Salary refunded to Comply with Company Law cannot be taxed

DCIT Vs Rajamannar Thennati (ITAT Ahmedabad)

The assessee was employed with Sun Pharma Advance Research Co. Ltd. as whole time director of the company with maximum salary of Rs. 3.5 crores as per the resolution passed in the annual general meeting of the company dated 31st July, 2012. Since there was limit for payment of remuneration to the whole time director as per the Company Act, 1956, therefore, the company has made an application to the Ministry of Corporate Affairs, Govt. of India for approving the salary of the whole time director as per the resolution passed in the annual general meeting dated 31st July, 2012.

However, the Central Government has approved the salary of the whole time director at a lesser amount. Thereafter, the company had made second application to the Central Government to approve the excess salary, however, no response was received from the Central Government. Therefore, the assessee was asked to refund the excess salary of Rs. 2.14 crores out of Rs. 1.99 crores pertained to the year under consideration. The assessee has refunded the excess amount of salary to the company and filed revised return of income showing the actual amount of salary received as approved by the Ministry of Corporate Affairs, Govt. of India. However, the Assessing Officer has taxed the excess amount as salary income on the ground that the amount was received by the assessee. The ld. CIT(A) has deleted the addition holding that refund of salary by the assessee was not voluntary but was to comply with the legal requirements of law, therefore, the same cannot be considered as income assessable to tax. The ld. CIT(A) has also placed reliance on the decision of Hon’ble Delhi High Court referred by the learned counsel in the case of CIT Vs. Raghunath Murti (2009) 178 taxman 144 (Del) wherein it is held since the assessee has refunded excess amount of remuneration in view of legal requirement contained in the provisions of Companies Act, 1956, the same could not be held as income of the assessee. Similarly in the case of the assessee, the Central Government had decided the remuneration according to the provisions of Companies Act, 1956 and the refund of the salary was not voluntary but was to comply with the legal requirement of law. We find that the facts and issue involved in the case of the assessee are similar to the case of the CIT Vs. Raghunath Murti (2009) 178 taxman 144 (Del) adjudicated by the Hon’ble Delhi High Court as referred supra in this order. In the light of the decision of the Hon’ble Delhi High Court as supra, we consider that the refund was made merely with a view to comply with the provisions of Companies Act, 1956, therefore, we do not find any infirmity in the decision of ld. CIT(A). Accordingly, the appeal of the Revenue is dismissed.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This assessee’s appeal for A.Y. 2014-15, arises from order of the CIT(A)-2, Vadodara dated 15-11-2017, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.

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