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Income Tax Appellate Tribunal, INDORE “SMC” BENCH, INDORE
Before: SHRI KUL BHARAT
Appellant by Shri S.N. Agrawal, A.R. & Shri Pankaj Mogra, D.R. Respondent by Shri Punit Kumar, Sr. D.R. Date of Hearing: 23.01.2020 Date of Pronouncement: 28.01.2020 आदेश / O R D E R PER KUL BHARAT, J.M:
This appeal by the assessee is directed against order of the Ld. CIT(A)-2, Indore dated 27.11.2018 pertaining to the [ ] [M/s. Viraje Cargo Care Private Limited, Indore] assessment year 2015-16. The assessee has raised following grounds of appeal:
1. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in maintaining the disallowance of Rs.5,00,000/- made by the assessing officer out of director remuneration by invoking the provisions of section 40A(2)(b) of the Income Tax Act without properly appreciating the facts of the case and submissions made before him.
The appellant reserves its right to add, alter and modify the grounds of appeal as taken by it.
2. The only effective ground is against addition of Rs.5 lakhs made on account of disallowance of Director’s remuneration by invoking provisions of section 40A(2)(b) of the Income Tax Act, 1961 (hereinafter called as ‘the Act’).
The facts giving rise to the present appeal are that case of the assessee was picked up for scrutiny assessment and the assessment u/s 143(3) of the Act was framed vide order dated 17.11.2017. While framing the assessment, the A.O. 2
[ ] [M/s. Viraje Cargo Care Private Limited, Indore] observed that during the financial year 2014-15, the assessee company paid Rs.10 lakhs each to the Directors remuneration. This is substantial increase from the last year when they were paid only Rs.12,50,000/-. The A.O. therefore issued a show cause to the assessee calling him to explain as to why there is such increase in the remuneration of the directors. In response thereto, the assessee filed a reply. However, that reply was not acceptable to the A.O. Therefore, he made addition of Rs.5 lakhs. Aggrieved against this, the assessee preferred an appeal before Ld. CIT(A), who after considering the submissions dismissed the appeal. Now the assessee is in further appeal before this Tribunal.
Ld. Counsel for the assessee reiterated the submissions as made in the written synopsis. For the sake of clarity, the submissions of the assessee are reproduced as under:
[ ] [M/s. Viraje Cargo Care Private Limited, Indore] [ ] [M/s. Viraje Cargo Care Private Limited, Indore] [ ] [M/s. Viraje Cargo Care Private Limited, Indore] [ ] [M/s. Viraje Cargo Care Private Limited, Indore] [ ] [M/s. Viraje Cargo Care Private Limited, Indore] [ ] [M/s. Viraje Cargo Care Private Limited, Indore] [ ] [M/s. Viraje Cargo Care Private Limited, Indore] [ ] [M/s. Viraje Cargo Care Private Limited, Indore] [ ] [M/s. Viraje Cargo Care Private Limited, Indore] [ ] [M/s. Viraje Cargo Care Private Limited, Indore]
On the contrary, Ld. D.R. opposed these submissions and supported the orders of the authorities below.
I have heard the rival submissions, perused the materials available on records and gone through the orders of the authorities below. The A.O. has made disallowance by invoking the provisions of section 40A(2)(b) of the Act by observing as under:
[ ] [M/s. Viraje Cargo Care Private Limited, Indore]
“If we calculate the PBT of the company for F.Y. 2014-15 and FY 2013-14 by adding back the Director’s remuneration, to see how much profits rose excluding this amount, we see that the PBT increased year on year by c. 22% - Rs.36,16,898/- + Rs.20,00,000/- (FY 2014-15) v/s Rs.33,52,000/- + Rs.12,50,000/- (FY 13-14).
Thus, at best, the increase in remuneration that can be justified is c. 22%, i.e. total of c. Rs.15,00,000/- (despite the fact that will reduce the distributable profits of the company by a larger proportion), rather than the 60% hike actually offered. Therefore, remuneration paid to Directors is being restricted to Rs.15,00,000/- and Rs.5,00,000/- is being disallowed u/s 40A(2)(b) of the I.T. Act, 1961.
There is no ambiguity so far law is concerned. Section 40A(2)(b) of the Act authorizes the A.O. to make disallowance, if in his opinion the expenditure incurred in respect of which payment is made or is to be made in person referred to in clause (b) of the sub-section (2) of section 40A, he can make disallowance by considering the expenditure being excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit 14
[ ] [M/s. Viraje Cargo Care Private Limited, Indore] derived by or accruing to him there from so much of the expenditure as is considered to be excessive or unreasonable. Therefore, the finding of the A.O. is required to be based upon the fair market value of the services, which is a condition precedent before making disallowance.
The A.O. in the present case has not given such finding as what is the fair market value, what the A.O. has based his finding purely on the basis of the past history of the assessee. There is no such finding that under the identical facts and circumstances how much remuneration is being paid to the Directors by other similarly situated assessees.
The coordinate bench of this Tribunal in the case of Edwise Consultants Pvt. Ltd. Vs. DCIT (2017) 83 Taxmann.com 27 (Mumbai Trib.) has observed as under:
[ ] [M/s. Viraje Cargo Care Private Limited, Indore]
In the present case also, the A.O. has not brought any material suggesting that fair market value of the remuneration paid to the Directors is lower than what is 16
[ ] [M/s. Viraje Cargo Care Private Limited, Indore] paid by the assessee. In the absence of such finding, the disallowance made cannot be sustained and the A.O. is directed to delete disallowance.
In the result, the appeal filed by the assessee is for the A.Y. 2015-16 is allowed.
Order was pronounced in the open court on 28 .01.2020.