AO to disallow under sec 40A((2)(b) should establish that the benefits given to the related party more than the faire market value

Court :
INCOME TAX APPELLATE TRIBUNAL

Brief :
Facts, in brief, as per relevant orders are that return declaring nil income after adjusting brought forward loss of ``10,74,016/-. under the normal provisions and book profits of `8,67,496/- in terms of the provisions of section 115JB of the Income-tax Act, 1961 (hereinafter referred to as the Act) filed on 22.09.2008 by the assessee, running a hotel, was selected for scrutiny with the service of a notice u/s 143(2) of the Act. During the course of assessment proceedings, the Assessing Officer[AO in short] noticed that even though the assessee was engaged in the business of hotel, the assessee derived income only from interest-``50,06,561/- and dividend- ``96,21,236/- in the year under consideration while the assessee paid salary of `36 lacs to its director Shri Patanjali Keswani, Director @ `3 lacs per month. Total expenses claimed against interest income were `41,37,764/-. In the light of these facts, to a query by the AO, seeking explanation as to reasonableness of salary paid to the director in terms of provisions of the section 40A(2)(a) of the Act, the assessee replied that Shri Patanjali Keswani was a highly qualified individual, having B.Tech. from IIT and MBA from IIM beside having a experience of 15 years in Taj Group Hotels as chief operating Officer and Vice President with A.T. Kearney Inc. as their Director India. The remuneration paid to shri Keshwani was due to business exigencies and substantial profits were earned by the assessee company. Moreover, the assessee raised funds to the tune of ``28.93 crores, deployed in giving loans, making investment in mutual funds and setting up of hotels. Since shri Keshwani was paying tax at maximum rates, it could not be said that payment of remuneration was made to avoid taxes. However, the AO did not accept the submissions of the assessee and disallowed an amount of ``30 lacs, invoking the provisions of sec. 40A(2)(a) of the Act, considering the salary of ``50,000/-pm paid to shri Keshwani, reasonable.

Citation :
DCIT,Ci rcle-9(1),Room no.163, C.R. Bui lding, IP Estate, New Delhi (Appellant) Vs. M/s Spark Hotels Pvt . Ltd. , B-6/17, Safdarjang Enclave, New Delhi [PAN AAJCS 6454 Q] (Respondent)