SUNVIN INDUSTRIES PVT. LTD.,MUMBAI vs. DCIT 4(3), MUMBAI

PDF · subscribers
ITA 5380/MUM/2017Status: DisposedITAT Mumbai15 March 2019AY 2011-124 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the disallowance was made on conjecture and surmise, as there was no proper evaluation of fair market value or cogent basis for the disallowance. The Tribunal found no comparison with similar payments or violation of the Companies Act.

What were the facts?

The Assessing Officer (AO) disallowed Rs. 22 lakhs of director remuneration under Section 40A(2)(b) due to an increase from the previous year and perceived lack of justification. The CIT(A) restricted the disallowance to Rs. 10 lakhs.

What were the issues?

Whether the disallowance of director remuneration under Section 40A(2)(b) was justified without proper evaluation of fair market value and cogent basis.

Which sections of the Income-tax Act were involved?

Section 40A(2)(b)

AI-generated summary — verify with the full judgment below

Cases cited in this judgment(1)Show list

Detected automatically from the text. Citations are also linked where they appear in the judgment. The count shows how many other judgments on BharatTax rely on the same authority.

Income Tax Appellate Tribunal, “G” BENCH, MUMBAI

Before: SHRI SHAMIM YAHYA, AM & AMARJIT SINGH, JM

Hearing: 03.01.2019Pronounced: 15.03.2019

O R D E R Per Shamim Yahya, A. M.:

This appeal by the Assessee is directed against the order of the learned Commissioner of Income Tax -9, Mumbai (‘ld.CIT for short) dated 14.03.2017 and pertains to the assessment year (A.Y.) 2011-12.

2.

The grounds of appeal read as under:

1. "The Honourable Commissioner of Income tax (CIT) is not justified in partially disallowing the addition of Rs.10,00,000/- of Remuneration to Directors us 40A(2) ignoring the fact that the payment made is reasonable vis-à-vis the market conditions and having regard to the qualification, experience of the Directors, the exigencies of the business and benefit accruing to the appellant.

2. The Appellant craves leave to make additions, deletion or alternation to the above grounds of appeal.

3.

Brief facts of the case are that the AO has disallowed excess amount of expenses on remuneration paid to the Directors u/s. 40A(2)(b) of the Act. The AO has also observed that there is no evidence to show that Directors had rendered any extra services for payment of huge remuneration. The AO has also observed that remuneration has increased from Rs.6 lacs in previous year to Rs.30 lacs this year. The AO has further observed that the turnover and the profit also did not justify the huge payment to the Directors. After considering the submission made by the appellant, the AO disallowed an amount of Rs.22 lacs under the provisions of section 40A(2)(b) of the Act. Against the above order assessee appealed before Ld. CIT(A).

4.

Before the Ld. CIT(A) assessee made following submission

* The appellant paid remuneration to the Director as follows a) Remuneration to Mr. Vinod Khetrapal = Rs.18,00,000/- b) Remuneration to Mr. Sunil Runga = Rs. 12,00,000/- Rs. 30,00,000/- • Mr. Vindo Khertrapal and Mr. Sunil Rungta are technical directors and are highly reputed and have very fast and excellent experience. • In view of their experience, qualification and knowledge the remuneration paid is extremely reasonable and is much lesser than the remuneration that person of similar skill and knowledge may charge as per the market and business exigencies. • The assessing officer has disallowed the remuneration paid to director amounting to Rs.22,00,000/- merely on the ground that all remuneration paid to the directors during the year is higher as compared to the previous year without considering the fact that the payment is reasonable.

• The Director Mr. Vinod Khetrpal is a highly reputed technically qualified person with 30 years of experience. • The Director is responsible and carry out all the function such as a Production, Planning and marketing Strategies, financial Planning and control. • Having regard to the nature and the scope of work of the directors and their qualification the afore-stated remuneration is very reasonable. • Reliance is place of judgment of Honourable Delhi High Court in the cae of Hive Communication (P) Ltd v/s CIT (2011) 201 Taxmann 99/12 taxmann.com 287 , wherein the court has deleted disallowances of Director Remuneration u/s 40A(2) of the judgment referred enclosed in Annexure-i).”

5.

However, Ld. CIT(A) did not consider the above convincing and held that disallowance made is on a higher side. Looking into the facts of the case, he directed the AO to restrict the disallowance to Rs.10 Lacs.

6.

Against the above order assessee is in appeal before us.

7.

We have heard Ld. Departmental Representative and perused the records. None appeared on behalf of the assessee despite notice.

8.

Upon careful consideration we find that this disallowance has been made on conjecture. Section 40A(2)(b) provides for disallowances if the payment is excessive or unreasonable having regard to the fair market value. Hence for making any disallowance under this section, proper evaluation of fair market value is necessary. It does not provide for disallowance on surmise. No cogent basis has been brought on record for the disallowances. No comparison with any other similar payment has been brought on record. It is also not the case that director remuneration paid is not in accordance with company’s Act. Hence we set aside the order of authorities below.

9.

In the result, appeal filed by the assessee is allowed.

Order pronounced in the open court on 15th March, 2019.

More judgments on Section 40A(2)(b)

All 1,172 judgments and leading authorities on Section 40A(2)(b) →

Recent GST High Court judgments

Search GST case law →