Tribunal grants relief on remuneration and FOC expenses, deems daughter-in-law's increase excessive.

The Tribunal partially allowed the appeal, granting partial relief on the disallowed remuneration and full relief on the disallowed Free of Cost (FOC) expenses. The Tribunal found the significant increase in remuneration to the daughter-in-law excessive, reducing it to a reasonable amount. Additionally, the Tribunal accepted the FOC expenses as legitimate sales promotion tactics and overturned their disallowance. The decision was pronounced on 3rd August, 2016.

---

---

Issues Involved:
1. Addition made under Section 40A(2) towards payment of salary to assessee’s daughter-in-law.
2. Disallowance of the entire amount spent on Free of Cost (FOC) items.

Issue-wise Detailed Analysis:

1. Addition made under Section 40A(2) towards payment of salary to assessee’s daughter-in-law:

The assessee paid a salary of Rs. 20,70,833 to his daughter-in-law, Smt. Seema Bhandari, during the assessment year 2012-13, compared to Rs. 4,60,000 in the preceding year. The Assessing Officer (AO) restricted the allowable remuneration to Rs. 4,60,000 and disallowed the excess amount of Rs. 16,10,833, citing lack of plausible explanation for the significant increase and potential profit reduction through related-party transactions. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO’s findings, noting that the increase in turnover did not justify the 350% increase in remuneration.

The assessee argued that Smt. Seema Bhandari was taxed at the maximum marginal rate, negating any tax evasion motive. The assessee cited CBDT Circular No. 6-P and various judicial precedents to argue that Section 40A(2) should not apply in bona fide cases where no tax evasion is evident. The assessee also provided details of Smt. Bhandari’s role and the increase in business turnover as justification for the remuneration.

The Tribunal considered the facts and noted that Smt. Bhandari had been working with the assessee since financial year 2007-08 and was actively involved as Chief Executive Officer. Given that both the assessee and Smt. Bhandari were taxed at the maximum marginal rate, the Tribunal found no grounds for tax evasion. However, the Tribunal deemed the 350% increase in remuneration excessive and considered Rs. 1 lakh per month reasonable, resulting in a partial disallowance of Rs. 8,70,833.

2. Disallowance of the entire amount spent on Free of Cost (FOC) items:

The AO disallowed Rs. 16,26,229 claimed as FOC expenses, noting that the assessee failed to provide justification and that such expenses were nil in the preceding year. The CIT(A) upheld the disallowance due to lack of justification during assessment and appellate proceedings.

The assessee argued that FOC items were provided to customers as part of sales promotion tactics in a competitive environment. Detailed evidence, including deal sheets and invoices, was submitted to support the claim. The assessee contended that these transactions were with non-related parties and were part of prudent business practices to increase turnover. It was also noted that similar FOC expenses were accepted in subsequent assessment years.

The Tribunal found that the FOC items were given to non-related parties and were part of sales promotion tactics. The genuineness of the expenses was not doubted by the lower authorities. Considering the acceptance of similar expenses in subsequent years, the Tribunal deemed the disallowance of Rs. 16,29,229 unjustified and deleted it.

Conclusion:

The appeal was partly allowed, with partial relief granted on the disallowed remuneration and full relief on the disallowed FOC expenses. The Tribunal’s order was pronounced in open court on 3rd August, 2016.

---