INCOME TAX ACT, 1961

Section 40A(2)(b)

Business disallowance under section 40A(2)(b) - Excessive or unreasonable payment - Exponential increase in directors' remuneration - No motive to evade tax being established

Assessee-company was engaged in business of publishing books for school students. AO noticed that during the year under consideration, there was an exponential increase in directors' remuneration whereas the salaries of other employees remained static. Accordingly, the AO held the directors' remuneration as a colorable device to reduce profits of the company. He was of the opinion that the assessee could not justify the increase in the directors' remuneration and thus, disallowed 50% of the remuneration under section 40A(2)(b). Further, CIT(A) reduced such disallowance to 15%. Held: It is settled law that although the objective of section 40A(2) is to prevent evasion of tax through excessive or unreasonable payments, but this provision should not be applied in a manner which will create hardship in bona fide cases. A perusal of the assessment order showed that the AO had not brought any comparable cases on record to establish and support his allegation that the remuneration paid to the directors was excessive as compared to the remuneration being paid to similar persons with similar qualifications and experience. CIT(A), though gave partial relief to the assessee by limiting the disallowance, however, he also did not consider such aspect of the case and reduced the disallowance in an ad hoc manner. It was also undisputed that the assessee-company as well as the directors were in the same tax bracket, and, therefore, there could be no question of any evasion of tax by paying remuneration to the directors. Further, the CBDT Circular No.6-P dated 6-7-1968, clearly states that no disallowance is to be made under section 40A(2) in respect of payments made to relatives and sister concerns where there is no attempt to evade tax. In instant case, since no motive to evade tax was established and further, the AO had not pointed out any comparables to demonstrate that the remuneration paid to directors was excessive, the addition sustained under section 40A(2)(b) by the CIT (A) was deleted.

Relied:Sigma Research & Consulting Pvt. Ltd. v. CIT (2019) 103 Taxmann.com 397 (Delhi) : 2019 TaxPub(DT) 2363 (Del-HC), Pr. CIT v. Gujarat Gas Financial Services Ltd. (2015) 60 Taxmann.com 483 (Guj) : 2015 TaxPub(DT) 3902 (Guj-HC), CIT v. Spank Hotels Ltd. (2014) 50 Taxmann.com 452 (Del), CIT v. Siya Ram Garg (HUF) (2012) 20 Taxmann.com 622 (P & H) : 2011 TaxPub(DT) 724 (P&H-HC), CIT v. VS. Dempo and Co. P. Ltd. (2010) 8 Taxmann.com 159 (Bom-HC) : 2011 TaxPub(DT) 552 (Bom-HC), Amit Mehra v. ITO (2020) 116 Taxmann.com 870 (Del-Trib.) : 2020 TaxPub(DT) 2305 (Del-Trib), Divakar Solar System Ltd. v. Dy. CIT (2017) 88 Taxmann.com 770 (Kol-Trib.) : 2016 TaxPub(DT) 5174 (Kol-Trib), Tally Solutions (P) Ltd. v. Dy. CIT (2011) 8 ITR (1) 434 (Bang) : 2010 TaxPub(DT) 329 (Bang-Trib) and Asstt. CIT v. Doon Valley Motors (2006) 10 SOT 525 (Del-Trib) : 2006 TaxPub(DT) 1824 (Del-Trib).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2012-13

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