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TMI Blog2025 (4) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... has paid excess remuneration which is much more than 11% of the Net Profit to its Managing Director by violating Provisions of section 197 read with section-I of part-ll of Schedule V of the Company Act, 2013. 2. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) erred in directing the Assessing Officer to delete the disallowance made u/s 40A(2)(b) of the Income Tax Act on the basis that the Assessing Officer did not bring on record any comparable case to justify that the payment made to its Managing Director is excessive or unreasonable, despite the fact that the AO in his order had recorded a comparable case within the same company, indicating that the remuneration paid to the Managing director was excessive and unreasonable." 3. The relevant facts in brief are that the Assessee [Formally known as Indiareit Fund Advisors Pvt. Ltd.] is a private limited company which is a wholly owned subsidiary of Piramal Enterprises Limited (a public company). For the Assessment Year 2015-2016, the Assessee filed return of income on 26/11/2015 which was selected for regular scrutiny. While passing Assessment Order, dated 22/12/2017, under Section 143(3) of the Act th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for in respect of remuneration paid to the managing director under Section 37(1) read with Explanation 1 thereto. Before the CIT(A) it was contended on behalf of the Assessee that the managing director of the Assessee-Company was appointed vide Special Resolution, dated 21/03/2013, by the members of the Assessee- Company for a term of 3 years (w.e.f. 1/02/2013) and, therefore, the said appointment was governed by the provisions of the Companies Act 1956. The provisions governing the payment of managerial remuneration were contained in Section 198 read with Schedule XIII of the 1956 Act. As per Section 198(1) of Companies Act, 1956, the total managerial remuneration payable by a private company which is a subsidiary of a public company to its directors shall not exceed 11% of the net profits of such company computed in the prescribed manner. However, Section 198(4) overrides Section 198(1), as it states that subject to Schedule XIII, when the profits of the company are inadequate, the company shall not pay managerial remuneration except with previous approval of Central Government. Section I of Part II of Schedule XIII deals with remuneration payable by companies having profits wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r No. 07/2015 [F.No.1/5/2013-CL-V dated 10/04/2015, issued by MCA] provided that companies can continue to pay remuneration for the remaining term of the managerial personnel in accordance with terms and conditions approved by such company as per relevant provisions of Schedule XIII of Companies Act, 1956 even if the part of such managerial personnel's tenure fell after 01/04/2014. The relevant extract of the aforesaid Circular No. 07/2015 reads as under: "Stakeholders have drawn attention to the provisions of Schedule XIII (sixth proviso to Para (C) of Section II of Part II) of the Companies Act, 1956 (Earlier Act) and as clarified vide Circular number 14/11/2012-CL-VII dated 16th August, 2012 which allowed listed companies and their subsidiaries to pay remuneration, without approval of Central Government, in excess of limits specified in para II Para (C) of such Schedule if the managerial person met the conditions specified therein. Stakeholders have expressed that since similar provisions are not available in the Schedule V of the Companies Act, 2013, there is a need for clarification that a managerial person appointed in accordance with such provision of Schedule XIII of Earl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2014-2015). The contention of the Assessee that the Assessee-company is a subsidiary of public limited company and that the Assessee-company did not have adequate profits during the relevant previous year was not assailed during the appellate proceedings before this Tribunal. A co-joint reading of Section 198(1)/(4) read Section I/Section II of Part II of Schedule XIII to the Companies Act, 1956 show that the remuneration payable to the managing director in the facts of the present case would have been governed by Part C of Section II of Part II of Schedule XIII to the Companies Act, 1956 dealing with managerial remuneration exceeding the ceiling of INR.48,00,000/- per annum payable to managing director by a company having inadequate profits. Since, the condition specified in proviso inserted in Part C of Section II of Part II of Schedule XIII to the Companies Act, 1956 [By way of GSR 534(E), dated 14/07/2011] were satisfied, no approval was required from the Central Government for making the remuneration as per provisions of Companies Act, 1956. The application of aforesaid provisions was extended to the extent provided by General Circular No.07/2015, dated 10/04/2015. According t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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