Tribunal grants relief to appellant by setting aside disallowance under Section 40A(2)

The tribunal allowed the appellant's grounds, setting aside the disallowance under Section 40A(2) for excessive payment made to the director, granting relief to the appellant.

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Issues Involved:
1. Disallowance under Section 40A(2) for excessive payment made to director.

Analysis:
The appellant, a company engaged in computer software services, filed an appeal against the order passed by the Ld. CIT(A)-3, Bangalore for the assessment year 2015-16. The primary issue was the disallowance of Rs. 3,82,10,387 under Section 40A(2) for allegedly excessive payment made to its director. The Ld. AO noted that the payment to the director was double without any basis, considering it unreasonably high and excessive. The appellant argued that invoking Section 40A(2) would result in double taxation as the director had already paid taxes at the same rate. However, both the Ld. AO and Ld. CIT(A) upheld the disallowance.

The appellant contended that the payment made to the director was justified due to his efforts in bringing new contracts and achieving a significant turnover during the year. The appellant emphasized that the director had paid taxes at the same rate applicable to the company, citing CBDT Circular No. 6P of 1968. The Ld. CIT(A), though, rejected these arguments and upheld the addition made by the Ld. AO.

In its analysis, the tribunal referred to the CBDT Circular and judicial precedents to determine the applicability of Section 40A(2) in the case of alleged excessive payments to a director. It was noted that the director was in the highest tax bracket and there was no evidence of tax evasion. Drawing parallels to previous court decisions, the tribunal found that the expenditure claimed by the appellant was not in violation of any tax provisions. Therefore, the tribunal remanded the issue back to the Ld. AO to verify the tax rate applicable to the director and consider the appellant's claim in accordance with established legal principles.

In conclusion, the tribunal allowed the grounds raised by the appellant, setting aside the disallowance under Section 40A(2) and granting relief to the appellant. The order was pronounced on 22nd July 2021.

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