By TIOL News Service

MUMBAI, MAR 12, 2019: THE ISSUE IS - Whether when entire excess paid to Director by a valid resolution sanctioning higher remuneration, is repaid back to Company by pro-tanto reduced remuneration for subsequent years, then no disallowance is warranted on account of contravention of Companies Act. YES IS THE ANSWER.

Facts of the case:

The assessee company, engaged in the business of selling art works & paintings, filed its return declaring loss at Rs.73,88,458/-. In its P&L A/c, the assessee had debited a sum of Rs.72,00,000/- pertaining to Director's remuneration viz. Shri Sanjay Kumar of Rs.24,00,000/- and Ms. Geeta Mehra of Rs.48,00,000/-. During the course of assessment proceedings, the AO noticed that in the auditor's report, it was mentioned that remuneration to Managing/Whole Time Directors was in excess of the limits specified u/s 198 r.w.s. 309 of the Companies Act, for which approval of the Central Government was pending to be filed and non-compliance of transactions entered u/s 297 of the Companies Act, for which prior approval of the Central Government was not obtained. In view of the same, the AO came to a finding that Ms. Geeta Mehra got excess remuneration of Rs.6,13,128/- not approved by the Central Government. He therefore disallowed the excess remuneration of Rs.28,86,642/- and added it to the total income.

On appeal, the CIT(A) observed that this was a case where excess amount was paid in contravention to the Companies Act and duly mentioned by the auditors in their report. He therefore, confirmed the disallowance of Rs.28,86,642/- made by AO.

Tribunal held that:

++ in the instant case, after the closure of the books and audit of accounts for the year ended Mar 31, 2011, the auditors noticed that the remuneration sanctioned by the EGM and paid to the Directors was in excess of the limits set out in Schedule-XIII of the Companies Act. The excess can be redone by an appropriate application to the Central Government u/s 309 of the Companies Act. Accordingly, the statutory auditors in their audit report made comments without quantifying in any manner the alleged excess. Further, it is found that the entire excess which is paid by a valid resolution, sanctioning higher remuneration was repaid back to the company by a pro-tanto reduced remuneration for the subsequent three years. It shows that the payments made earlier and recovery later are within the four corners of law. There is no infraction of provisions of Income Tax Act. In view of the same, the addition of Rs.28,86,642/- made by AO is deleted.

(See 2019-TIOL-622-ITAT-MUM)