DCIT, NEW DELHI vs. M/S. SUN NIRMAN INFRASTRUCTURE (P) LTD., NEW DELHI

The brief facts of the case are that assessee is a company carrying on the business as civil contract. It filed its return of income of Rs. 35718944/- on 7/10/2010. During the assessment proceedings it was found that the assessee has increased share capital of Rs. 45 Lacs during the year under assessment. The Ld. assessing officer enquired that and it was submitted that assessee has issued equity shares of Rs. 45 lakhs to the directors of the company and debited in the same in the profit and loss account under the head director’s remuneration. The assessee company was also asked whether any tax deduction at source has been made on such remuneration given in the form of sweet equity shares and as to whether such income has been shown as income in the hands of the directors. The company submitted that no tax has been deducted at source neither the same as been shown as income in the hands of the directors. Therefore, the ld. Assessing Officer noted that it does not have any relationship Page | 1 Assessment Year 2010 – 11 with the business of the assessee and further the expenditure claimed by the assessee is also not of revenue, nature but of capital nature. Therefore he disallowed the sum of Rs. 45 lacs.

The assessee preferred appeal before the Ld. CIT (A) who deleted the above disallowance. The Ld. CIT(A) held that cost of sweet equity shares is revenue expenditure under section 37 of the Income Tax Act, as per the unlisted companies (issue of sweet equity shares), Rule 2003. He further held that there was no requirement of deduction of tax at source on such perquisite and further the provisions of Section 40(a)(ia) also exclude salary expenses from its purview of disallowance on TDS default. In view of this he allowed the above sum of Rs. 45 lacs holding it to be a managerial remuneration in accordance with the company law, regulation and as revenue expenditure.

The Ld. departmental representative vehemently supported the order of the Ld. Assessing Officer and submitted that the sweat equity expenditure is not allowable as revenue expenditure. He further submitted that expenses claimed by the assessee is of remuneration to directors and same is allowable in accordance with Section 37(1) of the Act and assessee has not established what services have been rendered by those directors to the company. The ld AO has stated that assessee has failed to show any relevance of such expenditure with the business of the assessee. He further submitted that unless above expenditure are in accordance with the scheme of employees stock option scheme same is not allowable. As such, he submitted that the above expenditure incurred by the assessee is capital in nature and therefore should have been disallowed.

Despite notice, none appeared on behalf of the assessee and therefore issue is decided on the merits of the case based on the material available on record.

We have carefully considered the rival contentions and also perused the orders of the lower authorities. Admittedly, during the year, assessee has increased share capital of Rs. 45 lacs and same was debited to profit and loss account as director’s remuneration. Admittedly, provisions of section 40(a)(ia) do not apply to provisions of section 192 of the Act. Therefore, even if for that year no tax was deducted on such payment of director’s remuneration, no disallowance can be made. However, for allowance of the above expenditure, it should have been wholly and exclusively incurred for the purposes of business of the assessee. In the present case the assessee is a private limited company and it is not shown that how the above expenditure debited as Director’s remuneration is allowable, what are the services rendered by the directors of the company, who are the key managerial persons and it is also not specified by the assessee whether on such remunerations, directors have paid the taxes or not, ld CIT(A) has also not stated any finding