DCIT, NEW DELHI vs. M/S. KL CONCAST PVT. LTD., DELHI

The only ground raised in this appeal is against the deletion of addition of Rs. 39,60,000/-. Briefly stated facts of the case are that the assessee is engaged in the business of manufacturing and trading of billets, shapes, sections and other products of steel. During the course of assessment proceedings, it was observed by the Assessing Officer that salary and bonus amounting to Rs.77,4,000/- was paid to three directors. He held such a payment as excessive in view of decrease in the ratio of net profit to turnover. He restricted the deduction to the amount of salary and bonus as allowed by him in the financial year relating to the assessment year 2009-10. Remaining amount of Rs.39,60,000/-, comprising of salary of Rs. 33,00,000/- and bonus of Rs.6.60 lac was disallowed in terms of section 40A(2)(b). The learned CIT(A) deleted the addition, against which the Revenue has come up in the appeal before the Tribunal.

We have heard both the sides and perused the relevant material on record. Total remuneration paid to the directors during the year stands at Rs.77.04 lac as against remuneration of Rs.67.68 lac paid during the preceding year. Total sales made by the assessee during the year are to the tune of Rs.288.73 crore as against the preceding year’s sales at Rs.263.81 crore. Ratio of directors’ remuneration to sales for the year under consideration is 0.26% in comparison with 0.257% in the preceding year. 2

The Assessing Officer has invoked the provisions of section 40A(2) for making disallowance of Rs.37.60 lac. Clause (a) of section 40A(2), mandating the making of disallowance, provides that : `Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is 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 derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction’. A bare reading of the provision clarifies that before venturing to make the disallowance, the AO has to necessarily show that the payment made by the assessee to the persons referred to in clause (b) is excessive as to the fair market value of goods or services or the legitimate needs of the business or the benefit derived by the assessee. Only then, the provisions of section 40A(2) are triggered. No disallowance can be made in an arbitrary manner without satisfying the statutory conditions as set out in the section.

Adverting to the facts of the instant case, it is evincible that the Assessing Officer has not shown the existence of any one or more of the three conditions stipulated in section 40A(2) of the Act before making disallowance. He simply allowed directors’ remuneration to the extent as allowed by him in making assessment for the assessment year 2009-10 and the excess amount was disallowed. Such a course of action is not in accordance with the prescription of section 40A(2) of the Act. In view of the foregoing discussion, we are of the considered opinion that the learned CIT(A) was fully justified in deleting the addition made by the Assessing Officer.

In the result, the appeal is dismissed.