2016 (6) TMI 596 - HC - Income Tax

Addition u/s 40A(2) - excessive remuneration - whether the Revenue can tax the same income in the hands of the company on which the Directors had already paid the tax at the same rate at which the company would have been liable to be assessed? - Held that - We may recall that consistently before Assessing Officer CIT(Appeals) and Tribunal the assessee had canvassed that all the four Directors who had received such remuneration were taxed in the highest bracket of 30%; at the same rate at which the assessee company at the relevant time was assessed. In fact the assessee had demonstrated before CIT(Appeals) that the tax liability of the company on such disputed remuneration amount was exactly the same as the tax the four Directors had paid to the Revenue. To these factual aspects even the Revenue has at no stage raised any dispute. We may therefore proceed on the basis that the element of excessive remuneration represents that income of the company which was eventually taxed in the hands of the Directors at the same rate at which; had it not been so distributed; would have been taxed in the hands of the company. In that view of the matter the question of revenue neutrality would immediately arise. A certain income has already been taxed in the hands of the Directors. Permitting the Revenue to tax the same income again at the same rate in the hands of the principal payer would amount to double taxation. Only on this count we answer question in favour of the appellant-assessee and against Revenue

Summary

Issues:
1. Disallowance of remuneration paid to directors under Section 40A(2) of the Income Tax Act, 1961.
2. Revenue neutrality in the context of taxation of the same income in the hands of the company and directors.

Analysis:
1. The appellant, a company registered under The Companies Act, had its return for the assessment year 2010-2011 scrutinized. The Assessing Officer disallowed a sum of ?71,30,178/- of the remuneration paid to four Directors under Section 40A(2) of the Act. The appellant contended that the remuneration was justified and not excessive, and that both the company and directors were taxed at 30%, making it revenue neutral. However, the Assessing Officer rejected these contentions, stating the rise in remuneration was not for business purposes and that the tax paid by directors did not justify the increase.

2. The matter was appealed to the CIT(Appeals) who upheld the disallowance under Section 40A(2). The appellant argued for revenue neutrality, providing details showing that the tax paid by the company and directors on the disputed remuneration was the same. Despite this, the CIT(Appeals) held that distributing the excess amount as dividends would lead to higher tax liability, thereby dismissing the revenue neutrality argument.

3. Further appeal was made to the Tribunal, which limited the disallowance to ?47,90,178, without addressing the revenue neutrality argument in detail. The appellant then filed a Tax Appeal against the Tribunal's decision. The Division Bench of the High Court rejected the contention against Section 40A(2) but admitted the appeal on the issue of revenue neutrality. The substantial question of law framed was whether the Tribunal was right in confirming any part of the disallowance despite revenue neutrality.

4. The High Court, in its judgment, considered the question of taxing the same income in the hands of both the company and directors. It noted that all directors were taxed at the highest bracket of 30%, similar to the company's assessment rate. The court found that the disputed remuneration was already taxed in the directors' hands at the same rate as the company would have been liable. Therefore, allowing the Revenue to tax the same income again in the company's hands would result in double taxation, leading to a finding in favor of the appellant-assessee and against the Revenue. The Tribunal's order was set aside, and the Tax Appeal was allowed, disposing of the matter accordingly.