40A(2) - onus on deptt. - Excessive Remuneration

IT : Where the director of a company is being paid remuneration which is excessive or unreasonable in the opinion of the AO, he has to first record his findings in support of his opinion to justify the disallowance of the remuneration incurred by the assessee company. Thus, the onus lies on the department to invoke the provisions of section 40A(2)(a)

• During the relevant year, the assessee company is engaged in the Hotel business. However, the assessee derived income from interest & dividend only and had paid director remuneration @Rs. 3,00,000/- per month to one of its directors. According to AO, the remuneration paid by the assessee to its director was excessive and unreasonable; he thus disallowed the same to the extent of Rs. 2,50,000/- per month without stating any sound reason, material or ground and simply ignoring the qualification and the experience of the director concerned. Moreover, the CIT (A) found the remuneration justified recognizing the qualifications & the professional experience of the concerned director and consequently deleted the addition made by the AO.

• On further appeal by the revenue, the issue came before ITAT Delhi. During arguments, the DR gave reference of the case of CIT v. Eastern Condiments (P.) Ltd. 325 ITR 251 (Ker.), which could not support the revenue due to the reason of separate facts and circumstances of that case. The AR, on the other hand, quoted the qualification and the professional experience of the director involved to justify the remuneration paid by the assessee company.

• The Appellate Authority highlighted the basic & independent requirements of section 40A(2)(a), as pointed out by the Gujarat High Court in the case ofCoronation Flour Mills v. ACIT 188 taxmann.com 257 stating that section 40A(2)(a) can be invoked where the payment is made to a person referred under section 40A(2)(b) and which is excessive and unreasonable having regard to:-

 (a) fair market value of the goods, services or facilities for which the payment is made;

 (b) the legitimate needs of the business of the assessee; or

 (c) the benefits derived by or accruing to the assessee on receipt of such goods, services or facilities.

The Hon'ble Bench, made clear that the onus to prove the excessiveness or unreasonableness of the payment made, lies on the revenue and also that in the absence of any material and basis with the AO to treat the remuneration as excessive and unreasonable, the decision given by the CIT (A) was upheld.

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[2012] 22 taxmann.com 257 ( Delhi - Trib.)

IN THE ITAT DELHI BENCH 'G'

Deputy Commissioner of Income-tax, Circle - 9(1)

v.

Spark Hotels (P.) Ltd.

G.C. GUPTA, VICE-PRESIDENT

AND A.N. PAHUJA, ACCOUNTANT MEMBER

IT APPEAL NO. 4631 ( DELHI ) OF 2011

[ASSESSMENT YEAR 2008-09]

JUNE 22, 2012