Onus is on AO to create similar cases in order to demonstrate that installment made to directors were immoderate

  • Income Tax
  • High Court
  • Supreme Court

During the scrutiny proceedings, the Assessing Officer (AO) asked the assessee-company to explain remuneration paid to its directors. The assessment furnished the details of remuneration paid to directors and claimed that the same was as per Industry norms.  

AO believed that the assessee failed to justify the nature of services rendered by the directors to command such a huge remuneration. Consequently, he made addition pursuant to section 40A (2) (b) forming an opinion that the payment made to the director was excessive and unreasonable. 

Aggrieved by the request for AO, assessee favored an allure before CIT(A). Assessee fought that AO had not reached any obvious result nor had given any apt motivations to legitimize the restriction. AO had horribly neglected to show that such use was exorbitant and preposterous. CIT(A) saw that the workers were not invested individuals. 

CIT(A) further observed that the AO had failed to bring on record or substantiate that how such salary payments were excessive. Consequently, additions made by AO have been deleted. On revenue’s appeal, Delhi ITAT held that AO had not brought any comparable case to demonstrate that the payments made by assessee were excessive or unreasonable.  

A plain reading of Section 40A(2) shows that onus has been cast upon AO to bring on record comparable cases to demonstrate that the transactions made by assessee with the related parties were unreasonable and excessive. AO had failed to bring such comparable case on record. Furthermore, the payees were also assessed to tax at the same rate of tax.  

The CBDT vide Circular No. 6-P, dated 06-07-1968, stated that no disallowance is to be made under Section 40A(2) in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax. Given the totality of the facts considering the CBDT Circular, the order passed by CIT (A) deleting the additions was upheld.