Director remuneration cannot be disallowed merely due to approval post payment :Delhi High Court

Case Name : PCIT Vs MLS CBRE South Asia Private Limited ((Delhi High Court)

Date of Judgement: 13/02/2020

Fact of the Case:

The facts of the case are that the Respondent is a private limited company, wherein, Mr. Anshuman Magazine holds 24% shares and is also an employee and Director of the assesse-Company. The remaining 76% shares are held by CB Richards Ellis holding. The assessee filed its return of income on 28.09.2009, declaring an income of Rs. 31,79,41,751/-. The case of the assessee was selected for scrutiny and a notice under Section 143(1) was issued. Pursuant thereto, an assessment order was framed on
25.12.2010 under Section 143(3) of the Act whereby inter alia an addition of Rs.6,64,65,442/- was made by way of disallowance under Section 36(1)(ii) of the Act. In the appeal preferred by the assessee, CIT (A) upheld the aforenoted disallowance, observing that when the assessee-Company passed the resolution dated 27.05.2003 for payment of incentive to the shareholder- Mr. Anshuman Magazine, he held 99.99% shares of the assessee and but for the resolution to pay the commission, the sum so paid would have been passed on to him as dividend. In the eventuality, the assessee would have paid dividend distribution tax on such profits earned and the profits/ taxable income of the assessee would have also further increased by amount paid as commission to Mr. Anshuman Magazine. In order to avoid dividend distribution tax, the assessee had made the payment under the guise of commission.

Aggrieved by the aforesaid order, revenue has preferred the present appeal. Mr. Shailender Singh, Advocate argues that the Tribunal has erred in reversing the decision of the CIT (A), in as much as, the Tribunal has made wrong observations that CIT (A) has not given a finding to the effect that the excess remuneration was not incurred for the business purpose of the assessee. He submits that the Tribunal has overlooked the reasoning of the CIT (A) for the disallowance under Section 36(1)(ii) of the Act, where it has been held that the remuneration was to avoid payment of dividend and was not for genuine purposes. This reasoning for disallowance would also hold good for disallowing the expenditure under the head of “excess expenditure”. He further submits that the Tribunal also overlooked the fact
that the factual situation in the AY 2009-10 were different from AY 2007-08 and 2008-09, where the assesse had declared dividend.

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