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2018 (11) TMI 1113 - AT - Income TaxPenalty u/s 271(1)(c) - disallowance made u/s 40A(2)(a) - higher salary paid to Directors - Related party transactions - Held that:- 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) the assessee has paid remuneration to the directors. The object behind introduction of section 40A(2) is for preventing evasion of tax through shifting of profit by making payment to related parties. Therefore, it is of paramount importance to examine whether the assessee has made payment for evading tax through shifting of profit. In the facts of the present case, it is evident that the assessee had been showing loss continuously for past several years and the Assessing Officer has also accepted loss shown by the assessee. That being the case, there cannot be any intention on the part of the assessee to evade tax by shifting profit. It is equally important to note that the remuneration paid to the directors have been offered by them to tax while filing their individual tax returns for the respective assessment years. This fact is evident from the copies of the income tax returns of the concerned directors filed before us by the learned Sr. Counsel. It is also not disputed that the concerned directors are assessed to tax at the maximum rate of 30% - the provisions of section 40A(2) are not attracted to the payment made to the directors - we are of the view that the disallowance made under section 40A(2)(a) of the Act in the impugned assessment years are unsustainable. Accordingly, we deleted the disallowances made in all the assessment years under appeal. - Decided in favour of assessee.
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