2021 (1) TMI 286 - AT - Income Tax

Addition u/s 40A (2) (b) - exponential increase in the Directors remuneration whereas the salaries of other employees had remained static - assessee had debited Directors remuneration which the Assessing Officer held to be a colorable device to siphon the profits of the assessee company and AO was of the opinion that the assessee could not justify the increase in the Directors remuneration - HELD THAT - A perusal of the assessment order shows that the Assessing Officer has not brought any comparable cases on record to establish and buttress his allegation that the salary paid to the Directors was excessive as compared to the salary being paid to similar persons with similar qualifications and experience. CIT (A), though has given partial relief to the assessee by limiting the disallowance also did not consider this aspect of the case and has reduced the disallowance in an ad hoc manner. It is also undisputed that the assessee company as well as Directors both are in the same tax bracket, which is the highest in their cases and, therefore, there can be no question of any evasion of tax by paying remuneration to the Directors. CBDT Circular No.6-P dated 6th July, 1968 clearly states that no disallowance is to be made u/s 40A (2) in respect of payments made to relatives and sister concerns where there is no attempt to evade tax. Clearly no case of evasion of tax can be made out in the present appeal. This circular is binding on the Department and since no motive to evade tax is established and further since the AO has not pointed out any comparables to demonstrate that the salary paid to Directors was excessive, we have no option but to set aside the order of the CIT (A) and while doing so, we direct the Assessing Officer to delete the entire addition. - Decided in favour of assessee.

Summary

Issues:
Disallowance of Director's remuneration under section 40A (2) (b) of the Income Tax Act, 1961.

Analysis:

Issue 1: Disallowance of Director's Remuneration
The case involved an appeal against the disallowance of ?12,60,000 under section 40A (2) (b) of the Income Tax Act, 1961, concerning an exponential increase in Directors' remuneration. The Assessing Officer disallowed 50% of the remuneration, which was later reduced to ?12,60,000 by the Commissioner of Income Tax (Appeals) (CIT(A)). The appellant argued that the increase was justified due to improved financial performance, and the disallowance was arbitrary without comparable cases. The Authorized Representative contended that no excessive payment was proven, and the remuneration was in line with market rates. The Senior Departmental Representative supported the disallowance due to a significant increase in remuneration without proper justification.

Issue 2: Judicial Analysis
The Tribunal noted a 775% increase in Directors' remuneration but emphasized that section 40A(2) should not cause hardship in bona fide cases. It was observed that the Assessing Officer failed to provide comparable cases to establish excessive payment. The Tribunal referred to a CBDT Circular stating no disallowance under section 40A (2) in the absence of tax evasion motives. Relying on various judicial precedents, the Tribunal set aside the CIT(A)'s order and directed the deletion of the entire addition. The decision highlighted the lack of tax evasion intent and the absence of evidence for excessive remuneration.

Conclusion
The Tribunal allowed the appeal, emphasizing the importance of establishing excessive payment before disallowing Director's remuneration under section 40A (2) (b). The judgment underscored the need for comparable cases and evidence to support disallowance decisions, ensuring fairness and compliance with tax laws.