barred from receiving reasonable remuneration. The expenditure each paid to the said to Directors is hereby held to be justified. Disallowance of Depreciation u/s 32 - Cars were purchased in the name of directors and claimed by the assesse as deduction as the same were shown in the books of the company and are appearing in the balance sheet of the company - Department considered the payment made towards the purchase to be treated as advance/loan to the Directors. Held that - As held by the Supreme Court in the case of Mysore Minerals Ltd 1999 (9) TMI 1 - SUPREME Court owner is one who is entitled to own the property to the exclusion of the others. In the present case, the assessee company cannot be said to be holding the property to the exclusion of the Directors especially when the cars are not only purchased in the name of the Directors but also they are the registered owners of the cars. The purchase of the cars in the name of other persons by the assessee company itself implies that the assessee company treated the said persons as owner of the property and did not want to exercise its domain over the property. Merely because the company has shown the cars as its assets in the books of account, cannot put it into the definition of owner of the cars to the exclusion of the legal/registered owners of the cars. The learned CIT(A) has rightly observed.

Summary

Issues Involved:
1. Condonation of Delay in Filing the Appeal
2. Disallowance of Incentive Bonus Paid to Directors
3. Disallowance of Depreciation on Motor Cars Registered in the Name of Directors

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal was filed with a delay of 36 days. The assessee company explained that the delay was due to an oversight by the accountant who got busy with time-barring assessments for the subsequent assessment year. The Tribunal accepted the explanation, supported by an affidavit from the accountant, and condoned the delay, allowing the appeal to proceed.

2. Disallowance of Incentive Bonus Paid to Directors:
The assessee company paid Rs. 10 lacs each as incentives to three Directors, totaling Rs. 30 lacs. The Assessing Officer (AO) disallowed the entire amount, questioning the justification for such payments as no incentives were paid in previous years, and the Directors had other sources of income. The CIT(A) confirmed the disallowance.

Upon review, the Tribunal found that:
- The Directors were not solely engaged in the company's affairs, as evidenced by their income from other sources.
- The payment of Rs. 10 lacs as incentives, especially when one Director (Mr. Ajay A Sukhwani) had already received salary and consultation charges, was deemed excessive and unreasonable.
- The Tribunal upheld the CIT(A)'s finding that the payment of Rs. 10 lacs as incentives was not justified by the fair market value of services rendered.
- However, the Tribunal allowed a reasonable remuneration of Rs. 3.6 lacs each to the other two Directors (Mr. Assan Sukhwani and Mr. Sushil Sukhwani), deleting the disallowance to that extent but confirming the disallowance of Rs. 6.4 lacs each.

3. Disallowance of Depreciation on Motor Cars Registered in the Name of Directors:
The AO disallowed depreciation of Rs. 3,05,992 on three cars registered in the names of the Directors, despite the assessee company claiming ownership and showing the cars in its balance sheet. The CIT(A) confirmed the disallowance.

The Tribunal analyzed the issue and found:
- The cars were purchased and registered in the individual names of the Directors, not the company.
- The cited case laws (e.g., Mysore Minerals Ltd., Navdurga Transport Co.) were distinguished on the grounds that in those cases, the assets were effectively transferred to the assessee, but due to certain exigencies, the title was not registered in the assessee's name.
- In the present case, there was no explanation for the cars being purchased in the Directors' names, indicating that the company did not intend to exercise ownership over the cars.
- The Tribunal upheld the CIT(A)'s finding that the payment for the cars should be treated as an advance/loan to the Directors, and the company could not claim depreciation on the cars.

Conclusion:
The appeal was partly allowed. The delay in filing was condoned. The disallowance of incentive bonuses was partly upheld, allowing reasonable remuneration but disallowing excessive payments. The disallowance of depreciation on cars registered in the Directors' names was confirmed.