2014 (6) TMI 325 - AT - Income Tax

Directors' Salary Disallowance Upheld Based on Sister Concern Turnover Ratio

The Tribunal upheld the disallowance of salary and commission paid to directors for assessment year 1999-2000, based on turnover ratio between sister ... Disallowance out of salary and commission paid – services provided by the Directors to two companies - Expenses only for the purpose of business – Held that:- The defence taken by the assessee company with regard to the disallowance was that the salary and commission given to the directors were within the limit prescribed under the Companies Act i.e. u/s 309 - the salary is disallowed by the AO on the basis that such expenditure was not debited to profit and loss account of its sister concern and is excessive or unreasonable while comparing with the assessee company and thus erred in adopting Premier Hollowers as yardstick. The rendering of has not been denied at any stage - the directors were also incurring the travelling expenditure to travel between the assessee company and M/s Premier Hollowers Pvt ‘s office - it is a matter of fact that the directors have rendered the services to M/s Premier Hollowers Pvt Ltd. and also no salary has been debited on account of remuneration payable to these directors in the books of account of M/s Premier Hollowers Pvt Ltd. - If it is so then those directors have also worked for M/s Premier Hollowers Pvt Ltd and salary paid to them cannot be said to be exclusively have been paid for the services rendered by them to the assessee company - the AO was right in proportionate allocation of salary paid to the directors on the basis of turnover of both the companies – thus, there was no infirmity in the order of the CIT(A) – Decided against Assessee. Issues:1. Disallowance of salary and commission paid to directors.2. Applicability of Section 309 of the Companies Act.3. Disallowance based on turnover ratio between sister concern and assessee company.Issue 1: Disallowance of salary and commission paid to directorsThe appeal was against the disallowance of Rs.2,11,858/- out of the salary and commission paid to the appellant's directors for assessment year 1999-2000. The AO observed that the directors were working for both the assessee and a sister concern, incurring common expenses. The disallowance was based on the turnover ratio between the companies. The appellant argued that the disallowance was unjustified as the payments were for services rendered and were wholly for business purposes. The AO and CIT(A) upheld the disallowance, stating that the intention was to reduce taxable income, citing the decision in Mc Dowells V/s CIT. The Tribunal found the disallowance justified, as the directors rendered services to the sister concern as well, and the salary allocation was proportionate based on turnover.Issue 2: Applicability of Section 309 of the Companies ActThe appellant claimed that the salary and commission were within the limit prescribed under Section 309 of the Companies Act. However, the AO contended that Section 309 applied to public limited companies, and the appellant failed to explain why the directors provided free services to the sister concern. The Tribunal noted that the directors indeed provided services to the sister concern and that the salaries were not debited in the sister concern's accounts. Therefore, the payment allocation was not exclusively for services to the assessee company.Issue 3: Disallowance based on turnover ratio between sister concern and assessee companyThe appellant argued that the disallowance was unjust as it was based on a comparison with the sister concern and the companies were separate legal entities. The Tribunal found that the directors worked for both companies, incurring common expenses. The disallowance was upheld as the salary payment was not solely for services to the assessee company. The Tribunal declined to interfere with the CIT(A)'s decision and dismissed the appeal.In conclusion, the Tribunal upheld the disallowance of salary and commission paid to directors, considering their services to the sister concern and the turnover ratio between the companies. The Tribunal found no fault in the CIT(A)'s decision and dismissed the appeal.