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TMI Blog2018 (11) TMI 1113X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the assessee. That being the case, there cannot be any intention on the part of the assessee to evade tax by shifting profit. It is equally important to note that the remuneration paid to the directors have been offered by them to tax while filing their individual tax returns for the respective assessment years. This fact is evident from the copies of the income tax returns of the concerned directors filed before us by the learned Sr. Counsel. It is also not disputed that the concerned directors are assessed to tax at the maximum rate of 30% - the provisions of section 40A(2) are not attracted to the payment made to the directors - we are of the view that the disallowance made under section 40A(2)(a) of the Act in the impugned assessment years are unsustainable. Accordingly, we deleted the disallowances made in all the assessment years under appeal. - Decided in favour of assessee. - ITA no. 35/Mum./2016, ITA no. 7171/Mum./2010, ITA no. 7141/Mum./2011, ITA no. 1576/Mum./2013 And ITA no. 3949/Mum./2014 - - - Dated:- 24-10-2018 - Shri Saktijit Dey, Judicial Member And Shri Manoj Kumar Aggarwal, Accountant Member For the Assessee : Shri Percy Pardiwala, Sr. Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of the goods, services or facilities for which payment is made as well as the legitimate business needs of the assessee and the benefit derived by or accruing to the assessee, the Assessing Officer called upon the assessee to explain why the remuneration paid to the directors should not be disallowed in terms of section 40A(2)(a) of the Act. Further, the Assessing Officer observed, to escape the rigors of the provisions of section 2(22)(e) of the Act, the assessee has camouflaged the payments made to the directors as remuneration. In response to the query raised by the Assessing Officer, though, the assessee justified the payments made by stating that the directors were having considerable wealth of experience in the newspaper and printing industry and have been working with the newspaper for several years. It was submitted, the remuneration paid to the directors is not excessive or unreasonable compared to the remuneration paid in the private sector for similar services rendered. The Assessing Officer, however, did not find merit in the submissions of the assessee and held that the payment of remuneration to the director is excessive and unreasonable having regard to the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjected to increase in remuneration and has allowed deduction on account of remuneration paid even in scrutiny assessments. The learned Sr. Counsel submitted, compared to the remuneration paid in assessment year 2006 07 which was allowed by the Assessing Officer in scrutiny assessment, the remuneration paid in the impugned assessment year is lesser. Therefore, he submitted, the remuneration paid to directors cannot be considered as excessive or unreasonable. The learned Sr. Counsel drawing our attention to the provisions of section 40A(2) of the Act submitted, before invoking the said provision the Assessing Officer must bring material on record to demonstrate that the payment of remuneration to directors is excessive or unreasonable compared to the market rate of payment for such services. He submitted, no material has been brought on record by the Assessing Officer to establish such fact. He submitted, the only reason for which the Assessing Officer disallowed remuneration in the impugned assessment year is because of loss shown by the assessee. He submitted, loss shown by the assessee is due to substantial reduction in advertisement revenue. Therefore, that by itself cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. Before we proceed to decide the validity of the disallowance made under section 40A(2)(a) of the Act in the assessment years under appeal, it is necessary and relevant to look into the provisions contained under section 40A(2) of the Act. On a careful reading of the said provision, it is apparent, in the relevant previous year the assessee did make payment to persons referred to under clause (b) of section 40A(2) of the Act. However, before invoking the provisions of section 40A(2)(a) of the Act, the following conditions have to be satisfied: i) The payment made is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made; or ii) The expenditure incurred is excessive or unreasonable having regard to the legitimate business needs of the assessee s business; or iii) Expenditure incurred is excessive or unreasonable having regard to the benefit derived by or accruing to the assessee from the payment. 8. Keeping in view the aforesaid legal position, if we examine the facts of the present case, it is evident that the assessee had been paying remuneration to the concerned directors from past sever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n our view, is purely on estimate basis without having any relevance to the actual facts on record including the fact that in the immediately preceding assessment year the assessee has not only paid remuneration of ` 1.56 crore to the concerned directors but the Assessing Officer has also allowed such payment in scrutiny assessment. As regards the observations of the Assessing Officer that to avoid the mischief of section 2(22)(e) of the Act, the assessee has camouflaged loan / advances to the directors as remuneration, we do not find any substance in such allegation. Undisputedly, the assessee had been paying remuneration to the concerned directors from past several years. Moreover, from the shareholding pattern of the company, it appears that the total share holding of the aforesaid three directors combined together constitutes only 15%. Therefore, it cannot be said that for escaping the rigors of section 2(22)(e) of the Act the assessee has paid remuneration to the directors. The object behind introduction of section 40A(2) of the Act is for preventing evasion of tax through shifting of profit by making payment to related parties. Therefore, it is of paramount importance to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e penalty order passed by the Assessing Officer was challenged by the assessee before the first appellate authority. 12. The learned Commissioner (Appeals) after considering the submissions of the assessee in the context of facts and material on record being satisfied that it is merely a disallowance of deduction claimed by the assessee not leading to concealment of income, deleted the penalty imposed under section 271(1)(c) of the Act. While doing so, he relied upon certain judicial precedents, including, the decision of the Hon'ble Supreme Court in CIT v/s Reliance Petroproducts Pvt. Ltd., [2010] 322 ITR 158 (SC). 13. We have considered rival submissions and perused materials on record. Undisputedly, the imposition of penalty under section 271(1)(c) of the Act is on account of part disallowance of remuneration paid to the directors by invoking provisions of section 40A(2)(a) of the Act. It is a fact on record that the assessee had been paying remuneration to the concerned directors from past several years and the Department has also accepted the deduction claimed by the assessee on that account in scrutiny assessments. Even, in the impugned assessment year the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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