TaxTMI 
TaxTMI 
2014 (11) TMI 145
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....hat it has paid remuneration to the Directors as under:- Sr. No. Name of Director Total salary & incentive (Rs.) 1 Dineshbhai S. Panchal 1338363/- 2 Nishit D. Panchal 1338363/- 3 Yogeshbhai S. Panchal 2676726/- 4 Rohitbhai S. Panchal 2676726/- Total 8030178/- 4. The assessee further explained that there was substantial rise in sales over preceding year and therefore, it was decided to give incentive to directors on the basis of sale in addition to normal salary paid to them. Copy of Board Resolution was filed before the Assessing Officer. It was further submitted that the Directors have disclosed the said salary income in their return of income and it was submitted that all the Directors have paid tax at maximum rate of 30% on their income. 5. The Assessing Officer did not accept the above explanation of the assessee on the ground that the hike in remuneration was given because of rise in sale but no evidence was furnished to substantiate and justify that the rise in sales was attributable to the efforts of the Directors only to whom hike in remuneration was given. The Assessing Officer further observed that payment of tax at maximum rate by Directors on their income ....
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....evidence, it was found that the Directors have not rendered any special service or any special exertion for increase in the sale. Hence, the AO by relying upon the decision in the case of Swadeshi Cotton Mills Co. Limited (supra) held that Directors remuneration paid in excess of Rs. 9,00,000/- was excessive, unreasonable and unjustified. Accordingly, the amount of Rs. 71,30,178/- was disallowed and added to the total income of the appellant. 4.4.1 During the appellate proceedings, the appellant has controverted the finding of the AO by stating that there was 262% rise in sale due to extraordinary skilful efforts and marketing by Directors. The appellant has also submitted statements explaining developments in business and services rendered collectively by all Co-Directors. The appellant has furnished a chart of sales made in 2008-09 and financial 2009- 10 and has stated that the sale profit availability has gone up mainly due to innovation of newly developed latest technological packing equipments by all the Directors collectively during this year. List of such machines has been furnished as follows:- Sr. No. Description of machine Nos. Total Sales 1. Ingredient fruit feeder ....
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....ishitbhai Panchai - Director - Aged about 37 years academically passed Diploma Mech Engineers. - Looking after assisting in production and quality matters factory administration. Long experience assisting in manufacture activities looking after machine design & Automation. The machine as developed of which programming of these machines is success. He also co-ordinates procurement of components & bought outs. Getting complicated components manufactured at our factory plant & coordinating activities of timely manufacturing of even machine. 4.4.2 As held by Hon'ble Mumbai High Court in its decision in the case of Shatrunjay Diamonds, 128 taxmann 759(Bombay), burden is on the assessee to establish that the payments made by him to concerns specified u/s 44A(2)(b) are not excessive. In the present case, the only explanation filed by the appellant is that the increase in sale was due to the efforts made by the Directors and hence incentive was paid to them. But such submission has not been supported by any material evidence to show that only the Directors were instrumental in increasing the sale and not other staff and employees. Besides from the details of qualification of the ....
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....e having control over in the appellant company. These are the families headed by Shri Dineshbhai S Panchal, Shri Yogeshbhai S. Panchal and Rohitbhai Panchal. All these three persons are Directors of the appellant company. Besides the son of Shri Dineshbhai Panchal namely Shri Mishit D Panchal is also a Director. Now the incentive commission paid to these Directors is as follow:- I) Dineshbhai S. Panchal Rs. 13,38,363/- II) Nishit D Panchal Rs. 13,38,363/- III) Yogeshbhai S. Panchal Rs. 26,76,726/- IV) Rohitbhai S Panchal Rs. 26,76,726/- 4.5.2 Thus, the payment of incentives is not according to the work done or qualification of the Directors. Had been it so, Shri Dineshbhai S Panchal who is a qualified engineer should have received at least equal or more incentive as compared to Shri. Yogeshbhai S. Panchal who is simple B.Com and holder of Diploma in Business Management, or Shri Rohitbhai S Panchal who is simple B. Com and LLB. But these persons have been paid twice the amount of incentive paid to Shri Dineshbhai S Panchal. Hence, the appellant's submission that the incentive was paid to the Directors on account of new innovations in machinery made by them is contradicted b....
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....laration is allowed to a company in computation of its taxable income. Thus, the entire amount paid as dividend is taxable in the hands of the appellant company @ 30%. Besides, the company has to pay dividend distribution tax @ 15% of this amount. Thus, when the profit is distributed by a company by making payment of dividend, the entire amount of dividend payment is subjected to effective tax rate of 45%. But if such dividend is paid to the shareholders in the garb of expenditure as done by the appellant, the entire expenditure is allowed as a deduction is computation of the total income of the company and the recipients pay the tax on such receipts as per the tax rate applicable to them. Hence, in the present case if the amount of Rs. 71,30,178/-had been paid as dividend, then a tax of Rs. 32,08,580/- by way of Income Tax and Dividend Distribution Tax had to be paid on such payment made by the appellant. But by making the payment in the garb of incentive, the tax paid by the Directors comes to Rs. 21,39,053/- only. Thus, the appellant's submission that there is no evasion of tax on j account of such payment of incentive to the Directors, as the Directors have paid the tax on ....
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....ayment of huge commission in addition to services rendered as an employee for which salary had been paid. [Para 7.11] The instant case involved a family business owned by the three directors who were not only shareholders but were also decision makers. They were also blood relations (father and sons). Therefore, they could easily show payment of dividend as commission and take the payment in such a manner that the same amount did not become payable as dividend though the total amount remained within the family. Considering the facts and circumstances of the case, the commission payment in the instant case was in lieu of dividend and, therefore, the claim could not be allowed only on the ground that the payment taken by the directors was not in the hold ing ratio. The device adopted by the assessee was obviously with the intention to avoid payment of full taxes. There was obvious tax avoidance. In case dividend would have been paid, the tax payable at the rate of 35.75 per cent in case of a company on the amount of Rs. 1.20 crores would come to Rs. 42.90 lakhs and in ttiat case the company would have also to pay dividend distribution tax at the rate of 12.5 per cent which would come....
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....2)(b) as well as the provision of Section 36(l)(ii) of the Act. Hence, the action of the AO is upheld and this ground of appeal is dismissed." 7. We have heard the rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the assessee company is engaged in the business of manufacturing of packing machines. The Assessing Officer observed that the assessee-company claimed deduction for Directors' remuneration of Rs. 80,30,178/-; whereas in the immediately preceding year the Directors' remuneration paid was Rs. 9,00,000/-. According to the Assessing Officer, the above huge rise in the Directors' remuneration cannot be attributed to business consideration. He, therefore, allowed deduction for Directors' remuneration of Rs. 9,00,000/- only and disallowed the entire increase in the Directors' remuneration of Rs. 71,30,178/-. 8. On appeal, the CIT(A) confirmed the action of the Assessing Officer. 9. Before us, the AR of the assessee pointed out that the sales of the assessee-company in the immediately preceding year was Rs. 99,80,414/- and the sales achieved by the assessee-company in the year under consideration was Rs. 3,....
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.... be looked at from the view point of the company." (v) ACIT vs. Bombay Real Estate Development Company (P) Ltd. [2011] 64 DTR (Mum) (Trib.) 137 "Business expenditure - Disallowance under s. 40A(2) - Excessive or unreasonable payments to managing director - M is a chartered accountant and had quality experience of ten years as employee of a reputed company before joining the assessee company - He is stated to be running the entire show whereas the other two directors are not so qualified and do not take part in the business in the same way as M - Thus, comparison of the payment to M with the other two directors is not justified - AO has not brought on record anything to show that the payment made by the assessee company to M is excessive or unreasonable having regard to the fair market value of the services for which the payment was made or the benefits derived from such services - Therefore, the conditions of s. 40A(2) are not satisfied - Disallowance rightly deleted by CIT(A)." (vi) CIT vs. Indo Saudi Services (Travel) (P) Ltd. (2008) 12 DTR (BOM) 304 "Business expenditure - Disallowance under s. 40A(2) - Payment of commission to sister concern - In view of CBDT Circular No.6-....
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....We find that the lower authorities have allowed the Director's remuneration during the year under consideration at Rs. 9,00,000/- which is exactly the same amount of Directors' remuneration which was paid in the immediately preceding year. Thus, in other words, according to the lower authorities, the entire increase in the Directors' remuneration during the year under consideration is unreasonable and unjustified. In our considered view, the above inference of the lower authorities cannot be sustained, specially when it is observed that the assessee-company's turnover has increased to 3.6 times i.e. from Rs. 99,80,414/- to Rs. 3,61,38,065/-. In the background of such increase in turnover of the assessee-company, the contention of the assessee that the same was the result of hardwork put in by the Directors cannot be ruled out. Therefore, some increase in remuneration to Directors for their hard-work is certainly justified and reasonable. However, the increase in Directors' remuneration to about 9 times cannot be justified on the basis of above increase in the turnover. In our considered opinion, it shall be fair and reasonable, keeping in view the increase in turnover to 3.6 times,....
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....e advance. The AO ignoring the facts and evidences produced and made addition of Rs. 21,74,747/- from Yammy Food & Beverages as unexplained cash credits and added to the total income. It is requested your honour to appreciate facts and records of the case as explained above and delete entire addition as above and oblige. i) Directors remuneration be allowed Rs.71,30,178/- ii) Advance against order Rs.21,74,747/- Total Rs.93,03,925/- 16. The CIT(A), after considering the submissions of the assessee, held as under:- "5.3.1 So far as receipt of advance from Happy Yammy Foods and Beverages is concerned, neither during the assessment proceedings nor during the appellant proceedings, any details of this party or any confirmation from this party has been submitted. The submission of the appellant is that this amount was received as advance for manufacture of ice-cream balls machinery. The appellant had submitted the copy of ledger accounts of this company for the Financial year 2005-06, during which an amount of Rs. 6,03,954/- had been received and of Financial year 2006-07, during which further amount of Rs. 15,70,793/- had been received. The appellant has also submitted the cop....
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....to the income of the assessee by invoking provisions of Section 68 of the Act during the year under consideration i.e. AY 2010-11. 18. On appeal, the CIT(A) observed that advance was received by the assessee in the previous years relating to the AY 2006-07 (Rs.6,03,694/-) and AY 2007-08 (Rs.15,70,793/-). As the amounts were not credited for the first time in the books of the assessee of the year under consideration and the same was brought forward balance, the same could not be added to the income of the assessee by invoking provisions of Section 68 of the Act. Therefore, the CIT(A) deleted the addition of Rs. 21,74,747/- made u/s 68 for the year under consideration. 19. However, the CIT(A) went on further and directed the Assessing Officer to add Rs. 6,03,954/- in the AY 2006-07 and add Rs. 15,70,793/- to the income of the assessee in the AY 2007-08. 20. The above direction was given purportedly u/s 153 r.w.s. 150 of the Act. 21. The assessee, being aggrieved by this further direction, is in appeal before us. 22. The case of the assessee is that the further direction given by the CIT(A) is without jurisdiction and unwarranted. 23. The DR supported the order of the CIT(A). 2....