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2020 (12) TMI 14 - AT - Income TaxRemuneration paid to the Managing Director - Limited scrutiny assessment - disallowance made as expenditure not wholly and exclusively laid out for the purpose of business - AO viewed that the payment as remuneration to the Managing Director is excessive but not due to the business expediency - HELD THAT:- Managing Director has offered the income in his hands and paid the taxes thereon. Merely because losses were set off against the income, it cannot be concluded that the payment of remuneration is a colorable device. Incorrect allowance of loss also is having potential tax effect, thus the reducing the loss is permitted as per law and the same cannot be equated with colourable device. Since the company felt that remuneration paid to the Managing Director was reasonable, burden shifts on the revenue to make out a case of fair value of remuneration with reference to identical facts and comparable cases apropos to the services rendered by the Managing Director. No such exercise was made by the AO. Therefore, we hold that the Ld. CIT(A) erred in upholding the decision of the AO in confirming the addition, hence, we set aside the order of the Ld.CIT(A) and delete the addition made by the AO. As observed from the order of the AO, the case was selected for scrutiny for limited purpose of verifying whether the deduction claimed on account of business loss is admissible or not. AO did not make any discussion on the deductibility or otherwise of losses and examined the reasonableness of remuneration paid to the Managing Director which is beyond the jurisdiction of the AO as per the scrutiny guidelines. In case the AO intends to examine the issue, the AO ought to have converted the case into complete scrutiny, after obtaining the approval from the Pr.CIT or CCIT as applicable. No such approval was obtained by the AO before going into the details of reasonableness of remuneration paid to the Managing Director. - Decided in favour of assessee.
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