Commission to Director cannot be disallowed without examining appointment terms

Kirloskar Oil Engines Limited Vs JCIT (ITAT Pune)

The issue under consideration is whether the disallowance made for commission paid to director u/s. 40A(2) is justified?

ITAT states that, the assessee is against disallowance of commission paid to Shri Atul Kirloskar u/s. 40A(2) of the Act. It is an undisputed fact that in earlier assessment years disallowance on account of remuneration to the Directors were made by the Assessing Officer. The issue travelled up to the Tribunal and the Tribunal in appeal by the Revenue in ITA No. 1919/PUN/2014 for assessment year 2009-10 vide order dated 17-07­2019 deleted the disallowances. In the assessment year under appeal, the Commissioner of Income Tax (Appeals) has disallowed commission paid to Shri Atul Kirloskar on the ground that he was appointed Director on the last date of the financial year ending on 31-03­2010 and there is no plausible explanation for paying such huge commission to the Directors appointed on the last date of financial year. ITAT observe that the authorities below have not examined the issue in proper perspective. For making disallowance u/s. 40A(2) the onus is on the Revenue to show that payments made by assessee to persons referred in clause (b) are excessive or unreasonable with regard to fair market value of the goods or services received by the assessee. In the present case the authorities below have failed to examine terms and conditions of appointment of Shri Atul Kirloskar. If the terms of appointment allow payment of such commission at the time of appointment, the commission paid to Shri Atul Kirloskar is allowable, provided the commission paid is within the limits specified under Companies Act. ITAT are of considered view that this issue needs revisit to the file of Assessing Officer for re­examination in the light of our above observations. Accordingly the appeal filed by assessee is allowed.

FULL TEXT OF THE ITAT JUDGEMENT

The appeal by the assessee in ITA No. 61/PUN/2015 and cross appeal by the Revenue in ITA No. 79/PUN/2015 are directed against the order of Commissioner of Income Tax (Appeals)-V, Pune dated 27-10-2014 for the assessment year 2010-11. The assessee has filed another appeal in ITA No. 406/PUN/2015 for assessment year 2010-11 assailing the same order of Commissioner of Income Tax (Appeals) on the issue of disallowance u/s. 14A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).

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