2020 (12) TMI 14 - AT - Income Tax

Remuneration paid to the Managing Director - Limited scrutiny assessment - disallowance made as expenditure not wholly and exclusively laid out for the purpose of business - AO viewed that the payment as remuneration to the Managing Director is excessive but not due to the business expediency - HELD THAT - Managing Director has offered the income in his hands and paid the taxes thereon. Merely because losses were set off against the income, it cannot be concluded that the payment of remuneration is a colorable device. Incorrect allowance of loss also is having potential tax effect, thus the reducing the loss is permitted as per law and the same cannot be equated with colourable device. Since the company felt that remuneration paid to the Managing Director was reasonable, burden shifts on the revenue to make out a case of fair value of remuneration with reference to identical facts and comparable cases apropos to the services rendered by the Managing Director. No such exercise was made by the AO. Therefore, we hold that the Ld. CIT(A) erred in upholding the decision of the AO in confirming the addition, hence, we set aside the order of the Ld.CIT(A) and delete the addition made by the AO. As observed from the order of the AO, the case was selected for scrutiny for limited purpose of verifying whether the deduction claimed on account of business loss is admissible or not. AO did not make any discussion on the deductibility or otherwise of losses and examined the reasonableness of remuneration paid to the Managing Director which is beyond the jurisdiction of the AO as per the scrutiny guidelines. In case the AO intends to examine the issue, the AO ought to have converted the case into complete scrutiny, after obtaining the approval from the Pr.CIT or CCIT as applicable. No such approval was obtained by the AO before going into the details of reasonableness of remuneration paid to the Managing Director. - Decided in favour of assessee.

Summary

Issues:
1. Delay in filing appeal - Condonation of delay
2. Disallowance of excessive remuneration paid to Managing Director

Delay in filing appeal - Condonation of delay:
The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals), citing a delay of 67 days due to the wife's illness. The assessee provided a medical certificate supporting the wife's treatment, leading to the condonation of the delay by the tribunal.

Disallowance of excessive remuneration paid to Managing Director:
The primary issue in the appeal was related to the remuneration paid to the Managing Director. The Assessing Officer (AO) disallowed a significant portion of the remuneration paid, considering it excessive due to the absence of business activities in the company. The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that the payment was unreasonable and a colorable device to set off losses against remuneration.

The assessee contended that the remuneration was paid for services rendered by the Managing Director, emphasizing the absence of restrictions under the Companies Act for such payments. The tribunal noted that the AO did not determine a fair and reasonable remuneration amount, focusing solely on the turnover. The tribunal agreed with the assessee's argument that turnover alone should not dictate remuneration, emphasizing the importance of services rendered by the Managing Director.

Furthermore, the tribunal highlighted that the AO exceeded the scope of scrutiny by delving into the reasonableness of remuneration, which required a full-fledged scrutiny approval. As the AO did not obtain such approval, the tribunal deemed the examination beyond jurisdiction, warranting the allowance of the assessee's appeal.

In conclusion, the tribunal allowed the appeal, setting aside the Commissioner's decision and deleting the addition made by the Assessing Officer.