9911796707
TMI Blog2022 (12) TMI 1547X X X X Extracts X X X X X X X X Extracts X X X X ..... AO to another AO and so long as the assessee has been assessed within the jurisdiction of CIT-2, Raipur, the jurisdiction is proper" by ignoring the provisions of section 120 and section 124 of the Act, notification no. 1/2014-15 dt. 15.11.2014 issued by the PCIT-II, Raipur to allocate jurisdiction to various AO's under his jurisdiction and judicial pronouncement referred by the appellant. 2) That learned CIT(A) erred in confirming disallowance of Rs. 13,20,000/-out of Directors Remuneration made by the Assessing Officer by invoking provisions of section 40A(2)(b) of the Act without properly appreciating and fully considering the written submission filed before him and without considering the facts and circumstances of the case properly. 3) The appellant reserves the right to add, amend, or alter any ground or grounds of appeal at the time of hearing." 2. Succinctly stated, the assessee company which is engaged in trading of motor vehicles and spare parts had e-filed its return of income for A.Y.2015-16 on 15.09.2015, declaring an income of Rs. Nil. Subsequently, the case of the assessee was selected for scrutiny assessment u/s. 143(2) of the Act. 3. During the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any success on the aforesaid issue. i.e., sustainability of the disallowance of the assessee's claim for deduction of director's remuneration which was sustained by the first appellate authority. 5. The assessee being aggrieved with the order of the CIT(Appeals) has carried the matter in appeal before me. 6. I have heard the ld. authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. 7. Although the Ld. Authorized Representative (for short 'AR') for the assessee had at the very outset of hearing of the appeal assailed the validity of the jurisdiction that was assumed by the A.O, i.e., ITO- 1(1), Bhilai for framing of the impugned assessment in absence of any notice u/s. 143(2) of the Act, but after arguing for some time and considering the reply of the A.O dated 14.11.2022, it was submitted by him that he seeks to not press the ground of appeal No.1. Accordingly, as per the concession of the Ld. AR the Ground of appeal No.1 raised by the assessee is dismissed as not pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted by the Ld. DR, that as observed by the A.O, the assessee had not only failed to justify the exorbitant increase in the director's remuneration during the year, but had also not placed on record the company's resolution to the said effect as passed in its AGM. It was averred by the Ld. DR that as there was an exorbitant rise in the director's remuneration from an amount of Rs. 1 lac in the preceding year to an amount of Rs. 15.60 lac during the year under consideration, therefore, the A.O had on the basis of a feasible comparison and as per the mandate of law restricted the same to Rs. 2.40 lac. Apart from that, it was submitted by the Ld. DR, that as observed by the A.O, and, rightly so, now when as per the Companies Act, 2013, the remuneration to the directors of a company is not to exceed 10% of the net profit of the company, therefore, adopting the same as a yardstick the claim of the assessee company was rightly confined to Rs. 2.40 lac. 11. Rebutting the aforesaid claim of the Ld. DR, it was submitted by Shri R.B Doshi, the Ld. AR for the assessee, that reference by the A.O to the provisions of Companies Act, 2013 as regards the upper limit of remuneration which could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a deduction." On a careful perusal of the aforesaid statutory provision, I find that the same contemplates that where the assessee's claim for deduction of any expenditure incurred in respect of a specified person, when tested in the backdrop of the prescribed basis/yardsticks factored in the said statutory provision, viz. (i). the fair market value of the goods or services or facilities for which the payment is made; or (ii). the legitimate needs of the business or profession of the assessee; or (iii). the benefit derived by or accruing to the assessee, is in the opinion of the Assessing Officer excessive or unreasonable, then, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. In sum and substance, the element of excessiveness or unreasonableness of the assessee's claim for deduction of expenditure incurred in respect of specified person is to be strictly looked into in the backdrop of the aforesaid three prescribed basis/yardsticks. 13. Although, in the case before me, the A.O by referring to the director's remuneration of Rs. 1 lac per annum that was paid by the assessee company in the immediately prec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onable portion in the total commission payment. There is no finding on what is the legitimate need of the business. Both the authorities have gone by the principle that since in the earlier year the amount paid was 94%, the excess becomes unreasonable. In our opinion, this approach is not correct. There is no presumption that whatever was paid in earlier year only becomes reasonable and anything in excess becomes unreasonable. There may be several reasons that the assessee may pay lower commission in initial years. However, the finding, which is required, is what is the reasonableness or excessiveness for the year under appeal. Looking to the background of Shri Sharma and the nature of services rendered by him, we find that payment of commission at 2-1/2% cannot be considered as excessive or unreasonable. The partners of the firm are merely female partners whereas Shri S K Sharma is an influential person, who retired from M/s MICO Ltd. as Senior Vice President and is able to influence the said company, which is one of the top most customers of the appellant firm. We accordingly hold that no part of commission can be disallowed invoking the provision of Section 40A(2) of the Act." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee company before me. Apropos, the claim of the assessee that the steep rise in the director remuneration was for the reason that the company had entered into an arrangement with them, as per which, unlike as in the preceding years, they had agreed to remain exclusively associated with the company and render their services, I find had not been dislodged by the A.O by placing on record any material proving to the contrary. As regards the view taken by the A.O that the steep rise in the directors remuneration was not commensurate with the miniscule rise of Rs. 13 lac in the turnover of the assessee company during the year, the said fact, in my considered view, could have by no means formed a justifiable basis for drawing of adverse inferences as regards the increase in the director's remuneration during the year under consideration. I, say so, for the reason that the fact that efforts of the directors could not have been be expected to have resulted result to a spontaneous increase in the turnover of the assessee company. In fact, I find that the claim of the assessee that as both the directors, viz. S/sh. Rajesh Batra and Vishal Batra who were not exclusively involved in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to the issue in hand and is unable to persuade myself to subscribe to the view taken by the lower authorities. As the A.O had failed to adopt either of the prescribed basis/yardstick for verifying the reasonableness of the director's remuneration that was paid by the assessee company during the year under consideration, therefore, there was no justification on his part to have confined the assessee's claim for deduction of the same to Rs. 2.40 lac (supra) u/s. 40A(2)(a) of the Act. Apart from that, I am unable to concur with the view of the CIT(Appeals), who despite taking cognizance of the contentions of the assessee that on the basis of services rendered by the directors on full time basis, it was able to scale down its expenses, liquidate its debtors, raise its commission income etc., had upheld the view taken by the A.O on the solitary basis that there was no substantial increase in the turnover and there was a comparative decline in the net profit of the company during the year under consideration. Be that as it may, as the A.O had without adopting ant prescribed basis/yardstick held the director's remuneration as excessive and unreasonable, therefore, I am unable to uphold ..... X X X X Extracts X X X X X X X X Extracts X X X X
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