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2016 (9) TMI 955 - ITAT BANGALORE

2016 (9) TMI 955 - ITAT BANGALORE - TMI - Disallowance of salary paid to the Director by applying the provisions of Section 40A(2) - Held that:- Assessing Officer has disallowed the salary increase in the salary by invoking the provisions of Section 40A(2) which mandates that in case the Assessing Officer of the opinion that an expenditure is excessive or unreasonable having regard to Fair Market Value of goods; services or facilities for which the payment is made or legitimate need of the busin .....

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t to note that when the salary paid to the Director is still less than the salary paid to the other Directors during the year under consideration then the provisions of Section 40A(2) cannot be invoked. It may be a case that this particular Director was under paid in earlier year and just to bring the parity of the salary with the other Directors the salary of the Director was increased during this year. In view of the above facts as well as decision of this Tribunal in assessee's own case (supr .....

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as explained the differences due to certain investments that were not taken into consideration by these parties however in the absence of the relevant evidence produced before the authorities below for their examination and verification this explanation of the assessee cannot be accepted at this stage - I.T.A. No.258/Bang/2016 - Dated:- 11-8-2016 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER For The Appellant : Shri S. Ramasubramanian, C.A. For The Respondent : Smt. Renuka Devi, JCIT (D.R) ORDER Per Shr .....

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at the salary of ₹ 7,12,400 is hit by Section 40A(2) of the Act and a sum of ₹ 3,52,400 has been rightly disallowed. 3. That the learned CIT (Appeals) erred in law and on facts in holding that the salary paid to the Director of the company is to be disallowed even though there is no tax avoidance and the order passed is contrary to by Circular No.6P issued in July, 1968. 4. That the learned CIT (Appeals) erred in law and on facts in upholding the additionofRs.38,471 being the differe .....

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ve grounds either before or at the time of hearing of this appeal. 3. Ground No.1 is general in nature and does not require any specific adjudication. 4. Ground Nos.2 & 3 are regarding addition made on account of disallowance of salary paid to the Director by applying the provisions of Section 40A(2) of the Income Tax Act, 1961 (in short 'the Act'). 5. Mrs. Malati Kulkarni is the Director of the company. During the course of assessment proceedings, the Assessing Officer noted that sa .....

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d that an identical issue has been considered in assessee's own case for the Assessment Year 2007-08 wherein the Tribunal has decided this issue in favour of the assessee and deleted the disallowance made by the Assessing Officer under Section 40A(2) of the Act. 7. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that the Assessing Officer found that there is an abnormal income in the salary of one Director namely Mr .....

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s have not conducted proper enquiry to determine whether the remuneration paid to the directors is excessive or not having regard to the fair market value for the services rendered by the directors. The Tribunal in the case of Jagadamba Roller Flour Mills Ltd. v ACIT (316 ITR (AT) 422) (at page 432) had held that it is not correct to compare the current year salary with the salary in the earlier year. It was held by the Tribunal that the onus is on the Assessing Officer to bring the material on .....

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her such expenditure was excessive or unreasonable having regarding to the fair market value of the services rendered. To that extent, I am in agreement with the observations of the learned Accountant Member. However, no enquiry was made by the Assessing Officer to ascertain whether the payment was excessive or unreasonable having regard to the fair market value of the services. On the other hand, the Assessing Officer made the enquiry in a different direction, i.e. whether the increase in the s .....

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prove that the payment made by the assessee was excessive or unreasonable having regard to the fair market value of the services rendered. If some material/evidence is brought on record to indicate that payment appeared to be excessive or unreasonable then the onus would shift to the assessee to prove that the payment was not excessive or unreasonable. Since no enquiry as contemplated by the aforesaid provisions was made on this account, it cannot be said that the payment was excessive or unreas .....

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duction. Thus once the Assessing Officer has to form an opinion that a particular expenditure is excessive or unreasonable. The formation of opinion should be based on having regard to the fair market value of the services or goods. However the Assessing Officer has not conducted such enquiry but disallowed the salary of the same director in the earlier year. It is pertinent to note that when the salary paid to the Director is still less than the salary paid to the other Directors during the yea .....

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regarding addition made on account of difference between the balances in the accounts of M/s. Kayen Print Services Pvt. Ltd. and M/s. UPM Kymmene India Pvt. Ltd. 10. I have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The Assessing Officer disallowed a sum of ₹ 38,471 being unexplained difference of balance outstanding as per the confirmation of M/s. Kayen Print Services Pvt. Ltd. and further a s .....

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