Disallowance of Excess Remuneration to Directors: ITAT holds Section 40 A(2)(b) can’t be invoked

The Income Tax Appellate Tribunal (ITAT), Chennai bench, has held that section 40 A(2)(b) can’t be invoked without corroborative evidence and set aside the order of the Commissioner of Income Tax Chennai in ITA No.49/2015-16/A-1 dated 29.12.2017.

The appellant is a resident domestic company involved in software development and engineering designs. The AO noted that the directors’ remuneration is Rs.75,07,380/- against the net profit declared at Rs.84,40,020/-. The AO restricted the allowance of remuneration to 20% of the net profit of Rs.16,88,004/- and disallowed the differential amount of Rs.58,19,376/- under Schedule XIV of Companies Act, 1956 and invoked the provisions of Section 40A(2)(b) of the Act.

The appellant stated that payments were made to three directors who are actively involved in the affairs of the company and contended that the AO and CIT(A) had wrongly invoked the provisions of section 40A(2)(b) of the Act on the ground under the provisions of section 198 of the Companies Act, which is applicable only to the public limited companies. Further, contended that the provision will not apply to the directors’ payment in the absence of any material brought on record to demonstrate that the payment is actually excessive or unreasonable. The respondent supported the order of CIT(A) and stated that AO had rightly invoked section 40(2)(b) of the Act and also the provisions of the Companies Act, where the remuneration payable is restricted.

The Tribunal observed that the turnover is at Rs.1,42,13,393/- and profit earned is at Rs.84,40,020/- and remuneration paid to these three directors is at Rs.75,07,380/- which doesn’t create revenue loss to the Department even it was paid on maximum margin rate.

The Coram consists of Shri Mahavir Singh and Shri Manoj Kumar Aggarwal while allowing the appeal held that in the absence of corroborative evidence on findings by the AO is not valid and provision u/s 40(2)(a) cannot be invoked. Shri D. Anand appeared for the appellant and Shri G. Johnson appeared for the respondent.