WHETHER INCREASE IN DIRECTOR’S SALARY 15 TIMES WITHOUT MUCH INCREASE IN SALES ATTRACT 40A(2)(a)?

Respected Members

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Short note of today's case law for quick reference:

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[2024] 119 ITR (Trib) 329 (ITAT[Raipur])

[BEFORE THE INCOME-TAX APPELLATE TRIBUNAL — RAIPUR "SMC" BENCH]

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SAIRAM WHEELS P. LTD.

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INCOME-TAX OFFICER

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1. A careful perusal of section 40A(2)(a) showed that the element of excessiveness or unreasonableness of the assessee’s claim for deduction of expenditure incurred in respect of a specified person was to be strictly looked into the backdrop of the following yardsticks.

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a. The fair market value of the goods, services or facilities for which the payment was made

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b. The legitimate needs of the assessee’s business or profession

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c. The benefit derived by or accruing to the assessee was in accordance with the payment made.

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2. Assessee company was engaged in the trading of motor vehicles and spare parts.

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3. There was 15 times increase in director’s remuneration inspite of minuscule increase in the assessee’s company turnover.

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4. No copy of resolution passed in the annual general meeting was placed on record to that effect.

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5. A.O. disallowed director’s remuneration u/s 40A(2)(a) which was upheld by CIT(A).

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6. On further appeal ITAT held that:

Increase in director’s remuneration to a magnitude of 15 times, on a standalone basis could not justify drawing of an adverse inference within the meaning of section 40A(2).

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7. The standalone basis for making disallowance did not satisfy either of the three prescribed yardsticks.

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8. Mere reference to the remuneration paid by the assessee company to its directors in the immediately preceding year would neither reveal the fair market value of the services rendered by the directors to the assessee nor reflect the value of such services considering the legitimate needs of the assessee’s business or the benefit accruing therefrom to the latter.

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9. A.O. could not dislodge the claim of the assessee that increase in remuneration is due to company’s arrangement with them by which they agreed to remain exclusively associated with the company in rendering their services full time.

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10. The efforts of the directors could not be expected to bear immediate results.

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11. The directors’ Income tax returns revealed that during the year under consideration their only source of income was the remuneration and interest on deposits.

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12. Pursuant to the services rendered by the directors, the assessee was able to scale down its expenses, liquidate its debtors and raise its commission income substantially.

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13. The amount of salary paid to the staff was also reduced.

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14. Addition deleted.