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Facts
The assessee's appeal for AY 2020-21 arose from an order invoking Section 40A(2)(b) of the Income Tax Act, 1961. The lower authorities disallowed Rs. 18,00,000/- paid as salary to the director, Ms. Veenu Jain, deeming it excessive or unreasonable. The assessee was absent during the hearing, and the case proceeded ex-parte.
Held
The Tribunal noted that the assessee, both payer and payee, declared income at the maximum marginal rate for the assessment year. Citing various judicial precedents and a CBDT circular, the Tribunal held that disallowances are not maintainable in such revenue-neutral cases where both parties are taxed at the highest rate.
Key Issues
Whether disallowance under Section 40A(2)(b) is justified when both the payer and payee are assessed at the maximum marginal rate, rendering the transaction revenue-neutral.
Sections Cited
40A(2)(b), 143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘E’, NEW DELHI
Before: Sh. Satbeer Singh Godara&
ORDER
Per Satbeer Singh Godara, Judicial Member:
This assessee’s appeal for Assessment Year 2020-21, arises against the CIT(A)-26, New Delhi’s order dated 08.01.2025, in proceedings u/s 143(3) of the Income Tax Act, 1961 (in short “the Act”).
Case called twice. None appears at the assessee’s behest. It is accordingly proceeded ex-parte.
It next transpires during the course of hearing that the assessee/appellant is aggrieved against both the learned lower authorities’ action invoking section 40A(2)(b) salary disallowance to it’s director Ms. Veenu Jain amounting to Rs. 18,00,000/- as excessive or unreasonable; as the case may be, in assessment order dated 26.08.2022 and upheld in the lower appellate discussion.
The Revenue vehemently supports the impugned disallowance that the same has been admittedly found excessive in both the lower proceedings.
We find no merit in the Revenue’s foregoing stand. This is for the precise reason that the assessee has filed it’s payee/director’s income tax return in the very assessment year 2020-21 declaring income of Rs.82,96,410/- assessable at the maximum marginal rate. This being the clinching factual position, we notice that various judicial precedents i.e. PCIT Vs. Future First Info Services (P.) Ltd. (2022) 145 taxmann.com 35 (Del.), CIT vs. Indo Saudi Services (Travel) (P.) Ltd. (2009) 310 ITR 306, CIT Vs. V.S. Dempo & Co. Ltd. (2011) 336 ITR 209 (Bom.) as well as the CBDT’s landmark Circular No. 6-P issued way back on 18.06.1967 have settled the issue against the department that when both the payer and payee are assessed at maximum marginal rate, the impugned disallowance is not maintainable being a revenue neutral case. We thus reverse both the learned lower authorities’ action invoking section 40A(2)(b) of the Act in the assessee’s case in very terms.