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Facts
The assessee, a private limited company engaged in the transport business, filed its return for AY 2015-16. The AO disallowed bonus and incentive expenses and made an addition for interest on delayed TDS. The CIT(A) confirmed these additions.
Held
The Tribunal held that the restriction of incentive payment to 11% of net profit, as applicable to public limited companies, is not applicable to the assessee, a private limited company. The disallowance of interest on delayed TDS was confirmed due to lack of supporting material.
Key Issues
Whether the restriction on managerial remuneration applies to private limited companies and if interest on delayed TDS is allowable as a deduction.
Sections Cited
143(3), 40A(2)(b), 271DA, 36(1)(ii), 43B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, AHMEDABAD “C” BENCH
Before: DR. BRR KUMAR & Shri T.R. SENTHIL KUMAR
Shree Dhain Auto Income Tax Officer, Logistics Pvt. Ltd. Ward-2(1)(1), 1, Dhain Compound, Vs (Previously The DCIT Nr. Aradhana Hotel, Circle-2(1)(1), Opp. Air Force Station, Vadodara N.H.8, Darjipura, Vadodara-390022 Gujarat PAN: AAJCS2871F (Appellant) (Respondent) Assessee Represented: Shri Manish J Shah, A.R. Revenue Represented: Shri Rignesh Das, Sr.D.R. Date of hearing : 23-01-2025 Date of pronouncement : 25-02-2025 आदेश/ORDER PER : T.R. SENTHIL KUMAR, JUDICIAL MEMBER:-
This appeal is filed by the Assessee as against the order dated 02.09.2023 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, (in short referred to as “CIT(A)”), arising out of the reassessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year 2015-16.
A.Y. 2015-16 Page No 2 Shree Dhain Auto Logistics Pvt. Ltd. vs. ITO
The registry has noted that there is a delay of 124 days in filing the above appeal. The assessee filed Notarized sworn Affidavit of its Accountant, wherein he has stated that due to tax audit finalization of accounts, he failed to communicate the appellate order to the Chartered Accountant. However on receipt of penalty notice u/s. 271DA of the Act for the other Asst. Year 2018-19, he realized that the appeal is not filed and immediately thereafter approached their Advocate for filing the appeal which has resulted in delay of 124 days. We are satisfied with the reasons stated and the delay in filing the above appeal is hereby condoned.
Brief facts of the case is that the assessee is a Private Limited Company engaged in the business of transport operator and having fleet of vehicles and providing services mainly to corporate customers. For the Asst. Year 2015-16, assessee filed its Return of Income on 10-09-2015 declaring total income of Rs.68,09,140/-. The case was selected for scrutiny assessment and Assessing Officer disallowed bonus and incentive expenses of Rs.32,00,000/- u/s. 40A(2)(b). The Assessing Officer also made an addition of Rs.32,40,223/- on which interest on TDS of Rs. 40,223/- was claimed, but corresponding the income is not offered in the computation of income.
Aggrieved against the same, assessee filed an appeal before Ld. CIT(A) who has confirmed the addition by holding as follows: “Reply: Incentives to the employees of the company are profit linked. Without increase in profit incentives cannot be paid to the employees. As per the Company's Act Remuneration to mangers is restricted to 11% of the Net Profit. It is not clear whether this is a Public limited company or A.Y. 2015-16 Page No 3 Shree Dhain Auto Logistics Pvt. Ltd. vs. ITO
Pvt. Ltd. Company. If it is a public limited company the assessing officer is requested to restrict the managerial remuneration i.e. Incentive to 11% of Net Profit. If the Company is a private company there is no restriction on the remuneration payable to Directors. In the Corporate world Incentives play a major role in motivating managers. Managerial remuneration is an essential factor to consider in managing a business. While it is crucial to provide incentives to those performing the challenging role of managing the companies it is equally important not to exceed reasonable limits with perks and pay (Since in a public limited company remuneration has to be restricted to 11 % of Net profit it works out to roughly Rs. 750000 whereas taxpayer has debited Rs. 2000000 to Director. This is more than double that claimable. As mentioned here if the taxpayer is a public limited company remuneration is to be restricted to 11 % of Net Profit. Whereas if the taxpayer is a private ltd company there is no restriction. But going by the facts of the case since Incentive is linked to profit and profit has not shown an increase during the year the Incentive paid/payable to the Director has to be restricted. The taxpayer has paid 30% of the Net profit towards Incentive. This is restricted to 20% of the Net Profit which works out to Rs. 1362000. The Incentive payable to the Director is restricted to 1362000/-. In the event a relief of Rs. 638000 is given. Addition upheld: 1362000/- ……………………. Reply: this is not an allowable expense since this is nothing but income tax paid which is not an allowable expense. Interest is a statutory levy for delayed payment of TDS. Under section 43B tax, cess etc. paid will be allowable only in the year in which it is it is actually paid. That is tax, fee, cess, duty etc. relating to a taxpayer/paid by a taxpayer under any other law in force for the time being is allowable as deduction only in the year in which it is actually paid. The addition made by the assessing officer @ Rs 40223 is upheld.”
Aggrieved against the appellate order, assessee is in appeal before us raising the following Grounds as well as Revised Grounds of Appeal:
1. The Ld. CIT(A) has erred in law and on facts of the case in sustaining the disallowance u/s. 36(1)(ii) of bonus and incentive expense of Rs. 32,00,000/- paid to the director of the assessee company.
A.Y. 2015-16 Page No 4 Shree Dhain Auto Logistics Pvt. Ltd. vs. ITO
2. The Ld. CIT(A) has erred in law and on facts of the case in upholding the disallowance of interest on delayed payment of TDS.
3. The appellant craves leave to add, amend or alter the grounds of appeal at the time of hearing, if need arise.
Revised Grounds:
The Ld. CIT(A) has erred in law and on facts of the case, in sustaining the disallowance of payment of incentive to the directors of the assessee company to the extent of Rs. 13,62,000/-.
Heard rival submissions at length and perused the materials available on record including the submissions of both parties and Paper Book filed by the assessee. The Ld. CIT(A) in his order mentions that as per the Company’s Act, remuneration to managers is restricted to 11% of the Net Profit when it is Public Limited Company. However the Ld. CIT(A) observed that it is not clear whether the assessee is a Public Limited Company or a Private Limited Company. Whereas the name of the assessee itself makes it very clear that it is Private Limited Company. Hence the restriction of disallowance for payment of incentive to the Directors of the Company of Rs. 13,62,000/- at 11% of the Net Profit will not be applicable to the assessee being a Private Limited Company in the present case. Thus the Ld. CIT(A) is not justified in restricting the addition of Rs.13,62,000/- which is liable to be deleted. Hence the Revised ground raised by the Assessee is hereby allowed.
Regarding the second ground namely disallowance of interest on delayed payment of TDS. Though substantial ground raised
by the Assessee but no material is in placed on record for delay in A.Y. 2015-16 Page No 5. Shree Dhain Auto Logistics Pvt. Ltd. vs. ITO payment of TDS which resulted in payment of interest. In the absence of any details before us, we have no hesitation in confirming the additions made by the Lower Authorities. Thus the Ground No. 2 raised by the Assessee is hereby dismissed.
In the result, the appeal filed by the Assessee is partly allowed.
Order pronounced in the open court on 25 -02-2025 Sd/- Sd/- (DR. BRR KUMAR) (T.R. SENTHIL KUMAR) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad: Dated 25/02/2025 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद