M/S. ODC LOGISTIC PVT. LTD., ,KOLKATA vs. JCIT, RANGE - 6, KOLKATA, KOLKATA

The issue involved in ground no 1 relates to the disallowance of Rs. 2,79,300/- made by the A.O. and confirmed by the Ld. CIT(A) u/s 40A(2)(b) on account of directors remuneration.

The assessee in the present case is a company which is engaged in the business of rendering of transportation and other logistic services. The return of income for the year under consideration was filed by it on 09.10.2010 declaring a total income of Rs. 21,52,062/-. During the course of assessment proceedings, it was noticed by the Assessment Year: 2010-11 ODC Logistic Pvt. Ltd A.O. that the turnover of the assessee during the year under consideration has reduced drastically by 43.69% whereas the remuneration paid to the director has increased to Rs. 19,13,300/- as against Rs. 16,34,000/- paid during immediately preceding year. While explaining this increase in director’s remuneration, it was submitted by the assessee before the A.O. that one new director of the company was appointed during the year under consideration while the remuneration of other directors was increased in the normal course. This explanation of the assessee was not found acceptable by the A.O. According to him when there was a huge fall in the business, the increase in director’s remuneration by the assessee company was excessive and unreasonable having regard to the services rendered by them. He, therefore, disallowed the increase in director’s remuneration of Rs. 2,79,300/- u/s 40A(2)(b).

The disallowance made by the A.O. u/s 40A(2)(b) on account of director’s remuneration was challenged by the assessee in the appeal filed before the Ld. CIT(A) and the following submissions was made on behalf of the assessee before the Ld. CIT(A) in support of its case on this issue: “Director remuneration is subject matter of provisions of Companies Act, 1965. There is no qualification of Auditor that provisions of Co’s Act have been violated A.O. has simply restricted the claim to the preceding year’s claim and after deducting Rs. 16,34,000/- of the last year’s claim from this year’s claim of Rs. 19,13,300/- has disallowed Rs. 2,79,300/-. He has applied Section 40A(2)(b) . A.O. has given no reason as to why the claim is not reasonable u/s 40A(2)(b) and simply observed that there is a huge full in business. Fall in business cannot be attributed to the payment of remuneration to director who are rendering whole time services. It is well known that F.Y. 2009-10 was the period of big show down of economic activities and had a global effect. Further one new director was also appointed as one other director was going to resign.

In view of above and considering that payment confirms the provision of Companies Act, 1956, remuneration approved by shareholders of the company, disallowance is liable to deleted.”

I have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that the increase of Rs. 2,79,300/- in the remuneration paid to the directors during the year under consideration was explained by the assessee by pointing out that one new director was appointed during the year under consideration with remuneration of Rs. 1,44,000/- while balance amount represented normal increase in the remuneration of other director. This explanation of the assessee however was not accepted by the authorities below on the ground that there was substantial reduction in the turnover of the assessee-company during the year under consideration. As rightly contended by the learned counsel for the assessee, turnover alone cannot be thedeterminative factor for deciding quantum of remuneration to be paid to the directors and the allegation made by the authorities below regarding unreasonableness of director’s remuneration cannot be based solely on quantum of turnover. The reasonableness of such payments is to be considered on the basis of services rendered by them and when the normal increase in director’s remuneration was duly explained by the assessee, the disallowance, if any, by invoking section 40A(2)(b)

The issue raised in ground no 2 relates to the addition of Rs. 11,280/- made by the A.O. and confirmed by the Ld. CIT(A) on account of alleged discrepancy in rent payments.

The enquiry made by the A.O. directly from the concerned authority revealed that rent of Rs. 34,128/- was paid by the assessee company to M/s. Birla Brothers Pvt. Ltd. as against the rent of Rs. 45,408/- claimed by the assessee. Since no satisfactory explanation could be offered on behalf of the assessee in this regard, the A.O. made a disallowance of Rs. 11,280/- on account inflated rate.

The disallowance made by the A.O. on account of alleged inflated rent was challenged by the assessee in the appeal filed before the Ld. CIT(A) and the following submission was made on behalf of the assessee in support of its case on this issue: “Claim of rent is same as in last year Rs. 45,408/-. This includes Rs. 34,128/- paid to Birla Brothers Pvt. Ltd. and Rs. 11,280/- paid to Shri R.N.

I have heard the arguments of both the sides and also perused the relevant material available on record. As submitted by the learned counsel for the assessee, some portion of the property belonging to Birla Brothers Pvt. Ltd. was taken on rent directly by the assessee company while some portion of the said property was taken on rent by Shri R.N. Banka, Director of the assessee company. Since the portion of the premises taken on rent by Shri R.N. Banka was also used by the assessee company for the purpose of its business, rent for the same amounting to Rs. 11,280/- was paid to the landlord on behalf of Shri R.N. Banka. The learned DR, on the other hand, has submitted that some portion of the property thus was taken on rent by the director of the assessee company and rent paid for the same by the assesssee company cannot be considered as its business expenditure. There is however nothing on record to dispute the claim of the assessee of having used the said portion of the property taken on rent by Shri R.N. Banka for the purpose of its business. As a matter of fact, rent for the said portion was paid and claimed as expenditure by the assessee company even in the earlier years and the fact that the same was allowed clearly establishes that the portion of property

In ground no 3 and 4, the assessee has challenged the disallowance of 10% made by the A.O. and confirmed by the Ld. CIT(A) out of various expenses claimed by it under head miscellaneous expenses and office expenses, telephone and motor car expenses.

During the course of assessment proceedings, the expenses claimed by the assessee under different heads were examined by the A.O. and on such examination, he found that the miscellaneous expenses of Rs. 5,89,448/- and office expenses of Rs. 1,44,631/- claimed by the assessee were not fully supported by proper bills and vouchers. He also found that no proper record was maintained by the assessee to establish that the telephone expenses of Rs. 5,70,620/- and motor car expenses of Rs. 5,43,605/- were incurred fully and exclusively for the purpose of business. He, therefore, made a disallowance of 10% out of these expenses claimed by the assessee under four different heads. On appeal, the Ld. CIT(A) confirmed the said disallowance made by the A.O. after having taken note of the fact that the relevant expenses claimed by the assessee were not fully vouched and verifiable.

In the result, the appeal of the assessee is partly allowed. Order Pronounced in the Open Court on 24th May, 2018.