INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Allowability - Remuneration paid to Managing Director - No material produced to establish that Managing Director was directly responsible for business of company

Assessee-company was engaged in business of manufacture and export of ready-made garments. AO disallowed remuneration paid to director on the ground that there was no material to establish that the director rendered any services to the company warranting such huge payment, except being Managing Director (MD). He also alleged that the MD stayed in India for not for more than 14 to 15 days in the year. However, CIT(A) held that the MD was directly responsible for business of the company and he got sales for the company from European countries and therefore, was entitled for remuneration. Further, such order of CIT(A) was upheld by Tribunal. Revenue contended that the Tribunal was not correct in allowing remuneration paid to the MD, which was nearly 90% of the returned income of the company ignoring the applicability of section 40A(2). Held: As per provisions of section 37(1), burden is on assessee to establish that the amount was expended wholly and exclusively for the purpose of business or profession. Further, section 40A(2)(a) empowers the AO to disallow the expenditure which is excessive or unreasonable. In instant case, AO disallowed the payment made to the MD merely on the ground that total stay of the MD in India was for a period 14 to 15 days in the year. Further, such finding had been set aside by CIT(A) on the ground that the MD was directly responsible for the business of the company and therefore, was entitled to remuneration, which was affirmed by the Tribunal. However, CIT(A) as well as the Tribunal completely failed to consider that no material was produced by the assessee to demonstrate that the MD secured the business of the company from European countries. Further, the provisions of section 40A(2), which were applicable to the case, had also not been taken into account by the CIT(A) and Tribunal. Accordingly, the matter was remanded to the CIT(A) to decide the same afresh by taking into account the provisions of section 40A(2) and the fact that the assessee failed to adduce any material to show that the MD procured business for the company from European countries.

REFERRED :

FAVOUR : Matter remanded

A.Y. : 2006-07

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