Treatment of salary and incentives paid to the Directors u/s 40A(2)(a) of the IT Act

Last updated: 11 September 2021

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This case concerns the disallowance of salary and incentives paid to directors under Section 40A(2)(a) of the Income Tax Act. The Assessing Officer disallowed the full amount, and the CIT(A) confirmed 75% of the addition. However, the Income Tax Appellate Tribunal ruled that disallowances under this section cannot be sustained without examining analogous cases. Consequently, the assessee's appeal was allowed.

Court :
ITAT Delhi

Brief :
The present appeal has been filed by the assessee against the order of ld. CIT(A)-2, New Delhi dated 11.05.2018.

Citation :
ITA No. 5199/Del/2018

IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH ‘B’, NEW DELHI
Before Sh. Kul Bharat, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
(Through Video Conferencing)
ITA No. 5199/Del/2018 : Asstt. Year : 2014-15

Changex Services Pvt. Ltd.,
D-134, 1st Floor, East of Kailash,
New Delhi-110065

Income Tax Officer,
Ward-6(1),
New Delhi

Assessee by : Sh. Sharad Shah, CA
Revenue by : Ms. Alka Gautam, Sr. DR
Date of Hearing: 26.08.2021 Date of Pronouncement: 01.09.2021
ORDER

The Assessing Of ficer disal lowed the salary and incentives paid to the Directors of Rs.1,05,00,000/- u/s 40A(2)(a). The ld. CIT (A) conf irmed the addition to the extent of 75% and al lowed 25% of the claim holding it as reasonable.

2. The assessee company was incorporated in March 2011, engaged in Consultancy Services, having two shareholder Directors namely, Mr. Shalabh Sahai and Rahul Nainwal.

3. The AO had questioned the transaction under Section 40A(2)(a) of the Act between the assessee company and the two Shareholder/ Directors and sought for submission of documents to substantiate/ prove the 'reasonableness of the payment along with supporting evidences' .

4. In a nutshell, the disallowance made by the authorities u/s 40A(2)(a) without examining any analogous cases cannot be sustained.

5. In the result, the appeal of the assessee is allowed.
Order Pronounced in the Open Court on 01/09/2021.

Please find attached the enclosed file for the full judgement

FAQ :

The main issue was the disallowance of salary and incentives paid to the company's directors under Section 40A(2)(a) of the Income Tax Act.

The Assessing Officer disallowed the entire amount of salary and incentives paid to the directors.

The CIT(A) confirmed 75% of the disallowed amount, deeming only 25% of the payment as reasonable.

The ITAT allowed the assessee's appeal, stating that disallowances under Section 40A(2)(a) cannot be made without considering similar cases.

Section 40A(2)(a) relates to the disallowance of expenditure incurred by an assessee in respect of payments made to related parties, including directors, if the expenditure is considered excessive or unreasonable.

Attached File : 1442821_4386_1630584990_5199_changex_services_pvt_ltd_.pdf

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Judgement posted by

Poojitha Raam Vinay

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I simplify complex income tax, TDS, banking, and investment updates into practical insights for taxpayers, salaried professionals, pensioners, and senior citizens. I regularly write on ITR filing, tax compliance, savings schemes, and the latest financial rule changes in India.

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