2014 (4) TMI 436 - AT - Income Tax

Deduction u/s 37(1) of the Act Remuneration paid in contravention - The AO invoked the provisions of section 4 (7) of the Companies Act, 1956 and reached at the conclusion that the assessee company is to be treated as public company and the managerial remuneration paid in contravention to provisions of Companies Act, 1956 was an offence/prohibited in law Held that - The decision in CIT vs. Papilion Investments Pvt. Ltd. 2009 (8) TMI 832 - BOMBAY HIGH COURT followed - The total equity shares of the assessee company were 76,36,000 out of which 76,35,999 equity shares were held by NTT Communications Corporation, Japan and only one equity share was allotted to the Managing Director of the assessee company - The money for allotment of this one equity share to MD of the company was paid by NTT Communications Corporation, Japan - This single share was allotted to the MD in the capacity of a nominee of the assessee company to meet the requirement of minimum two shareholders in the case of a private limited company in view of Section 12 of the Companies Act the fact has been clearly mentioned in the Memorandum & Article of Association. There cannot be any company in India which has less than two members i.e. shareholders - the requirement of section 4(7) is that the whole of the share capital of the subsidiary company should be held by the holding company - The whole of the share capital being held by the holding company is certainly not the same thing as whole of the share capital being held in the name of the holding company - the situation is a legal impossibility in India - in case one is to proceed on the basis that entire share capital of the subsidiary should be held in the name of the holding company, there cannot be any situation in which section 4(7) can apply - That is certainly not an interpretation which can be termed as to make the statute effective rather than making it redundant - Thus, there was no fault in the order of the CIT (A) for granting the relief to the assessee thus, the order of the CIT(A) upheld Decided against Revenue.

Summary

Issues involved:
1. Classification of the assessee company as a private limited company.
2. Applicability of provisions of the Companies Act, 1956 regarding managerial remuneration.
3. Admissibility of managerial remuneration under section 37(1) of the Income Tax Act.

Detailed Analysis:
1. The primary issue in this case was the classification of the assessee company as a private limited company. The company had 76,36,000 equity shares, with NTT Communications Corporation, Japan holding 76,35,999 shares and one share held by the Managing Director as a nominee of the foreign corporation. The Assessing Officer contended that this arrangement violated the Companies Act, 1956, leading to the company being treated as a public company. However, the CIT (A) granted relief to the assessee based on clarifications from the Ministry of Corporate Affairs and a decision by the Mumbai High Court in a similar case. The court held that the holding of shares by a nominee of the foreign company should be considered as shares held by the foreign company itself, thus maintaining the private limited company status.

2. The second issue revolved around the applicability of provisions of the Companies Act, 1956 regarding managerial remuneration. The Assessing Officer disallowed the managerial remuneration paid by the company, citing violations of the Companies Act. However, the CIT (A) considered various documents submitted by the appellant, including opinions from experts and revised reports from auditors, to conclude that the company was not in contravention of the law. The court upheld this decision, stating that the managerial remuneration paid was admissible under section 37(1) of the Income Tax Act.

3. Lastly, the question arose regarding the admissibility of managerial remuneration under section 37(1) of the Income Tax Act. The revenue appealed the decision of the CIT (A), arguing that the disallowance made by the Assessing Officer should stand. However, the court, after considering the facts and legal interpretations presented, dismissed the revenue's appeal and upheld the decision in favor of the assessee. The court found no fault in the CIT (A)'s order and ruled in favor of the assessee, thus allowing the managerial remuneration and dismissing the revenue's appeal.

In conclusion, the judgment clarified the status of the assessee company as a private limited company, addressed the applicability of Companies Act provisions regarding managerial remuneration, and confirmed the admissibility of the managerial remuneration under the Income Tax Act. The decision was based on legal interpretations, expert opinions, and clarifications from relevant authorities, ultimately resulting in the dismissal of the revenue's appeal.