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2016 (9) TMI 762 - AT - Income TaxAddition u/s 40A - disallowance being the 50% of salary paid to Director - Held that - Assessing Officer (A.O.) in this case has not brought out any comparables before disallowing 50% of remuneration paid to Smt.Kiran Qureshi on adhoc basic u/s 40A(2)(b) of the Income Tax Act 1961 (the Act). The assessee justified the payment by demonstrating that Smt.Kiran Qureshi is having more than two decades of experience in the job and she is well education and widely travelled. It was further pointed out that she has wide exposure to different aspects of import export and aviation business and is a Promoter Director of the assessee company and that she is also on the Board of Directors of M/s Hind Industries Ltd. and M/s Hind Agro Industries Ltd. It was further submitted that Smt.Kiran Qureshi pays tax at the maximum marginal rates and hence there is no diversion of taxable income. In this case there is no evasion of tax. - Decided in favour of assessee.
Issues Involved:
1. Disallowance of ?15,00,000/- as 50% of salary paid to a director under Section 40A(2)(b) of the Income Tax Act, 1961. 2. Justification and reasonableness of the remuneration paid. 3. Tax evasion concerns and applicability of Section 40A(2) in cases of related party transactions. Detailed Analysis: 1. Disallowance of ?15,00,000/- as 50% of salary paid to a director under Section 40A(2)(b) of the Income Tax Act, 1961: The primary issue in this case is the disallowance of ?15,00,000/-, which represents 50% of the salary paid to Mrs. Kiran Qureshi, a director of the assessee company. The Assessing Officer (A.O.) disallowed the amount under Section 40A(2)(b) of the Income Tax Act, 1961, on an ad-hoc basis without providing any comparables to justify the disallowance. The assessee argued that Mrs. Kiran Qureshi has extensive experience and qualifications, and the payment was justified based on her contributions to the company. Additionally, it was highlighted that she pays tax at the maximum marginal rates, indicating no diversion of taxable income. 2. Justification and reasonableness of the remuneration paid: The Tribunal noted the lack of evidence from the A.O. to support the disallowance. The assessee provided substantial justification for the payment, citing Mrs. Kiran Qureshi's qualifications, experience, and roles in other companies. The Tribunal referenced the Co-Ordinate Bench's decision in the case of Amserve Consultants Ltd., which emphasized the need to examine the reasonableness of expenditures under Section 40A(2) by considering the fair market value of services and the legitimate needs of the business. The Tribunal further cited the CBDT Circular No. 6-B dated 6th July, 1968, which clarifies that the provision aims to check tax evasion through excessive payments to related parties and should not cause hardship in bona fide cases. 3. Tax evasion concerns and applicability of Section 40A(2) in cases of related party transactions: The Tribunal examined various judicial precedents, including the Hon’ble Supreme Court's decision in CIT-IV, New Delhi vs. M/s Glaxo Smithkline Asia P. Ltd., which discussed the applicability of Transfer Pricing Regulations to domestic transactions under Section 40A(2). The Tribunal also referenced the Hon’ble Bombay High Court's decision in CIT vs. Indo Saudi Services (P) Ltd., which held that no disallowance should be made under Section 40A(2) where there is no attempt to evade tax. The Tribunal emphasized that the burden of proof lies with the assessee to demonstrate that the price paid is not excessive or unreasonable, as per the Jurisdictional High Court's decision in Hive Communications P. Ltd. vs. CIT. In the present case, the Tribunal found that both the assessee company and the payee (Mrs. Kiran Qureshi) are assessed at the maximum marginal rate, making the transaction tax neutral. Therefore, there was no intention to evade tax. The Tribunal concluded that the A.O. failed to justify the disallowance, and the payment was reasonable considering the business needs and the point of view of a prudent businessman. Conclusion: Applying the principles laid down in the cited cases and considering the facts of the case, the Tribunal deleted the addition of ?15,00,000/- and allowed the appeal of the assessee. The Tribunal's decision underscores the importance of substantiating disallowances with concrete evidence and ensuring that tax provisions are applied fairly without causing undue hardship in bona fide cases. Order: The assessee’s appeal is allowed. The order was pronounced in the Open Court on 10th August, 2016.
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