DCIT Vs Khyati Chemicals Private Limite (ITAT Ahmedabad)
Excess Director Remuneration Restored Under Section 40A(2)(b) – ITAT Ahmedabad Reverses CIT(A) and Upholds ₹2.40 Crore Disallowance
The Ahmedabad Bench of the ITAT allowed the Revenue’s appeal for AY 2018-19 and restored the disallowance of ₹2.40 crores u/s 40A(2)(b) made on account of excessive remuneration paid to two whole-time directors of Khyati Chemicals Pvt. Ltd., holding that the payments were unreasonable and a device to distribute profits in the garb of salary to avoid dividend taxation.
The Assessing Officer found that while the company had accumulated profits exceeding ₹64 crores and declared no dividend, it paid ₹5.40 crores as salary to two related directors (₹3.6 crore and ₹1.8 crore respectively), far exceeding market comparables, whereas senior executives with similar or higher experience were paid below ₹30 lakhs per annum. The AO held that the company had diverted dividend in the form of salary, resulting in tax avoidance, and disallowed ₹2.40 crores as excessive and unreasonable remuneration.
The CIT(A) deleted the disallowance, holding the payments reasonable and observing that there was no loss of revenue and that double taxation would result.
Reversing the CIT(A), the Tribunal held that:
- The comparative salary data clearly showed the directors were paid disproportionately higher remuneration than similarly qualified senior executives.
- Non-declaration of dividend despite huge accumulated profits indicated profit distribution through salary.
- Section 40A(2)(b) is meant to curb exactly such tax-avoidance devices.
- The CIT(A)’s reasoning that there was no revenue loss was factually incorrect and contrary to record.
Accordingly, the ITAT restored the disallowance of ₹2.40 crores u/s 40A(2)(b). The assessee’s cross-objections on remuneration, spray-dryer expenditure and software expenses were dismissed, and depreciation as allowed by CIT(A) was left undisturbed.
Thus, the Revenue’s appeal was allowed and the assessee’s cross-objection was dismissed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
