2014 (11) TMI 145 - AT - Income Tax

Director s Remuneration disallowed Exceptionally high remuneration paid - Held that - The assessee company is engaged in the business of manufacturing of packing machines Directors remuneration during the year has been increased to ₹ 80,30,178/- from ₹ 9,00,000/- paid in the immediately preceding year - Thus, the increase in remuneration is about 9 times of the Director s remuneration paid in the immediately preceding year - The huge increment ought to be justified on the basis of increase in business turnover which is about 3.6 times as compared to immediately preceding year - the lower authorities have allowed the Director s remuneration during the year under consideration at ₹ 9,00,000/- which is exactly the same amount of Directors remuneration which was paid in the immediately preceding year - the inference of the lower authorities cannot be sustained, especially when it is observed that the assessee-company s turnover has increased to 3.6 times i.e. from ₹ 99,80,414/- to ₹ 3,61,38,065 - In the background of such increase in turnover of the assessee-company, the contention of the assessee that the same was the result of hardwork put in by the Directors cannot be ruled out - some increase in remuneration to Directors for their hard-work is certainly justified and reasonable - However, the increase in Directors remuneration to about 9 times cannot be justified on the basis of above increase in the turnover - it shall be fair and reasonable, keeping in view the increase in turnover to 3.6 times, the increase in Directors remuneration to 3.6 times of the immediately preceding year is justified Decided partly in favour of assessee. Amount received to be treated as income or not as per Explanation to section 153 r.w.s 150 Held that - The AO observed that the assessee has claimed to have received advance of ₹ 21,74,747/- from Happy Yammy Foods & Beverages - The assessee explained that the advance was received for manufacturing and supply of ice cream balls machinery and that final discussion was awaited from the party and that semi-finished machine was shown as work in progress - the CIT(A) correctly decided that the amount cannot be deemed as income of the year under consideration by invoking provisions of Section 68 of the Act - the further direction given by the CIT(A) to deem ₹ 6,03,954/- as income of the AY 2006-07 and ₹ 15,70,793/- as income of the AY 2007-08 was not in accordance with the provisions of Section 153(3) of the Act relying upon CIT, SHIMLA Versus M/s GREENWORLD CORPORATION and M/s THE GREEN WORLD CORPORATION Versus ITO, PARWANOO & ANR. 2009 (5) TMI 14 - SUPREME COURT OF INDIA wherein it has been held that as regards the expression direction in Section 153(3)(ii) of the Act, it must be an express direction necessary for the disposal of the case before the authority or court - It must also be a direction which the authority or court is empowered to give while deciding the case before it - The expressions finding and direction in Section 153(3)(ii) of the Act must be accordingly confined - Section 153(3)(ii) is not a provision enlarging the jurisdiction of the authority or court - no specific opportunity of hearing was allowed by the CIT(A) to the assessee before issuing the further direction thus, the direction of the CIT(A) is set aside Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Director's Remuneration.
2. Taxation of Advances Received as Unexplained Cash Credits.

Issue-wise Detailed Analysis:

1. Disallowance of Director's Remuneration:

The primary issue in this appeal was the disallowance of Director's Remuneration amounting to Rs. 71,30,178/- by the Assessing Officer (AO), which was confirmed by the Commissioner of Income-tax (Appeals) [CIT(A)]. The AO observed a significant increase in directors' remuneration from Rs. 9 lakhs in the previous year to Rs. 80,30,178/- in the assessment year 2010-11. The assessee justified the increase by attributing it to a substantial rise in sales due to the directors' efforts, supported by a Board Resolution and the fact that directors paid tax at the maximum rate.

However, the AO rejected this explanation, citing a lack of evidence to prove that the sales increase was solely due to the directors' efforts. The AO referenced the Supreme Court decision in Swadeshi Cotton Mills Co. Ltd. v. CIT, determining the remuneration as excessive and not wholly for business purposes. The CIT(A) upheld this view, emphasizing the absence of evidence linking the directors' efforts to the sales increase and noting the disproportionate remuneration relative to their qualifications and contributions.

Upon appeal, the Tribunal acknowledged the increase in company turnover from Rs. 99,80,414/- to Rs. 3,61,38,065/-, attributing it to the directors' hard work. However, the Tribunal found the ninefold increase in remuneration unjustifiable. It deemed a 3.6 times increase in remuneration, proportional to the turnover increase, as reasonable. Consequently, the Tribunal allowed directors' remuneration of Rs. 32,40,000/- and disallowed the excess amount of Rs. 47,90,178/-.

2. Taxation of Advances Received as Unexplained Cash Credits:

The second issue involved the addition of Rs. 21,74,747/- as unexplained cash credits under Section 68 of the Income Tax Act. The AO noted that the assessee showed this amount as an advance from Happy Yammy Foods & Beverages without providing confirmation or identity proof, despite multiple opportunities. The assessee claimed the amount was an advance for manufacturing ice cream balls machinery, shown as semi-finished work in progress.

The CIT(A) observed that the amounts were received in earlier years (Rs. 6,03,954/- in AY 2006-07 and Rs. 15,70,793/- in AY 2007-08), and thus, could not be added as income in the current year. The CIT(A) directed the AO to tax these amounts in the respective years they were received, under Section 153 r.w.s. 150 of the Income Tax Act.

The Tribunal upheld the CIT(A)'s decision that the amounts could not be added in the current year as they were not credited for the first time in the books during the year under consideration. However, it found the CIT(A)'s further direction to tax the amounts in earlier years without jurisdiction and unwarranted, citing the Supreme Court decision in CIT, Simla Vs. M/s. Green World Corporation. The Tribunal also noted that no specific opportunity of hearing was provided to the assessee before issuing the direction. Thus, it deleted the CIT(A)'s direction to tax the amounts in earlier years.

Conclusion:

The Tribunal partly allowed the appeal, permitting a reasonable increase in directors' remuneration proportional to the turnover increase and deleting the CIT(A)'s direction to tax the advances in earlier years.