Director's salary disallowance overturned due to lack of evidence

The Tribunal held that the disallowance of a portion of the Director's salary under Section 40A(2) of the Income Tax Act was unjustified as the Assessing Officer failed to establish fair market value or conduct a proper inquiry into the reasonableness of the salary increase. Therefore, the disallowance was deleted. However, the addition made on account of discrepancies in account balances between two parties was upheld due to the appellant's failure to provide supporting evidence despite explanations provided. The appeal was partly allowed, with the disallowance on this ground sustained.

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Issues Involved:
1. Disallowance of salary paid to the Director under Section 40A(2) of the Income Tax Act, 1961.
2. Addition made on account of difference between the balances in the accounts of M/s. Kayen Print Services Pvt. Ltd. and M/s. UPM Kymmene India Pvt. Ltd.

Issue 1: Disallowance of Salary Paid to the Director under Section 40A(2) of the Income Tax Act, 1961:
The appellant challenged the disallowance of a portion of the Director's salary under Section 40A(2) of the Act. The Assessing Officer noted a significant increase in the Director's salary from the previous year and disallowed a portion of it. The Tribunal referred to a previous decision in the appellant's case for the Assessment Year 2007-08 where it was held that the Assessing Officer must determine if the remuneration paid to directors is excessive based on fair market value. The Tribunal emphasized that without establishing fair market value, disallowance under Section 40A(2) cannot be justified. The Tribunal highlighted that the Assessing Officer failed to conduct a proper enquiry into the reasonableness of the salary increase. It was noted that if a director's salary increase is to align with other directors' salaries, invoking Section 40A(2) may not be appropriate. Consequently, the disallowance of the Director's salary increase was deemed unjustified and deleted.

Issue 2: Addition Made on Account of Difference Between Balances in Accounts:
The Assessing Officer disallowed discrepancies in the balances of two parties' accounts, M/s. Kayen Print Services Pvt. Ltd. and M/s. UPM Kymmene India Pvt. Ltd. The CIT (Appeals) upheld the disallowance due to the appellant's failure to provide relevant reconciliation and details. The appellant explained the differences as related to investments not considered by the parties, but this explanation lacked supporting evidence. Despite the appellant's explanation before the Tribunal, the absence of evidence provided to the authorities earlier led to the dismissal of the grounds related to the discrepancies in the account balances. Consequently, the appeal was partly allowed, with the disallowance on this ground sustained.

In conclusion, the judgment addressed the issues of disallowance of the Director's salary under Section 40A(2) and the addition made on account of discrepancies in account balances. The Tribunal emphasized the importance of establishing fair market value in determining the reasonableness of director's remuneration and highlighted the necessity of providing concrete evidence to support explanations for discrepancies in account balances to avoid disallowances.

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