2015 (12) TMI 297 - AT - Income Tax

Disallowance of incentive paid to directors u/s 40A(2)(a) - Held that - All the directors are in charge of the entire operations of the assessee company and the financial/operational results of the company are growing every year. Hence, on that count alone, the salary and incentive paid to the directors could be justified and could not be found fault with, without bringing the fair market value of services. In our view, the financial and operational results, justify the payments made to the directors. The income declared by all the three directors show that the incentive received by them in respective years has suffered tax at the higher rate of taxation, i.e., equivalent to the tax rate applicable to the assessee company. Hence there is merit in the contentions of the assessee that there was no attempt to evade tax. Hence, in our view, the decision rendered by the Hon ble Bombay High Court in the case of Indo Saudi Services (Travel) (P) Ltd (2008 (8) TMI 208 - BOMBAY HIGH COURT) squarely applies to the facts of the instant case. Hence, on this count the disallowance made u/s 40A(2)(a) is liable to the deleted in all the three years. In view of the foregoing discussions, we are of the view that there is no justification on the part of Ld CIT(A) in confirming the disallowance made u/s 40A(2)(a) of the Act. - Decided in favour of assessee. Disallowance of depreciation - Held that - Hon ble Gujarat High Court has considered identical issue in the case of Aravali finlease Ltd (2011 (8) TMI 814 - Gujarat High Court ) and has taken the decision that the depreciation is allowable in the hands of the company, even if it is registered in the name of its director provided that the vehicle is used for the purpose of business of company and income derived there from was shown as income of the company. In the instant case there is no dispute with regard to the fact that the vehicles are used for the purpose of business of the assessee company. In the case of Basti Sugar Mills Co. Ltd (2002 (5) TMI 27 - DELHI High Court), the Hon ble Delhi High Court approved the decision of the Tribunal in holding that, since vehicle is a movable asset, the registration as required in the case of transfer of immovable property is not a condition precedent for legal ownership. In the instant case, the funds for purchase of vehicles have been provided by the assessee company and they have been shown as assets of the assessee company. Hence, in our view, the assessee company should be considered as owner for all practical purposes and hence it is entitled for depreciation - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of incentive paid to directors.
2. Disallowance of depreciation.

Issue-wise Detailed Analysis:

1. Disallowance of Incentive Paid to Directors:

The assessee company, engaged in educational consultancy, challenged the disallowance of incentives paid to its three directors for the assessment years 2008-09, 2009-10, and 2010-11. The Assessing Officer (AO) disallowed the incentives under Section 40A(2)(a) of the Income Tax Act, following the precedent set in the assessment year 2007-08, and this disallowance was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

The AO argued that the directors, being part of the body of employers, were not entitled to incentives as these payments were not necessary for the business. However, the Tribunal noted that the AO did not examine the payments in terms of the conditions prescribed under Section 40A(2)(a), which requires an assessment of whether the expenditure is excessive or unreasonable relative to the fair market value of the services provided.

The Tribunal highlighted that the directors were fully responsible for the company's operations, which had shown consistent growth under their leadership. The financial and operational results supported the claim that the incentives were justified. The Tribunal also referred to the CBDT Circular No. 6-P, which states that no disallowance should be made under Section 40A(2) if there is no attempt to evade tax, a condition that was met since the directors were taxed at the same rate as the company.

The Tribunal concluded that the AO failed to provide evidence that the incentives were excessive or unreasonable. It also noted that the disallowance in the earlier year (2007-08) did not have binding effect for subsequent years as each year's circumstances must be examined independently. Therefore, the Tribunal directed the AO to delete the disallowance of incentives for all three years.

2. Disallowance of Depreciation:

The AO disallowed the depreciation claimed on vehicles purchased in the names of the directors, arguing that the assessee could not be considered the legal owner of the vehicles. The CIT(A) upheld this disallowance.

The Tribunal, however, considered precedents where courts allowed depreciation claims if the vehicles were used for the business and accounted as company assets, even if registered in the directors' names. The Tribunal cited the Gujarat High Court's decision in Aravali Finlease Ltd., which held that depreciation is allowable if the vehicle is used for business purposes and income derived therefrom is shown as the company's income.

Given that the vehicles were funded by the company, used for its business, and accounted as its assets, the Tribunal concluded that the assessee should be considered the owner for depreciation purposes. Thus, the Tribunal directed the AO to allow the depreciation on the vehicles.

Conclusion:

The Tribunal allowed the appeals filed by the assessee, directing the deletion of the disallowance of incentives and the allowance of depreciation on vehicles, thereby overturning the CIT(A)'s orders on both issues.