2017 (10) TMI 1241 - AT - Income Tax

ITAT decision on managerial remuneration and bogus purchases disallowance upheld, relief granted.

The ITAT dismissed the Assessee's appeal regarding the disallowance of managerial remuneration exceeding the Central Government's sanctioned limit. The ... Disallowances of managerial remuneration - AO made the disallowance observed that the assessee has paid the amount in excess of the amount sanctioned by the Central Government under the Companies Act - Held that:- In the present case the assessee claimed that it has paid remuneration to Mr.Kailash Nasta for securing some important agreements for the company. The said contract has resulted in profit of the assessee. The payment was also approved by the board resolution passed on 15th January 2009 and the remuneration paid does not violate any provisions of companies Act, 1956. It was further claimed before CIT(A) that Central Government has granted approval for payment of remuneration to Mr. Kailush Nasta under the provisions of section 334(1B) of the Companies Act, 1956. The approval granted by the Central Government is after considering the special resolution dated 15.03.2009. We gone through the case records and noted that CIT(A) has not considered this aspect while adjudicating the issue. Hence, for the purpose of verification of actual claim approved by Central Government, we restore this issue back to the file of CIT(A). Bogus purchases - whether only the profit element embedded in the bogus purchases is to be taxed instead of whole transaction - Held that:- Actual bogus purchases are at ₹ 56,24,615/- and this should be taken as correct figure in the order of CIT(A). However, we are not convinced with the arguments of learned DR to increase the profit rate or sustained full addition. We confirmed the order of CIT(A) except, the figures mentioned in the order of bogus purchases at ₹ 4,39,803/-, whereas, the actual bogus purchases are at ₹ 56,24,615/- which we have rectified. The appeal of Revenue is dismissed but subject to above directions. Issues:1. Disallowance of managerial remuneration exceeding limits sanctioned by Central Government.2. Taxation of profit element embedded in bogus purchases instead of the entire transaction.Issue 1 - Disallowance of Managerial Remuneration:The appeal concerns the disallowance of managerial remuneration by the Assessing Officer (AO) exceeding the limit sanctioned by the Central Government. The AO disallowed Rs. 7,32,880 out of the total remuneration of Rs. 25,32,880 paid to an individual. The AO's decision was based on the excess amount paid beyond the sanctioned limit. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the AO's action, citing relevant court decisions. The appellant argued that the remuneration was necessary for the business and was paid in accordance with a board resolution and Central Government approval. The Income Tax Appellate Tribunal (ITAT) noted discrepancies in the CIT(A)'s consideration and remanded the issue for verification of the Central Government's approval.Issue 2 - Taxation of Profit Element in Bogus Purchases:The second appeal pertains to the taxation of the profit element embedded in alleged bogus purchases. The AO added the entire amount of Rs. 56,24,615 from three parties as bogus purchases. The CIT(A) restricted the disallowance to 25% of the profit element, citing circumstantial evidence and a Gujarat High Court decision. The Revenue challenged this decision before the ITAT. The ITAT affirmed the CIT(A)'s order regarding the bogus purchases but corrected the figure to Rs. 56,24,615. The ITAT dismissed the Revenue's appeal, maintaining the profit estimation at 25% and granting relief on the remaining balance.In conclusion, the ITAT set aside the appeal of the Assessee and dismissed the Revenue's appeal, with modifications to the figures related to bogus purchases. The judgment provides detailed analysis and legal interpretations concerning the disallowance of managerial remuneration and the taxation of profit elements in bogus purchases, ensuring a comprehensive review of the issues involved.