2022 (6) TMI 685 - AT - Income Tax

Disallowance u/s. 40(A)(2)(b) - excessive salary payment - payment to close associates / related parties - HELD THAT - Section 40A(2) of the Act, puts a curb on expenditure in respect of which payment has been made to close associates having substantial interest in the company for goods, services and facilities. AO can disallow only that portion of the total expenditure, which in his opinion, is excessive or unreasonable. The onus is on the AO to form an opinion that the expenditure claimed as excessive/unreasonable having regard to the fair market value for which the payment is made. This opinion of the AO cannot be arbitrary but must be on the basis of determining the fair market value for which payment is made. AO must establish that the payment is excessive or unreasonable which should be on the basis of material on record and cannot be based on merely surmises and conjectures. The reasonableness of the expenditure is to be seen from the view point of the businessmen and not from the view of Revenue authorities. The expediency, legitimacy and the business needs will have to be examined from the assessee's point of view and not from the department's view as held in the case of Voltamp Transformers Pvt. Ltd. 1980 (10) TMI 35 - GUJARAT HIGH COURT We further find that Hon'ble Rajasthan High Court in the case of CIT vs. Consulting Engineering Group Ltd 2014 (4) TMI 970 - RAJASTHAN HIGH COURT has held that it is for an assessee as a businessman to come to a conclusion as to what remuneration of the salary is to be paid to the employees and the reasonableness of the expenses is to be judged from the angle of a businessman rather than from angle of an Assessing Officer. AR has also submitted that the respective persons, to whom the payments have been made, have offered the receipts as their respective income and those individuals are assessed to tax at maximum tax rates. The aforesaid contention of the Learned AR is not controverted by Learned DR. We find that in the present case the AO has only compared the salary payment made by the assessee in the year under considered with that of earlier year to come the conclusion of excessive salary payment. The aforesaid conclusion is not based on any material on record as contemplated u/s. 40(A)(2)(b) of the Act. Considering the totality of the aforesaid facts, we are of the view that the AO was not justified in disallowing the expenditure by invoking the provisions of Section 40(A)(2)(b) of the Act. We accordingly set aside the addition made by AO and CIT(A). Thus the ground of assessee is allowed.

Summary

Issues: Disallowance of excess salary to Directors and consultancy fees to a relative under Section 40(A)(2)(b) of the Income Tax Act.

Analysis:
1. The appeal was against the order passed by the Commissioner of Income Tax (Appeals) relating to the Assessment Year 2015-16. The primary issue was the disallowance of excess salary to Directors and consultancy fees to a relative under Section 40(A)(2)(b) of the Income Tax Act.

2. The Assessing Officer (AO) disallowed the increase in salary of Directors and consultancy fees to a relative, citing that the salary hike was unjustifiable based on the increase in turnover. The AO held that the increase in salary was not in line with the business performance, leading to the disallowance of the aggregate amount.

3. The Commissioner of Income Tax (Appeals) upheld the AO's order, leading to the appeal before the ITAT Delhi. The appellant contended that the increase in salary was reasonable, considering the business growth and the decisions made by the Directors. The appellant argued that the AO's decision was arbitrary and not based on fair market value.

4. The ITAT Delhi referred to legal precedents emphasizing that the reasonableness of expenses should be judged from the viewpoint of a businessman, not the Revenue authorities. The Tribunal highlighted that the AO must establish the excessive or unreasonable nature of expenditures based on material evidence, not surmises.

5. The ITAT Delhi noted that the AO's comparison of salary payments between different years was not sufficient to justify the disallowance under Section 40(A)(2)(b) of the Act. The Tribunal agreed with the appellant's argument that the decisions regarding remuneration should be left to the businessman, and the AO's interference was unwarranted.

6. Ultimately, the ITAT Delhi allowed the appeal, setting aside the addition made by the AO and CIT(A). The Tribunal concluded that the disallowance of expenditures was not justified under Section 40(A)(2)(b) of the Income Tax Act, ruling in favor of the appellant.

7. In conclusion, the ITAT Delhi's judgment favored the appellant, emphasizing the importance of assessing expenses from a businessman's perspective and requiring the AO to provide concrete evidence to support disallowances under Section 40(A)(2)(b) of the Act.