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2014 (1) TMI 1496 - AT - Income TaxDisallowance u/s 40A(2)(b) of the Act – Directors remuneration – Held that:- The AO has to form an opinion having regard to the fair market value of the goods and services – but, the AO has simply disallowed on the basis that the hike in remuneration is excessive and unreasonable – the CIT(A) has also not given a proper finding with regard to the fair market value of the services rendered by the employees and how it can be termed as excessive or unreasonable – Relying upon CIT vs. NEPC India Ltd [2006 (12) TMI 129 - MADRAS HIGH COURT] what section 40A(2)(a) contemplates is that there should be some material available before the AO for invoking section 40A(2)(a) to initiate action to disallow or refuse to deduct the excessive or unreasonable expenditure mentioned thereunder - But at the same time, before taking any final decision by invoking the power under section 40A(2)(a), either allowing or disallowing such expenditure incurred as excessive or unreasonable, such decision of the Assessing Officer should be based on reasons well- founded, which is judiciously acceptable and in which event the finding or decision arrived at stating that the expenditure is excessive or unreasonable and the same cannot be allowed or deducted. Both the authorities below have not given any finding with regard to the fair market value of the services rendered by Shri Vipul J.Ray - In the absence of such finding, the contention of revenue cannot accepted that the hike in remuneration is excessive or unreasonable - the authorities below ought to have given a clear-cut finding about the fair market value of the services rendered by the Director prevalent during the year under consideration - the assessee brought to notice the orders of the CIT(A) passed in respective assessment years 2007-08 & 2008-09, the CIT(A) had accepted the remuneration even higher than Rs.24 lacs as claimed by the assessee-company – the AO was not justified in disallowing the remuneration as claimed by the Director of the assessee, without giving a finding in respect of the fair market value prevalent for the services rendered by the assessee – thus, the AO is directed to delete the disallowance as made u/s.40A(2)(b) of the Act – Decided in favour of Assessee.
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