Managing director remuneration protected by transitional company law framework, and excessive-payment disallowance failed for lack of comparables.

Remuneration paid to a managing director under a pre-existing special-resolution appointment was treated as compliant with the Companies Act framework, including Schedule XIII and the transitional protection for continued payment for the remaining term, so Explanation 1 to section 37(1) was not attracted and the disallowance failed. The separate disallowance under section 40A(2)(b) also failed because the Revenue produced no objective comparables or other material showing the payment was excessive or unreasonable; reliance only on relative remuneration levels and qualifications was insufficient. The deletion of both disallowances was therefore sustained in favour of the assessee.

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Issues: (i) Whether remuneration paid to the managing director was disallowable under section 37(1) of the Income-tax Act, 1961 on the footing that it violated the Companies Act and attracted Explanation 1; (ii) Whether the disallowance under section 40A(2)(b) of the Income-tax Act, 1961 was sustainable on the ground that the remuneration was excessive or unreasonable.

Issue (i): Whether remuneration paid to the managing director was disallowable under section 37(1) of the Income-tax Act, 1961 on the footing that it violated the Companies Act and attracted Explanation 1.

Analysis: The remuneration was fixed by a special resolution for a defined term. The relevant corporate regime was held to be the Companies Act, 1956, read with Schedule XIII, because the appointment and the governing terms originated before the later regime became operative. The company was treated as one having inadequate profits, so the case fell within Part II, Section II, Paragraph C of Schedule XIII. The conditions inserted by Notification No. G.S.R. 534(E) dated 14.07.2011 were satisfied, and the transitional protection in General Circular No. 07/2015 dated 10.04.2015 permitted continuation of remuneration for the remaining term even though part of the tenure fell after 01.04.2014. No contrary action by the corporate regulator or adverse audit remark was shown.

Conclusion: The payment did not violate the applicable corporate law provisions, and Explanation 1 to section 37(1) was not attracted. The disallowance was unsustainable in favour of the assessee.

Issue (ii): Whether the disallowance under section 40A(2)(b) of the Income-tax Act, 1961 was sustainable on the ground that the remuneration was excessive or unreasonable.

Analysis: The disallowance was not supported by comparable cases or other objective material showing that the payment was excessive or unreasonable. Reliance only on relative remuneration levels and qualifications was found insufficient to justify invocation of section 40A(2)(b).

Conclusion: The disallowance under section 40A(2)(b) was correctly deleted, in favour of the assessee.

Final Conclusion: The Revenue's challenge failed on both grounds, and the deletion of the impugned disallowances was sustained.

Ratio Decidendi: Where remuneration is paid under a valid pre-existing managerial appointment protected by the transitional framework of the Companies Act, and the Revenue fails to show objective comparables or material proving excessiveness, disallowance under sections 37(1) and 40A(2)(b) of the Income-tax Act, 1961 cannot be sustained.

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