2018 (10) TMI 425 - AT - Income Tax

Disallowance on account of excess claim of managerial remuneration - Held that - As decide in assessee s own case the RBI Act, the Companies Act and the Income Tax Act operate altogether in different fields and the question whether the assessee is entitled to particular deduction or not, will depend upon the provision of law relating thereto and not the way, in which entries are made in the books of accounts. AO therefore was not bound under the Income Tax Act, 1961 to hold the alleged non-compliance of the provisions of Section 4(7) read with Section 198 of the Companies Act, 1956, as the sole ground for making disallowance of expenditure relating to managerial remuneration for computing the income of the appellant under the head profit and gains from business or profession under the Income Tax Act, 1961, without citing the relevant provisions of the Act under which such disallowance was made. As held by me, the appellant did not commit any default u/s 43B, 40A(3), 40A(2)(b) and 40(a)(ia) and no adverse observation in respect to the various conditions prescribed u/s 37(1) were made by the Ld. AO, nor. Even though in my view the appellant company may be deemed as Public Limited Company under the Companies Act, 1956 and had made default under that Act, within the meaning of Section 198(1) read with Section 309, it could not be the sole reason for making disallowance of managerial remuneration for computing the taxable income of the appellant under the Income Tax Act, 1961. In view of the above, the addition made by the Ld. AO is deleted. - Decided in favour of assessee Addition on account of inflation of loss - Held that - The Hon ble Jurisdictional High Court in the case of CIT vs. M/s Triveni Engineering Industries Ltd. 2010 (11) TMI 90 - DELHI HIGH COURT has time and again upheld that if the rates of taxation are uniform, it does not make a difference if a portion of income is taxed in either of the years as such exercise becomes revenue neutral. In appellant s case, the position is even in the favour of the appellant if such exercise of bifurcation of income is made. In considered view, there is no need of doing such exercise and the results shown by the appellant should be treated as perfectly in order. AO s action in making the addition is not justified and the same is directed to be deleted.- Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of disallowance of ?84,07,826/- on account of excess claim of managerial remuneration.
2. Deletion of addition of ?55,28,763/- on account of inflation of loss.

Issue-Wise Detailed Analysis:

1. Deletion of disallowance of ?84,07,826/- on account of excess claim of managerial remuneration:

The assessee, engaged in providing IT services, filed a return declaring a loss of ?2,90,42,912/-. During scrutiny, the AO observed that the auditor commented on the excessive managerial remuneration claimed by the assessee. The auditor noted that the company, being a subsidiary of a foreign company (G4S Plc. UK), was deemed a public company under Section 4(7) of the Companies Act, 1956. Consequently, the remuneration paid was in excess of the limits specified in Schedule XIII of the Companies Act, 1956, and necessary Central Government approval was not obtained. The AO concluded that the company could not avail the exemptions and privileges of private companies and disallowed the excess remuneration.

The CIT(A) allowed the assessee's appeal, stating that the AO's disallowance lacked legal force under the Income Tax Act, 1961. The CIT(A) emphasized that the AO did not find the expenditure to be unreasonable or excessive under Section 40A(2)(b) and that the disallowance was based solely on the auditor's comments without considering business prudence and commercial expediency. The Tribunal upheld the CIT(A)'s decision, referencing a coordinate bench's decision in a similar case, stating that the AO's action of disallowing managerial remuneration based on the auditor's comments was not sustainable.

2. Deletion of addition of ?55,28,763/- on account of inflation of loss:

The AO observed that the auditor commented adversely on the recognition of service income amounting to ?55,28,763/- in the year ending 31.03.2009, stating that the assessee did not follow Accounting Standard-9 (AS-9) on revenue recognition. The AO added this amount back to the income of the assessee for the year under consideration, asserting that the assessee maintained a mercantile system of accounting.

The CIT(A) found that the assessee had already offered the income of ?55,28,763/- for taxation in AY 2009-10, which was scrutinized and accepted by the AO. The CIT(A) noted that taxing the same income again in AY 2010-11 would result in double taxation, which is not justified. The CIT(A) also highlighted that the assessee had a taxable income in AY 2009-10 and a loss in AY 2010-11, making the exercise of bifurcation of income revenue-neutral. The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the order and dismissing the revenue's appeal.

Conclusion:

The Tribunal dismissed the revenue's appeal on both grounds, upholding the CIT(A)'s decisions to delete the disallowance of ?84,07,826/- on account of excess managerial remuneration and the addition of ?55,28,763/- on account of inflation of loss. The Tribunal emphasized the importance of business prudence, commercial expediency, and avoiding double taxation. The order was pronounced in the open court on 03/10/2018.