2019 (4) TMI 1157 - AT - Income Tax

Disallowance of excess remuneration - addition 40A(2)(b) - commercial expediency - remuneration to Managing/Whole Time Directors, in excess of the limits specified u/s 198 r.w.s. 309 of the Companies Act, 1956, for which approval of the Central Government is pending to be filed - non-compliance of transactions entered u/s 297 of the Companies Act - HELD THAT - In the instant case, after the closure of the books and audit of accounts for the year ended 31.03.2011 (AY 2011-12), being the impugned year, the auditors noticed that the remuneration sanctioned by the EGM and paid to the Directors was in excess of the limits set out in Schedule-XIII of the Companies Act. The excess can be redone by an appropriate application to the Central Government u/s 309 of the Companies Act. Accordingly, the statutory auditors in their audit report vide para (g) made comments without quantifying in any manner the alleged excess. Further, we find that the entire excess which is paid by a valid resolution, sanctioning higher remuneration was repaid back to the company by a pro-tanto reduced remuneration for the subsequent 3 years. It shows that the payments made earlier and recovery later are within the four corners of law. There is no infraction of provisions of Income Tax Act. We delete the addition made by the AO - Decided in favour of assessee

Summary

Issues:
Disallowance of excess remuneration paid to directors under the Income Tax Act 1961.

Analysis:
1. The appeal was filed against the order of the Commissioner of Income Tax (Appeals)-14, Mumbai, regarding the disallowance of excess remuneration paid to directors.
2. The assessee declared a loss for the assessment year 2011-12 and debited a sum for director's remuneration, which was found to be in excess of limits specified by the Companies Act.
3. The Assessing Officer (AO) disallowed the excess remuneration as the Central Government approval was pending, and the AO found no plausible explanation from the assessee.
4. The CIT(A) confirmed the disallowance, stating it was a case of excess payment in contravention of the Companies Act, as mentioned by auditors.
5. The assessee submitted various documents to support the payment of remuneration, including resolutions and orders from the Ministry of Corporate Affairs.
6. The AO's deduction of the alleged excess amount was challenged by the assessee, arguing that no violation of the Companies Act or Income Tax Act occurred.
7. The Tribunal found that the excess remuneration was repaid by reducing future remuneration, showing compliance with the law, and deleted the addition made by the AO.
8. Consequently, the appeal was allowed, and the addition of excess remuneration was removed.

This detailed analysis covers the issues involved in the judgment, including the grounds of appeal, findings of the AO and CIT(A), submissions by the assessee, and the Tribunal's final decision to delete the addition of excess remuneration.