By TIOL News Service

NEW DELHI, JUNE 06, 2015: THE issue before the Bench is - Whether the expense of salary paid to Director beyond the limit prescribed under the Companies Act is hit by the provisions of u/s 37(1) when post facto approval is granted by the Ministry of Corporate Affairs. NO is the answer.

Facts of the case

The assessee is a limited company engaged in the business flying, operations, letting on hire, lease and charter hire of helicopters and providing aviation services in respect of helicopters. IT ad received a notice issued u/s 143(2). The assessment was completed u/s 143(3) at a total loss of Rs. 29,98,79,415/-. While doing so, AO had made the disallowance of Director’s remuneration of Rs. 18,69,463/-. The AO was of the view that the said remuneration paid in excess of the limits prescribed under the provisions of the Companies Act, 1956. Therefore, he was of the view that such remuneration cannot be allowed as deduction since it violates the provisions of the Companies Act, 1956. On appeal, CIT(A) allowed the claim of assessee by placing reliance on the decisions of SC in the cases of Badridas Daga Vs. CIT, 34 ITR 10 (SC), Nilgiri Finance and Hire Purchase Pvt. Ltd. Vs. CIT, 213 ITR 384 and CIT Vs. Sree Rajendra Mills Ltd., 93 ITR 122. The CIT(A) held that the AO fell in error by invoking the provisions of Section 198 of the Companies Act, 1956 which has no bearing on the allowability of the expenditure under Section 37(1) of the Act and therefore allowed the claim of the assessee.

Held that,

++ Explanation (I) to Section 37(1) inserted by the Finance Act no. 2 of 1998 with retrospective effect from April 1st, 1962 which provides that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. As we have been told at bar that the approval from the Ministry of Corporate Affairs was not produced before the authorities below therefore, the CIT(A) clearly fell in error in allowing this appeal in ignorance of the provisions of Explanation (I) to Section 37(1). However, in view of the fact that post facto approval granted by the Ministry of Corporate Affairs by letter dated 11th June, 2013 which is filed before us, the expenditure can no longer said be prohibited. It is settled proposition of law that the question whether there is an infraction of law of the expenditure incurred for any purpose which is an offence or which is prohibited by law is to be decided by the authorities or court empowered to do so under the respective laws not by the Income Tax Authorities as held by ACIT Vs. A.K. Menon and Ors., 215 ITR 364 (SC). In view of the approval, it amounts that the expenditure is not hit by the Explanation (I) to Section 37(1) of the Act. In this connection, we may also state that we have taken cognizance of the approval granted by the Ministry of Corporate Affairs filed before us, keeping in view that it is statutory order and does not require any verification by lower authorities. Hence, the appeal filed by the Revenue is dismissed. In the result, the appeal is dismissed.

(See 2015-TIOL-685-ITAT-DEL)