I-T - High remuneration paid to Directors cannot be construed as a tool to shift profits to evade tax if same is offered to tax through personal returns: ITAT
By TIOL News Service
MUMBAI, NOV 22, 2018: THE ISSUE IS - Whether high remuneration paid can be considered as tool to evade tax by shifting of profit even if remuneration paid to the Directors are offered to tax. NO IS THE VERDICT.
Facts of the case
The assessee company publishes a newspaper in Vernacular language. It had filed return for relevant AY declaring losses. During the assessment proceedings, the AO noticed that the assessee had paid remuneration @ Rs. 48,00,000 each to three whole time directors aggregating to Rs. 1,44,00,000. After calling for further information and verifying them, the AO found that the remuneration paid to the three directors was excessive and unreasonable having regard to the fair market value of the goods, services or facilities for which payment was made as well as the legitimate business needs of the assessee and the benefit derived by or accruing to the assessee, the AO called upon the assessee to explain why the remuneration paid to the directors should not be disallowed in terms of section 40A(2)(a) of the Act. The AO was not satisfied with the submissions of the assessee and held that the payment of remuneration to the director was unreasonable and hence, not allowable. The AO restricted payment of remuneration to three directors at Rs 36,50,000 as against remuneration paid of Rs 1,44,00,000. This resulted in disallowance of Rs.1,06,50,000. On appeal, CIT(A) upheld the order of AO.
Tribunal held that,
++ it is evident that the assessee had been paying remuneration to the concerned directors from past several years. In fact, the AO himself in the assessment order has stated that the remuneration paid to the three directors in assessment year 2003-04 was Rs.21 lakh, in assessment year 2004-05 is Rs.37.50 lakh, in assessment year 2005-09 Rs.90 lakh and in assessment year 2006-07 is Rs.1.56 crore. Thus, over the years there is incremental increase in payment of remuneration to the directors. It is not a fact that there is a quantum jump in payment of salary in the impugned assessment year only. Further, it is relevant to observe, payment of remuneration to the directors have been accepted by the Assessing Officer in past assessment years while completing scrutiny assessments under section 143(3) of the Act. This is evident from the copies of the assessment orders for assessment years 2001-02, 2003-04 and 2004-05 placed before us. In fact, while completing the scrutiny assessment for assessment year 2006-07 under section 143(3) of the Act, which is evident from the assessment order dated 16th December 2008, the AO has allowed payment of remuneration of Rs. 1.56 crore against loss determined at Rs.3,16,68,518. Therefore, in comparison to payment of remuneration in assessment year 2006-07 i.e. the immediately preceding assessment year, the payment of remuneration to the directors in the impugned assessment years cannot be considered to be either excessive or unreasonable having regard to the facts and circumstances of the case;
++ while invoking the provisions of section 40A(2)(a) of the Act, the AO must bring material on record to demonstrate that the payment made by the assessee is excessive or unreasonable having regard to the market rate for the goods, services, facilities availed or the business needs of the assessee or commensurate with the benefit derived by the assessee. On scanning through the assessment order passed for the impugned assessment year, no material was brought on record by the AO to demonstrate that the payment made by the assessee is excessive and unreasonable having regard to the market rate or business needs or benefit derived by the assessee. The AO by simply taking the remuneration paid in assessment year 2003-04 as a base has determined the reasonable remuneration payable to directors. This, is purely on estimate basis without having any relevance to the actual facts on record including the fact that in the immediately preceding assessment year the assessee has not only paid remuneration of Rs.1.56 crore to the concerned directors but the AO has also allowed such payment in scrutiny assessment;
++ object behind introduction of section 40A(2) of the Act is for preventing evasion of tax through shifting of profit by making payment to related parties. Therefore, it is of paramount importance to examine whether the assessee has made payment for evading tax through shifting of profit. In the facts of the present case, it is evident that the assessee had been showing loss continuously for past several years and the Assessing Officer has also accepted loss shown by the assessee. That being the case, there cannot be any intention on the part of the assessee to evade tax by shifting profit. It is equally important to note that the remuneration paid to the directors have been offered by them to tax while filing their individual tax returns for the respective assessment years. This fact is evident from the copies of the income tax returns of the concerned directors filed before the Sr. Counsel. It is also not disputed that the concerned directors are assessed to tax at the maximum rate of 30%. Thus the provisions of section 40A(2) of the Act are not attracted to the payment made to the directors. Accordingly, it was decided to delete the disallowances made in all the assessment years under appeal. In the result, all these appeals are allowed.
(See 2018-TIOL-2188-ITAT-MUM)
