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TMI Blog2022 (12) TMI 1547X X X X Extracts X X X X X X X X Extracts X X X X ..... debtors, raise its commission income etc., had upheld the view taken by the A.O on the solitary basis that there was no substantial increase in the turnover and there was a comparative decline in the net profit of the company during the year under consideration. Be that as it may, as the A.O had without adopting ant prescribed basis/yardstick held the director s remuneration as excessive and unreasonable, therefore, unable to uphold his view. Accordingly, set-aside the order of the CIT(Appeals) and vacate the disallowance that had been sustained by him. Thus, the Ground of appeal No.2 raised by the assessee is allowed. - Shri Ravish Sood, Judicial Member For the Assessee : Shri R.B Doshi, CA For the Revenue : Shri Ananjay Kumar Tiwary, Sr. DR ORDER PER RAVISH SOOD, JM The present appeal filed by the assessee is directed against the order passed by the CIT(Appeals)-II, Raipur dated 08.03.2019, which in turn arises from the order passed by the A.O u/s. 143(3) of the Income-tax Act, 1961 (in short the Act ) dated 11.12.2017 for the assessment year 2015-16. The assessee has assailed the impugned order on the following grounds of appeal before me: 1) That learned CIT(A) erred in adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... director s remuneration was not commensurate with the miniscule increase in the turnover of the assessee company drin the year under consideration, therefore, the explanation given by the assessee in its attempt to justify the same did not merit acceptance. Although, the assessee company tried to impress upon the A.O that it had during the year entered into an arrangement with Shri Rajesh Batra, director, as per which he in lieu of a remuneration of Rs. 1 lac per month was to exclusively attend the affairs of the company on a full time basis, but the said claim did not find favour with the A.O. It was observed by the A.O that not only the manifold increase in the director s remuneration was not commensurate with the marginal increase of turnover of the company by an amount of Rs. 13 lac as in comparison to the preceding year, but even otherwise no copy of the resolution passed in Annual General Meeting (AGM) of the assessee company was placed on record to substantiate the same. The A.O was also of the view that as the Companies Act, 2013 prescribed an upper limit of the director s remuneration at 10% of the net profit of the company, therefore, the remuneration allowable to the dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s remuneration paid by the assessee company during the year was found to be excessive or unreasonable in complete disregard of the prescribed basis/yardsticks factored in the said statutory provision, viz. (i). Fair Market Value (FMV) of the services for which the payment was made; or (ii). the legitimate needs of the business or profession of the assessee company; or (iii). the benefit derived by or accruing to the company from rendering of the services by the directors. It was averred by the Ld. AR that the only basis that was adopted by the A.O for working out the impugned part disallowance u/s. 40A(2)(a) of the Act was that the director s remuneration of Rs. 15.60 lac paid by the assessee company during the year under consideration was highly pitched, as against that paid in the immediately preceding year. It was submitted by the Ld. AR that the simplicitor reference to the director s remuneration for the preceding year could by no means form a justifiable basis/yardstick for treating the director s remuneration for the year under consideration as excessive or unreasonable within the meaning of Sec. 40A(2)(a) of the Act. In support of his aforesaid contention the Ld. AR had re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter of fact borne from record that the director s remuneration during the year under consideration had increased from Rs. 1 lac per annum that was paid in the immediate preceding year to an amount of Rs. 15.60 lac during the year under consideration. Although at the first blush the observation of the A.O that there was an exorbitant rise in the director s remuneration during the year under consideration appeared to be very convincing, but the said fact on a standalone basis could by no means justify drawing of adverse inferences within the meaning of Sec. 40A(2)(a) of the Act. To sum up, the sustainability of the part disallowance of assessee s claim for deduction of director s remuneration u/s. 40A(2)(a) of the Act is to be looked into in the backdrop of satisfaction of the pre-conditions contemplated in the said statutory provision. Before proceeding any further, I deem it fit to cull out Section 40A(2)(a) of the Act, as under :- (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a mere reference to the remuneration paid by the assessee company to its director s in the immediately preceding year would neither reveal the FMV of the services rendered by the director s to the assessee company during the year under consideration, nor reflect the value of such services considering the legitimate needs of the business of the assessee company; or the benefit accruing therefrom to the latter, therefore, the unreasonableness or excessiveness of the remuneration paid by the assessee company to its director s during the year could not have been arrived at on the basis adopted by the A.O. The aforesaid view arrived at by me is fortified by the order of the ITAT, Bangalore in the case of S.K Engineering Vs. JCIT (2006) 103 ITD 97 (Bangalore), wherein it was observed, that merely for the reason that in the earlier years commission was paid by the assessee @ 0.94%, the commission paid in excess during the year could not be to be held as unreasonable for the purpose of Section 40A(2)(a) of the Act. It was observed by the Tribunal that there may be several reasons as to why the assessee had paid lower commission in the initial years. Considering that u/s. 40A(2)(a) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure incurred in respect of specified parties by taking recourse to Section 40A(2)(a) of the Act. As the A.O in the said case had not uttered a word as to on what basis the expenditure incurred by the assessee before them in context of related/specified parties was found to be excessive or unreasonable, as tested in the backdrop of the prescribed factors/yardsticks, viz., (i). the FMV of the services for which the payment was made by the assessee; or (ii). the legitimate needs of its business or; (iii). the benefit derived by or accruing to the assessee therefrom, therefore, the tribunal had vacated the disallowance so made by the A.O. 14. On the basis of my aforesaid observations, I am of the considered view, that as the very basis for holding the director s remuneration paid by the assessee company during the year under consideration as unreasonable/excessive by the A.O u/s 40A(2)(a) of the Act, i.e., a simpliciter reference to the director s remuneration that was paid in the immediately preceding year is not in conformity with the mandate of law, therefore, the consequential disallowance of Rs. 13.20 lac (supra) so made/sustained by the lower authorities cannot be subscribed on m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenses towards discounts to customers were substantially scaled down from Rs. 43.15 lac as were incurred in the preceding year to Rs. 20.19 lac during the year under consideration. Also, it was the claim of the assessee company that due to the efforts put in by the directors its sundry debtors were scaled down from Rs. 70.46 lacs in A.Y.2014-15 to Rs. 43.16 lac during the year under consideration. It was also the claim of the assessee that on account of the services of the directors its commission income had increased substantially from Rs. 17.83 lac in A.Y.2014-15 to Rs. 34.05 lac during the year. Also, the assessee had stated before the CIT(Appeals) that it was due to change of companies policy that was brought in by the directors that its claim of expenses of Rs. 64.84 lac in A.Y.2014-15 was scaled down to Rs. 45.39 lac during the year under consideration. Apart from that, I find that the assessee in order to justify the increase in the director s remuneration, had stated that considering their services the amount of salary that was paid to staff (other than directors) was also reduced from Rs. 47.87 lac as was incurred in A.Y.2014-15 to Rs. 42.36 lac during the year, which, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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