2019 (2) TMI 348 - AT - Income Tax

Disallowance of salary paid to directors u/s 40A(2) - as per revenue assessee has failed to prove the concerned payees eligibility and qualification - Held that - Both the lower authorities have simply brushed aside assessee s payment claimed without even drawing a comparison of the market rate of the corresponding services vis- -vis educational qualifications. Neither of the lower authorities has taken into account assessee s business requirement of availing its directors services for effective management of its business operations in non-banking financial activities. Therefore hold that the impugned disallowance of ₹5.50 lac to be deleted. - Decided in favour of assessee.

Summary

Issues:
Challenge of correctness of sec.40A(2) disallowance of salary paid to directors.

Analysis:
The appeal involved a challenge against the correctness of the disallowance of salary paid to directors under sec.40A(2). The appellant contested the disallowance of ?5.50 lac paid to three directors, arguing that the remuneration was approved in a board meeting and justified based on the directors' qualifications, responsibilities, and market trends. The Assessing Officer (AO) had partly disallowed the director remuneration, citing it as extraneous and unreasonable without considering the business exigency and the directors' roles. The appellant relied on various judicial precedents emphasizing that the reasonableness of remuneration should be viewed from a businessman's perspective, not subjectively. The AO's decision was challenged based on the lack of evidence regarding directors' involvement, equal payment to directors with varying qualifications, and specific reasons for disallowance for each director.

The Tribunal considered the arguments presented by both parties. The Revenue contended that the appellant failed to prove the eligibility and qualifications of the directors receiving the salary. It was noted that the lower authorities did not analyze the market rate of services provided by the directors in relation to their qualifications. The Tribunal found that the business requirement for availing the directors' services for effective management of non-banking financial activities was not considered by the lower authorities. Consequently, the Tribunal held that the disallowance of ?5.50 lac should be deleted, ruling in favor of the appellant.

Therefore, the Tribunal allowed the appellant's appeal, overturning the disallowance of director remuneration under sec.40A(2). The judgment emphasized the importance of considering remuneration from a businessman's viewpoint and the necessity of proving the eligibility and qualifications of directors to justify the payments. The decision highlighted the need for a thorough assessment of business requirements and market rates when determining the reasonableness of director remuneration.