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Income Tax Appellate Tribunal, “E”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI SANDEEP GOSAIN, JM
आदेश / O R D E R PER R.C.SHARMA (A.M):
This is an appeal filed by the Revenue against the order of CIT(A)-20, Mumbai dated 03/10/2016 for A.Y.2011-12 in the matter of order passed u/s.143(3) of the IT Act wherein the following grounds have been taken by the Revenue. 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition Rs. 90,16,970/- on account of disallowance u/s 40A(2)(b) made by the AO without appreciating the facts of the case elaborately discussed by the AO in the assessment order u/s.143(3) of the IT. Act.
2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in ignoring the fact that, the working of previously paid remuneration is not justified by the assessee. Hence, it cannot be relied M/s. Eskay Elevators (India) Pvt. Ltd., upon method of giving relief in remuneration for year under consideration on the basis of previously paid remuneration.
3. "On the facts and in the circumstances of the case, the order of the Ld. CIT(A) deserves to be set aside and that of the Assessing Officer be restored".
Rival contentions have been heard and record perused.
The facts of this case are that the Assessing Officer on perusal of the accounts observed that the directors were paid remuneration for the current year amounting to Rs.1.82 crores as against Rs.82.52 lacs during the A.Y. 2010-11 and Rs.32.34 lacs during the A.Y. 2009-10. The assessee was asked by the A.O. to substantiate the said payment vis-a-vis the increase in sales and profit or any other benefit derived by the company. The assessee's representative vide its letter had tried to justify the increase in directors remuneration. The assessee had tried to justify the increase by stating that the efforts put during the year would yield results in subsequent years. The assessee had further stated that the legitimate needs of any business and its quantification would always be subjective and may not necessarily be measured in terms of turnover achieved and even the profitability earned during any particular year. However, AO did not agree with assessee’s contention and added the amount of Rs.90,16,970/- by making disallowance u/s.40A(2)(b). 4. By the impugned order of CIT(A) deleted the addition after having the following observation:-
M/s. Eskay Elevators (India) Pvt. Ltd., 5.5. I have carefully considered the assessment order and submissions made by assessee. The A.O. noted that from the comparative chart submitted by the assessee for A.Y. 2009-10 to A.Y. 2012-13, no substantial increase was seen in the turn over or profits of the company as compared to the increase in the remuneration paid to the directors. The increase in remuneration for A.Y. 2010-11 was 155% and that for A.Y. 2011-12 was 120% whereas the increase in turnover was only 11.5% and 9.58% respectively. Thus it was seen by the A.O. that there was no substantial increase in the profits or benefits derived by the assessee company by the said special efforts put in by the directors so as for them to earn a disproportionate increase in the remuneration. Based on the comparative chart submitted by the assessee, 5.5% of remuneration as compared to the turnover was considered to be fair and reasonable. Accordingly an amount of Rs.91,93,030/- was considered as reasonable remuneration and the balance amount of f 90,16,9707- (1,82,10,000/-- 91,93,030/-) was disallowed u/s 40A(2)(b) by the A.O. being excessive remuneration paid to the director.. In this regard it is no-ted that the Hon'ble Gujarat High Court in the case of CIT vs Bharat Vijay Mills Ltd. 1988 reported at 128 ITR 633 (Guj.) has held that provisions of sec.40A have been declared to be of overriding nature. The effect of this decision of the Hon'ble High Court is that the excessive directors remuneration can always be disallowed as per the provisions of sec.40A(2) of the I.T. Act if these are found to be excessive or unreasonable, in relation to the legitimate business need of the company and the benefit derived by or accruing to it. During the assessment proceedings as well as the appellate proceedings the appellant had submitted that the directors remuneration is approved by Board of Directors, the directors are qualified and the business of the company is increased in the subsequent year as a result of the service rendered by the directors and this justifies the rise in the remuneration to Directors. The Ld. authorized representative states that there is no dispute about genuineness of the impugned remunerations. It's a question of excessive element therein. It is submitted that assessee's payees i.e. the directors have already paid taxes there upon at the maximum marginal rate while filing their individual tax returns. It is noted that the remuneration paid to the director was restricted to 5.5% of remuneration as compared to the turnover which was considered to be fair and reasonable by the A.O. It is noted that the A.O. has not made any comparison of the impugned remuneration vis-a-vis market rate in assessment order so as to point, out any excessiveness element there in. The counsel of the assessee has vehemently opposed the addition and has submitted that if at all one were to apply some rationale and increase in the remuneration and make an allowance on that basis the law of averages should be an acceptable rationale. It is also prayed that the nature of the assessee is business the effort is of one year may translate into results and revenue streams in subsequent years. Further M/s. Eskay Elevators (India) Pvt. Ltd., the objects depend upon the various exigency is of the clients business over which the assessee has no control. Considering the average increase for the last two years and the year under consideration the average works out to an increase of 118% { 78% + 155.17% + 120.66%}. Having regard to the facts of the case it would be fair and reasonable if the disallowance out of remuneration to the directors be made keeping in view the increase in turnover and profitability of company. It is seen that the increase over the last years remuneration works out to an aggregate remuneration of 1,79,90,450/- (8,25,2500/- L.Y. + average growth rate 118%) "which will calls for a disallowance u/s 40A(2)(b) of Rs.2,19,550/- (1,82,10,000/ less 1,79,90,450/-, the disallowance as per the provisions of sec.40A(2) of the I.T. Act needs to be restricted to this figure of Rs 2,19,550/-. The A.O. is directed to restrict the disallowance out of remuneration to Directors as per the provisions of sec.40A(2) of the I.T. Act to Rs. 2,19,550/-. Accordingly these grounds of appeal are partly allowed.