2015 (4) TMI 53 - AT - Income Tax

ITAT decision on interest expenses, director remuneration, and penalty proceedings for assessment years 2007-08 and 2008-09

M/s Kalpana Nursing Home Pvt. Ltd. Versus The DCIT Circle-2 Udaipur

The Income Tax Appellate Tribunal (ITAT) set aside the disallowance of interest expenses for lack of proper determination by the Assessing Officer (AO) ... Disallowance of excessive and unreasonable remuneration/salary paid to the directors - Held that:- In the instant case, it is noticed that during the year relevant to the assessment year 2006-07, i.e., when the salary was increased first time, the assessee-company had set up a heart care unit, dialysis machine and intensive care unit, etc. Therefore, the area of working and functions of both directors had increased. In the present case, it is also noticed that another visiting doctors were getting the salaries varying from ₹ 4 lakhs to ₹ 9 lakhs only for visits of 2 hours to 4 hours while directors were working round the clock. If the salary paid to the directors is compared with the remuneration paid to the visiting doctors for few hours, it cannot be said that it was excessive. Further more, the Assessing Officer although invoked the provision of section 40A(2)(b) of the Act, however, no comparable case was cited where salary for similar work having similar qualifications was paid at lower rate. It is also not brought on record that how and in what manner salary paid to the directors was excessive or not comparable with the market rates. In the instant case, the Assessing Officer estimated the salary on the basis of the salary paid for the assessment year 2006-07 and increased the salary for the year under consideration to 50 per cent. of the preceding year. However, he had not considered this vital fact that new facilities were provided by the assessee-company in the year under consideration and the directors were required to devote more time in comparison to the earlier years. In our opinion, the estimate made by the Assessing Officer was without any basis. Similarly, the learned Commissioner of Income-tax (Appeals) without appreciating the facts of the case in right perspective considered the salary of ₹ 10 lakhs and ₹ 8 lakhs to Dr.Sunil Chugh and Dr. Kalpana Chugh respectively as reasonable but he had not assigned any basis for the same. In the instant case, it is noticed that Dr. Sheel Acharya who was visiting the assessee-company only for four hours had been paid a sum of ₹ 8.81 lakhs and if the working of the directors is to be considered for at least 12 hrs a day the remuneration on that basis would have been at ₹ 26.43 lakhs (Rs. 8.81 lakhs x 3) and even if this fact is to be considered that Dr. Sheel Acharya was having a super specialised degree while the directors were having specialised degrees then it cannot be said that the salary of ₹ 18 lakhs per annum for each of the directors was excessive. We, therefore, considering the totality of the facts of the case are of the view that the addition sustained by the learned Commissioner of Income-tax (Appeals) was not justified. Accordingly, the same is deleted. - Decided in favour of assessee. Disallowance of interest expenses - Held that:- In the instant case, the disallowance has been made by the Assessing Officer by observing that the assessee diverted the borrowed funds. On the contrary, the claim of the assessee is that surplus funds were available which were invested in the mutual funds. The CIT(Appeals) confirmed the disallowance made by the Assessing Officer observing that dividend income was exempted under section 10 of the Act, therefore, disallowance was to be made under section 14A of the Act. However, it is not brought on record how much surplus was available with the assessee out of which how much borrowed funds were invested in the mutual funds. It is not in dispute that disallowance under section 14A read with rule 8D of the Income-tax Rules, can be made, however, for doing so, the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed and the Assessing Officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. However, in the present case, nothing is brought on record as to whether the assessee earned any income which was claimed as exempt and what method was adopted by the Assessing Officer for making the impugned disallowance. The learned Commissioner of Income-tax (Appeals) also confirmed the disallowance made by the Assessing Officer in slip shod manner and had not brought material facts on record. We, therefore, considering the totality of the facts of the case deem it proper to set aside this issue back to the file of the Assessing Officer to be adjudicated afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee. - Decided in favour of assessee for statistical purposes. Issues Involved:1. Disallowance of interest expenses.2. Disallowance of remuneration/salary paid to directors.3. Initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961.Detailed Analysis:1. Disallowance of Interest Expenses:The assessee invested Rs. 145 lakhs in mutual funds using borrowed funds, incurring interest expenses of Rs. 8,43,500. The Assessing Officer (AO) disallowed this interest, citing a direct nexus between borrowed funds and investments in mutual funds, which generated exempt income. The assessee contended that the funds were temporarily idle and later used for business purposes. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's disallowance, noting that borrowed funds were immediately invested in mutual funds. However, the Income Tax Appellate Tribunal (ITAT) found that neither the AO nor the CIT(A) adequately determined how much surplus funds were available or how much borrowed funds were invested. The ITAT set aside this issue for fresh adjudication, emphasizing the need to follow the prescribed method under section 14A read with rule 8D of the Income-tax Rules.2. Disallowance of Remuneration/Salary Paid to Directors:The AO disallowed Rs. 28,48,500 of the remuneration paid to Dr. Sunil Chugh and Dr. Kalpana Chugh, considering it excessive and unreasonable under section 40A(2)(b) of the Income-tax Act. The AO noted a sharp increase in their salaries compared to other employees and previous years. The assessee argued that the increase was justified due to expanded responsibilities and market conditions. The CIT(A) partially agreed, reducing the disallowance to Rs. 18 lakhs, but the ITAT found that both the AO and CIT(A) failed to provide a reasonable basis for their conclusions. The ITAT noted that the directors' salaries were not excessive compared to visiting doctors and deleted the sustained addition, concluding that the remuneration was justified given the directors' increased responsibilities and market conditions.3. Initiation of Penalty Proceedings under Section 271(1)(c):The AO initiated penalty proceedings under section 271(1)(c) for concealment of income and furnishing inaccurate particulars of income. However, this issue was deemed premature and not adjudicated upon by the ITAT.Conclusion:The ITAT allowed the assessee's appeal for the assessment year 2007-08 and partly allowed the appeal for the assessment year 2008-09, while dismissing the Department's appeals for both assessment years. The ITAT emphasized the need for a thorough and methodical approach in determining disallowances and justified the remuneration paid to the directors based on their contributions and market conditions.