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2015 (5) TMI 581 - ITAT DELHI

2015 (5) TMI 581 - ITAT DELHI - TMI - Disallowance u/s 40A(2)(b) - excessive remuneration to Directors - Held that:- In the present case, it is noticed that one of the Directors, namely, Ms. Dilpreet Singh is a Chartered Accountant and also qualified CPA from the USA. She was earlier employed with Febindia Overseas Private Ltd. as a Chief Financial Officer and another Director, Mr. Prakash Tripathi is a commerce Graduate, he started his career with the Indian Institute of Management, Ahmedabad a .....

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Tripathi was getting a remuneration of ₹ 13,02,471/- from M/s Desert Artisans Handicrafts Pvt. Ltd. Jodhpur wherein he was earlier employed. Therefore, the remuneration amounting to ₹ 11,40,000/- and ₹ 15,68,050/- respectively received by them from the assessee cannot be said to be excessive by keeping in view, their previous experiences and earlier employment. Moreover, the AO had not brought any material on record to substantiate that as to how and in what manner the remuner .....

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appeal by the assessee against the order dated 17.04.2012 of CIT(A)-V, New Delhi. 2. The following grounds raised in this appeal are reproduced:- 1. The Learned Commissioner of Income Tax (Appeals) has erred - a) in disallowing a sum of ₹ 14,93,657/- by restricting the remuneration to 20% of the gross receipts without considering - i) The legitimate need of the business; ii) The work done by the Directors and their qualification and experience. b) in disallowing the sum of ₹ 14,93,65 .....

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rays tor appropriate relief based on the said grounds of appeal and the facts and circumstances of the case. 3. From the above grounds it is noticed that only grievance of the assessee relates to the disallowance of ₹ 14,93,657/- made by the AO by invoking the provision and Section 40A(2)(b) of the Income Tax Act, 1961 (hereinafter referred to as the Act in short). 4. The facts of this case in brief are that the assessee filed its return of income on 29.09.2008, declaring a loss of ₹ .....

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y expenses. The assessee submitted that the Directors were getting higher salary in their previous job. The AO observed that the chart furnished by the assessee revealed that the ratio of Directors remuneration to the total income has gradually declined from 44.60% during the year under consideration to 19.94% in the AY 2009-10 and 16.10% during the AY 2010-11 which shows that receipts has increased over the years but the Directors remuneration has remained more or less constant which looked ver .....

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Overseas Pvt. Ltd. as detailed below: i) Ms. Dilpreet Sokhi Singh joined the Fabindia Overseas Private Limited as Chief Financial Officer on 1st February 2003. The Company is the retail Brand Company and major retail player in Indian niche market. The Product range consist of Garments for men, women, children and home furnishing such as bed linen, bath linen, table Linen, Floor Covering, Kitchen Linen. Fabindia exports to over 25 Countries worldwide both to wholesalers as well as retailers. It .....

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development and craft. Spearheading the concept of an income generating programme for rural artisans in the craft sector, he worked towards organizing them into a sustainable association. As the founder co-coordinator for Artisans Alliance Jawaja, Beawar (Rajasthan), a joint project of IIMA and National Institute of Design, Ahmedabad, he was instrumental in making this concept a success. In 1991 he has joined the Desert Artisans Handicrafts Pvt. Ltd, Jodhpur, growing to Managing Director by 200 .....

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ing one of the COCs, Desert Artisans Handicrafts Jaipur Limited as Managing Director. Further since they were involved in the group and were expertise in finance & community managed companies respectively. Even before the learned Income Tax Officer the details were submitted regarding - a) the qualification and experience of Directors; b) the fact that they do now own any shares nor have any interest in the company excepting being professional Directors; and c) the remuneration paid to them .....

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31.03.2009 Year Ended 31.03.2010 Total Income 6,071,967.00 14,661,663.00 17,253,615.00 Director Remuneration 2,708,050.00 2,923,152.00 2,778,240.00 Ratio % % % Director Remuneration /total Income 44.60 19.94 16.10 While framing the assessment order, the Learned Income Tax Officer without appreciating the fact has invoked the provisions of Section 40A(2)(b) and disallowed an amount of ₹ 14,93,657/- by restricting the Directors remuneration to 20% of the receipt. The copy of our letter date .....

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Ltd. and Mr. Prakash Tripati in Desert Artisans' Handlcrafts Pvt. Ltd. and were drawing more salary and as such no disallowance U/s 40A(2)(b) is called for. 6. The assessee also referred to the paras 72 and 74 of the Circular No. 6P(LXXXVI-66) 1968 of the CBDT and submitted that the reasonableness of the expenditure has to be judged having regard to (a) fair market value of the goods, services or facilities for which the payment is made; (b) the legitimate needs of the business or professio .....

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1] 12 taxmann.com 287. The assessee also submitted efore the Ld. CIT(A) as under:- 1. Ms. Dilpreet Singh was earlier employed with M/s Fabindia Overseas Pvt. Ltd. and was getting a remuneration of ₹ 29,54,990/- as per copy of Form 16 enclosed herewith at Annexure-3. 2. Mr. Prakash Tripathi was earlier employed with M/s. Desert Artisans Handicrafts Pvt. Ltd. and was getting a remuneration of ₹ 13,02,471/- as per copy of Form 16 attached at Annexure-4. Their bio-data and also the proof .....

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03.2011 was ₹ 69.47 lakhs. 6.1 The reliance was placed on the following case laws:- i. Abbas Wazir (P.) Ltd. Vs. CIT (2003) 265 ITR 77 (All). ii. CIT Vs. Edward Keventer (P.) Ltd. (1972) 86 ITR 370 (Cal). iii. CIT Vs. Edward Keventer (P.) Ltd. (1978) 115 ITR 1499 (SC) iv. CIT Vs. Shatrunjay Diamonds (2003) 261 ITR 258 (Bom). v. CIT Vs. Computer Graphics Ltd. (2006) 285 ITR 84 (Mad.) 7. The Ld. CIT(A) after considering the submissions of the assessee confirmed the disallowance made by the A .....

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lary expenses and 44.6% of total receipts of ₹ 60,71,967/-. The AO has found the remuneration claimed in respect of these directors as unreasonable keeping in view the provisions of the Section 40A(2)(b) and has disallowed ₹ 14,93,657 /- restricting the remuneration to 20% of receipts which works out to ₹ 12,14,393/-. Section 40A(2)(b) deals with expenditure which is found unreasonable keeping in view the legitimate business needs of an assessee and the services rendered by the .....

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human probability. Moreover, to control unreasonable payment of remuneration to directors of the public limited companies, Section 309 of, the Companies Act, 1956 has prescribed limits for the payment of the remuneration to directors. Although the appellant is a private company, yet the claim of payment of remuneration to the directors is required to be reasonable with the business needs of the appellant; it should not be simply to defraud the revenue. The purpose of Sec.40A(2)(b) is also to ch .....

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urther submitted that no disallowance was made in the subsequent years, therefore, the disallowance made by the AO and confirmed by the Ld. CIT(A) was not justified. 9. In her rival submissions, the Ld. DR strongly supported the orders of the authorities below and further submitted that the assessee was a loss making concern, but the remuneration given to the Directors was highly excessive. 10. We have considered the rival submission of both the parties and carefully gone through the material av .....

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