The Tax Publishers2019 TaxPub(DT) 2363 (Del-HC)

INCOME TAX ACT, 1961

Section 40A(2)

Since AO disallowed a part of salaries and advisory fees paid to directors of assessee-company by invoking provisions of section 40A(2), such disallowance, being solely predicated on percentage of increase in the payments made to the directors and not whether payments made were reasonable, fair and commensurate with the market value of the work and services rendered or benefit accrued, would be liable to be deleted.

Business disallowance under section 40A(2) - Excessive or unreasonable payment - Salaries and advisory fees paid to directors -

AO invoked provisions of section 40A(2) and disallowed a part of payments made by assessee-company to its directors as salary and advisory fee by treating those payments as excessive and unreasonable. Such disallowance made by AO was deleted by CIT(A). However, the said disallowance was resorted by the Tribunal. Aggrieved, assessee was in appeal. Held: It was found that Tribunal failed to apply test of prudent and reasonable business person by ignoring the educational qualifications and work experience of directors. Further, the disallowance was solely predicated on percentage of increase in the payments made to the directors and not whether payments made were reasonable, fair and commensurate with the market value of the work and services rendered or benefit accrued. Further, CIT(A) also pointed out that the income earned by the said directors was taxable at the maximum rate of tax. Therefore, it was not a case where an attempt was made to evade taxes. Hence, the addition made under section 40A(2) was directed to be deleted.

REFERRED :

FAVOUR : In assessee's favour

A.Y. :



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