TaxTMI 
TaxTMI 
2026 (1) TMI 1310
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....2018 for the Asst. Year 2018-19 declaring total income of Rs. 17,84,76,810/- and later on filed a revised return on 08-02-2019 declaring the same income. The return was taken for complete scrutiny assessment and issued various notices calling for details and made the following disallowances: (i) Disallowance u/s. 40A(2)(b) of Rs. 2,40,00,000/- being excess remuneration paid to the two whole time directors (ii) Disallowance u/s. 37(1) on Spray Dryer of Rs. 9,23,994/- (iii) Disallowance u/s. 37(1) on Computer software expenses Rs. 3,29,520/- 3. Aggrieved against the assessment order, assessee filed an appeal before Ld. CIT(A) who deleted the addition made u/s. 40A(2)(b) of the Act by observing as follows: "6.2.1 On perusal of P & L Account, A.O. found that there was net profit of Rs. 16,81,64,030/- after claiming deduction on account of salary, which had been carried forward in the balance sheet as reserve and surplus. The company had not declared dividend as against 64,27,32,153/- crore as retained /accumulated profit. Hence, A.O. concluded that company had paid distributed dividend in the form of unreasonable salary to avoid payment of tax. A.....
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....there is excess tax collection in the hands of Government of India. Again, disallowance of Rs. 2,40,00,000/- from the account of the company will tantamount double taxation. Hence, addition made on account of disallowance of salary expense is deleted and Ground No. 6 to 17 raised by appellant are allowed." 3.1. Regarding disallowance made u/s. 37(1) on Spray Dryer, Ld. CIT(A) partly allowed the claim of depreciation by observing as follows: "6.4.1. I have gone through the submission made by the appellant, assessment order and all materials available on records. During assessment proceedings, A.O. issued show- cause notice thereby stating that purchase of spray dryer comes in the definition of capital asset and same is not allowed as revenue expenditure. In response thereto, appellant contended that the treatment of the expenditure as capital expenditure was grossly erroneous because in earlier years also during assessment proceedings under section 143(3), this question was raised by A.O. and contention of appellant was accepted by A.O. and the expenditure were allowed as revenue expenditure. In support of its contention, appellant submitted the copy of certificate issue....
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....llowance u/s 37(1) of Rs. 3,29,520/-, and of the considered view that the AO has applied his mind judiciously while examining this issue in detail. Hence, Ground No. 24, 25, 27 and 28raised by appellant are dismissed. However, Ground No. 26 raised by the appellant is allowed and the assessing officer is directed to allow depreciation thereon including additional depreciation in accordance with provisions of section 32(1)(ii) r.w.s. Rule 5(1) and Appendix 1 and section 32(1)(iia) at the time of giving appeal effect." 4. Aggrieved against the appellate order, the Revenue is in appeal before us raising the following Grounds of Appeal: 1. Whether on facts and circumstances of the case and in law, the Ld. CIT(A) has erred in law and on facts in deleting the addition made on account of disallowance of excess salary paid to directors' u/s. 40A(2)(b) of the Act amounting to Rs. 2,40,00,000/- being remuneration paid to the related directors which was clearly unreasonable having regard to the fact that the company had not declared dividend in spite of accumulated profit, thereby squarely attracting the mischief of section 40A(2)(b) of the Act? 2. The appellant craves lea....
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....ture on licence for use of software is expenditure of capital nature and accordingly not allowing as deduction under section 37(1), 4.1 The appellant submits that the expenses of Rs. 8,23,800/- was of revenue in nature and was incurred wholly and exclusively for the purpose of the business. The appellant submits that disallowance of Rs. 8,23,800/- be quashed. 4.2 The appellant without prejudice to above submits disallowance of Rs. 8,23,800/- Is excessive. The appellant submits that disallowance of Rs. 8,23,800/- be substantially reduced. The assessee prays for leave to add, alter, amend and/or withdraw all or any of the grounds of cross objection before the final hearing of the appeal. 6. Heard rival submissions and perused the materials available on record. Regarding disallowance u/s. 40A(2)(b) of the Act, the assessing officer had made thorough enquiry of the salary paid to one of its Vice President-Corporate and Chief Financial Officer Mr. Madan Sancheti who was paid annual salary to Rs. 20 to 30 lakhs namely Rs. 2,20,340/- per month salary whose having 35 years experience as Chartered Accountant. Whereas the Managing Director Shri Rajiv Bhandari ha....
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....lary. Even though the assessee has created the Provision for gratuity for earlier years of Managerial Remuneration of Rs. 5,62,50,000/- which is directly reduced from Balance Sheet (Reserve & Surplus-P&L) in AY. 2017-18. It was thus clear that the company had distributed dividend in the form of unreasonable salary and therefore, payment was covered by the exceptions provided in Section 40A(2)(b)of the Act. It is observed that the provisions of Section 40A(2)(b) were intended to prevent an escape from taxation by describing a payment as remuneration when, in fact ordinarily it should have reached the shareholders as profit or dividend as held by the Hon'ble High Court of Bombay in Loyal Motor Services Company Ltd. vs. CIT (14 ITR 647). It is pointed out, that had the assessee paid dividend 2.40 crore, the income of the company would have gone up by Rs. 2.40 crore on which tax at the rate of 33% would have been payable which came to Rs. 80. 00 lacs. In addition, the company would also have to pay dividend distribution tax at the rate of 20.36% on the entire amount of dividend which came to Rs. 48.86 lacs. Thus total outgoings in the form of tax in case assessee had paid ....