High Remuneration paid to Directors can’t be Disallowed If Same is already subjected to Tax through Personal Returns: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai bench has held that the payment of high remuneration to Directors cannot be disallowed by treating the same as a tool to shift profits to evade tax if the Directors have already offered the income for tax through their personal returns.

The assessee company, publishes a newspaper in Vernacular language, filed return for relevant AY declaring losses. The assessing Officer, while completing the assessment proceedings, noted that the assessee had paid remuneration @ Rs. 48,00,000 each to three whole time directors aggregating to Rs. 1,44,00,000. After calling for further information and verifying them, the AO found that the remuneration paid to the three directors was excessive and unreasonable having regard to the fair market value of the goods, services or facilities for which payment was made as well as the legitimate business needs of the assessee and the benefit derived by or accruing to the assessee, the AO, accordingly, disallowed the remuneration paid to the directors by invoking section 40A(2)(a) of the Act.

The Tribunal observed that the Assessing Officer failed to demonstrate that the payment made by the assessee is excessive and unreasonable having regard to the market rate or business needs or benefit derived by the assessee.

“Undisputedly, the assessee had been paying remuneration to the concerned directors from past several years. Moreover, from the shareholding pattern of the company, it appears that the total share holding of the aforesaid three directors combined together constitutes only 15%. Therefore, it cannot be said that for escaping the rigors of Section 2(22)(e) of the Income Tax Act the assessee has paid remuneration to the directors. The object behind introduction of section 40A(2) of the Act is for preventing evasion of tax through shifting of profit by making payment to related parties,” the Tribunal observed.

It was further added that “It is also not disputed that the concerned directors are assessed to tax at the maximum rate of 30%. In the aforesaid facts and circumstances, we are of the considered view that the provisions of section 40A(2) of the Act are not attracted to the payment made to the directors.”