The Chennai Bench of Income Tax Appellate Tribunal ( ITAT ) determined that the consultancy charges paid to a resident director by M/s Egberts India Private Limited were not “excessive or unreasonable.” Consequently, the tribunal allowed the company’s deduction claim for the payment made.
The appellant, M/s Egberts India Private Limited, challenged the disallowance of salary paid to one of its directors under Section 40A(2)(b) of the Income Tax Act. The company paid consultancy charges of Rs.93.78 Lacs to its resident director, Shri S. Sridharan, while the other two directors were non-residents.
The payment was justified by the company on the grounds of the significant involvement of S. Sridharan in the company’s daily operations, particularly after the commencement of a new commercial project in Panaiyur-ECR road during FY 2017-18, which generated revenue of Rs.6.29 Crores.
The primary issue before the tribunal was the disallowance of Rs.73.78 Lacs out of the consultancy charges paid to the director.
The Assessing Officer ( AO ) deemed the payment to be excessive compared to the previous year’s payment of Rs.20 Lacs and disallowed the differential amount.
The appellant, represented by Y. Sridhar, argued that the payment was reasonable and commensurate with the director’s role and the increased responsibilities following the launch of the new project.
The extensive experience and involvement of the director in the company’s management justified the increased remuneration. Furthermore, the payment was in accordance with the provisions of the Companies Act, and due TDS had been deducted.
The respondent, represented by R. Mukundan, maintained that there was no significant change in other employee costs and that the director did not assume greater responsibilities warranting such an increase. The AO contended that the payment was excessive without sufficient justification.
The two-member bench of Manoj Kumar Aggarwal ( Accountant Member ) and Manu Kumar Giri ( Judicial Member ) found that the AO had not provided any material evidence to demonstrate that the payment was excessive or unreasonable.
The bench emphasised that the reasonableness of expenditure should be judged from the perspective of a businessman, not the Revenue.
The tribunal referred to the ruling of Madras High Court in the case of Computer Graphics Pvt. Ltd, which held that disallowance under Section 40A(2) requires proof of excessive or unreasonable payment.
It was also noted that the revenue of the company from operations significantly increased in the year under consideration, justifying the higher remuneration to the resident director. The payment was also found to be in conformity with the provisions of the Companies Act, and the director had duly offered the income to tax in his return.
The tribunal deleted the disallowance of Rs.73.78 Lacs and directed the AO to re-compute the income of the assessee. Accordingly, the appeal was allowed.
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