ASSISTANT COMMISSIONER OF INCOME TAX 8(2)(1), MUMBAI, MUMBAI V. PIRAMAL FUND MANAGEMENT PRIVATE LIMITED, MUMBAI

ITA 5664/MUM/2024

AI Insights

The case revolves around the appeal by the Assistant Commissioner of Income Tax against the order of the CIT(A) which had deleted the disallowance made by the Assessing Officer on the remuneration paid to the managing director of Piramal Fund Management Private Limited. The Assessing Officer had initially disallowed the remuneration under Section 37(1) and Section 40A(2)(b) of the Income Tax Act, citing it as excessive and unreasonable. However, the CIT(A) found that the remuneration was compliant with the Companies Act, 1956, particularly noting that the managing director's appointment and remuneration were governed by the provisions applicable before the Companies Act, 2013 came into effect, and met the conditions specified in the relevant circulars and notifications.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 33187 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-03-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Laws Referred To: Income Tax Act, 1961, Companies Act, 2013, Companies Act, 1956
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: ASSESSEE
• Keywords: Wholly owned subsidiary
• Section: 143(3); 250; 37(1)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER SHRI AMARJIT SINGH, ACCOUNTANT MEMBER ITA No. 5664/MUM/2024 (Assessment Year: 2015-2016) Assistant Commissioner of Income Tax 8(2)(1), Mumbai Room No.461, Aayakar Bhavan Maharishi Karve Road , Mumbai - 400020 …………. Appellant Piramal Fund Management Private Limited Peninsula Corporate Park ,Delisle Road, S.O Mumbai - 400013, Maharashtra. [PAN:AABCI3931J] Vs …………. Respondent Appearance For the Appellant/Department For the Respondent/Assessee : : Shri Mahesh Pamnani Shri Chaitanya Joshi Date Conclusion of hearing Pronouncement of order : : 29.01.2025 19.03.2025 O R D E R Per Rahul Chaudhary, Judicial Member: 1. The present appeal preferred by the Revenue is directed against the order, dated 17/09/2024, passed by the National Faceless Assessment Centre, Delhi, [hereinafter referred to as ‘the CIT(A)’] under Section 250 of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] whereby the Ld. CIT(A) had allowed the appeal against the Order, dated 22/12/2017, passed under Section 143(3) of the Income Tax Act, 1961 for the Assessment Year 2010-2011. 2. The Revenue has raised following grounds of appeal : “1. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) erred in directing the AO to delete the addition made u/s,37(l) of the Income Tax Act, ignoring the fact that ITA No.5664/MUM/2024 Assessment Year: 2015-2016 2 the assessee company has paid excess remuneration which is much more than 11% of the Net Profit to its Managing Director by violating Provisions of section 197 read with section-I of part-ll of Schedule V of the Company Act, 2013. 2. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) erred in directing the Assessing Officer to delete the disallowance made u/s 40A(2)(b) of the Income Tax Act on the basis that the Assessing Officer did not bring on record any comparable case to justify that the payment made to its Managing Director is excessive or unreasonable, despite the fact that the AO in his order had recorded a comparable case within the same company, indicating that the remuneration paid to the Managing director was excessive and unreasonable.” 3. The relevant facts in brief are that the Assessee [Formally known as Indiareit Fund Advisors Pvt. Ltd.] is a private limited company which is a wholly owned subsidiary of Piramal Enterprises Limited (a public company). For the Assessment Year 2015-2016, the Assessee filed return of income on 26/11/2015 which was selected for regular scrutiny. While passing Assessment Order, dated 22/12/2017, under Section 143(3) of the Act the Assessing Officer disallowed deduction claimed by the Assessee in respect of remuneration of INR.6,12,29,046/- paid to its managing director (namely, Mr. Khushru Jijina) under Section 37(1) of the Act. Further, the Assessing Officer also concluded that remuneration paid to the managing director was not reasonable and the same should also be disallowed under Section 40A(2)(b) of the Act. In appeal preferred by the Assessee, the CIT(A), vide order dated 17/09/2024, deleted the aforesaid disallowance made by the Assessing Officer. As a result, the Revenue has preferred the present appeal challenging the aforesaid order passed by the CIT(A) on the grounds reproduced in paragraph 2 above. 4. During the course of hearing both sides reiterated the stand taken before the authorities below. We have heard both the sides, perused the material on record and examined the position in law in view of the submission advanced. ITA No.5664/MUM/2024 Assessment Year: 2015-2016 3 5. On perusal of the Assessment Order we find that according to the Assessing Officer the Assessee-Company had adequate cash profits for the purpose of payment of managerial remuneration during Financial Year 2012-2013 and 2013-2014 being the relevant time period when the terms and conditions of managerial remuneration payable to managing director were claimed to be finalized by the Assessee. Since the Assessee had adequate profits, the payment of managerial remuneration by the Assessee-company was governed by Section 197 read with Section I of Part II of Schedule V of Companies Act, 2013. Therefore, the remuneration payable to managing director could not have exceeded 11% of the net profits of the Assessee- Company computed in the prescribed manner. Further, the Assessing Officer was also of the view that the remuneration paid to the managing director was not reasonable when compared to profits earned by the Assessee-company and the remuneration payable to the Chief Financial Officer of the Assessee-company and therefore, the remuneration was to be disallowed in terms of Section 40A(2)(b) of the Act. The aforesaid stand was reiterated by the Learned Departmental Representative during the course of hearing by placing reliance on the Assessment Order. 6. Per contra, the contention of the Assessee, which was accepted by the CIT(A), was that there was no violation of the provisions contained in Companies Act, and therefore, no disallowance was called for in respect of remuneration paid to the managing director under Section 37(1) read with Explanation 1 thereto. Before the CIT(A) it was contended on behalf of the Assessee that the managing director of the Assessee-Company was appointed vide Special Resolution, dated 21/03/2013, by the members of the Assessee- Company for a term of 3 years (w.e.f. 1/02/2013) and, therefore, the said appointment was governed by the provisions of the Companies Act 1956. The provisions governing the payment of managerial ITA No.5664/MUM/2024 Assessment Year: 2015-2016 4 remuneration were contained in Section 198 read with Schedule XIII of the 1956 Act. As per Section 198(1) of Companies Act, 1956, the total managerial remuneration payable by a private company which is a subsidiary of a public company to its directors shall not exceed 11% of the net profits of such company computed in the prescribed manner. However, Section 198(4) overrides Section 198(1), as it states that subject to Schedule XIII, when the profits of the company are inadequate, the company shall not pay managerial remuneration except with previous approval of Central Government. Section I of Part II of Schedule XIII deals with remuneration payable by companies having profits whereas Section II of Part II of Schedule XIII deals with remuneration payable by companies having no profits or inadequate profits. The Assessing Officer had admittedly recorded that the net profit of the Respondent were not adequate to cover the remuneration paid to the managing director for the relevant previous year. As a result, the case of the Assessee-company was covered by Section II (and not Section I) of Part II of Schedule XIII of the 1956 Act which dealt with cases where the company has inadequate profits. Further, since the proposed remuneration payable to the Managing Director exceeded INR.48,00,000 per annum, it was governed by Paragraph C of Section II of Part II of Schedule XIII of the Companies Act 1956. As per the Notification [G.S.R 534(E) vide Notification- Extraordinary Part II - Section 3 - Sub-section (i) Published in the Official Gazette of India on July 14, 2011/ASADHA 23, 1933] issued by the Ministry of Corporate Affairs (MCA), a proviso was inserted in Paragraph C of Section II of Part II of Schedule XIII which read as under: \"3. In Schedule XIII, in Para II, in Section II- In sub-para (C), after fourth proviso, the following proviso shall be inserted, namely: \"Provided that no approval of Central Government is required if the managerial person is not having any interest in the capital of the company or its holding company directly or indirectly or through any other statutory structures and not having any direct or indirect interest or related to the directors or ITA No.5664/MUM/2024 Assessment Year: 2015-2016 5 promoters of the company at any time during last two years before or on the date of appointment and is having a graduate level qualification with expert and specialized knowledge in the field of his profession.\" [Emphasis added] 6.1. The managing director of the Assessee-company was not having any direct or indirect interest in the capital of the company and was a qualified Chartered Accountant having specialized knowledge in the field of his profession. Thus, the case of remuneration payable to managing director of the Assessee-company was covered by above Notification. Therefore, the Assessee-company, being a private company which was subsidiary of a public company, having inadequate profits during the relevant previous year did not require any approval from the Central Government for making payment of remuneration to managing director. Furthermore, the General Circular No. 07/2015 [F.No.1/5/2013-CL-V dated 10/04/2015, issued by MCA] provided that companies can continue to pay remuneration for the remaining term of the managerial personnel in accordance with terms and conditions approved by such company as per relevant provisions of Schedule XIII of Companies Act, 1956 even if the part of such managerial personnel’s tenure fell after 01/04/2014. The relevant extract of the aforesaid Circular No. 07/2015 reads as under: \"Stakeholders have drawn attention to the provisions of Schedule XIII (sixth proviso to Para (C) of Section II of Part II) of the Companies Act, 1956 (Earlier Act) and as clarified vide Circular number 14/11/2012-CL-VII dated 16th August, 2012 which allowed listed companies and their subsidiaries to pay remuneration, without approval of Central Government, in excess of limits specified in para II Para (C) of such Schedule if the managerial person met the conditions specified therein. Stakeholders have expressed that since similar provisions are not available in the Schedule V of the Companies Act, 2013, there is a need for clarification that a managerial person appointed in accordance with such provision of Schedule XIII of Earlier Act may receive relevant remuneration for the period as approved by the company in accordance with such provisions of Earlier Act. The matter has been examined in the light of earlier clarifications on transitional matters issued by the Ministry. It is clarified that a managerial person referred to in para 1 above may continue to receive remuneration for his remaining term in accordance with ITA No.5664/MUM/2024 Assessment Year: 2015-2016 6 terms and conditions approved by company as per relevant provisions of Schedule XIII of earlier Act even if the part of his/her tenure falls after 1st April, 2014.” (Emphasis Supplied) 6.2. On the strength of the above, it was contended on behalf of the Assessee that there was no violation of the provisions contained in Companies Act, 1956 in respect of remuneration paid to the managing director. Therefore, the provisions contained in Explanation 1 to Section 37(1) of the Act were not attracted and the Assessee was entitled to deduction in respect of remuneration paid to the managing director as claimed under Section 37(1) of the Act. The aforesaid contention of the Assessee was accepted by the CIT(A). During the course of hearing the Learned Authorised Representative for the Assessee reiterated the above submission made before the CIT(A) and placed reliance upon the copy of the relevant provisions, the Notification [G.S.R 534(E) vide Notification- Extraordinary Part II- Section 3 - Sub-section (i) Published in the Official Gazette of India on July 14, 2011/ASADHA 23, 1933] and Circular No. 07/2015 issued by the MCA. 7. We have perused the orders passed by the authorities below, and Special Resolution, dated 21/03/2013. We have also taken into consideration the rival submission and have analyzed of the relevant provisions of the Companies Act, 1956/2013, Notification [G.S.R 534(E), dated 14/07/2011] and Circular No. 07/2015 issued by the MCA. We concur with the view taken by the CIT(A) that the remuneration payable to the managing director for the relevant previous year shall be governed by the terms and conditions specified in the Special Board Resolution, dated 21/03/2013, passed by the members of the Assessee-company whereby the managing director’s remuneration was fixed for a term of 3 years. In our view, the Assessing Officer should have taken into consideration the profits earned by the Assessee-company during the relevant previous year (i.e. Financial Year 2014-2015). The contention of the Assessee that ITA No.5664/MUM/2024 Assessment Year: 2015-2016 7 the Assessee-company is a subsidiary of public limited company and that the Assessee-company did not have adequate profits during the relevant previous year was not assailed during the appellate proceedings before this Tribunal. A co-joint reading of Section 198(1)/(4) read Section I/Section II of Part II of Schedule XIII to the Companies Act, 1956 show that the remuneration payable to the managing director in the facts of the present case would have been governed by Part C of Section II of Part II of Schedule XIII to the Companies Act, 1956 dealing with managerial remuneration exceeding the ceiling of INR.48,00,000/- per annum payable to managing director by a company having inadequate profits. Since, the condition specified in proviso inserted in Part C of Section II of Part II of Schedule XIII to the Companies Act, 1956 [By way of GSR 534(E), dated 14/07/2011] were satisfied, no approval was required from the Central Government for making the remuneration as per provisions of Companies Act, 1956. The application of aforesaid provisions was extended to the extent provided by General Circular No.07/2015, dated 10/04/2015. According to the aforesaid Circular managerial person appointed in accordance with the provision of Schedule XIII of the Companies Act, 1956 would continue to receive remuneration for the period as approved by the company giving the remuneration in accordance with such provisions of the Companies Act, 1956 for the remaining term in accordance with terms and conditions approved by company as per relevant provisions of Schedule XIII of the Companies Act, 1956 even if the part of such tenure falls after 01/04/2014. (i.e. after the provisions of Companies Act, 2013 came into effect). In our view the remuneration paid by the Assessee to the managing director during the relevant previous year false within the ambit of Circular No.07/2015 and therefore, there is no violation of the applicable provisions of the Companies Act, 1956 and/or the Companies Act, 2013. We note that there is nothing on record to show that any proceedings were initiated against the Assessee-Company by the MCA for violating provisions of the ITA No.5664/MUM/2024 Assessment Year: 2015-2016 8 Companies Act, 1956/2013. Further, no adverse observations for the relevant previous year have been made by the statutory auditors of the Assessee-Company. Accordingly, we do not find any infirmity in the order passed by CIT(A) holding that provisions of Explanation 1 to Section 37(1) of the Act would not be attracted and the Assessee is entitle to claim deduction for managerial remuneration under Section 37(1) of the Act. Accordingly, Ground No.1 raised by the Revenue is dismissed. 8. We also find that the approach adopted by the Assessing Officer while invoking the provisions contained in Section 40A(2)(b) of the Act was flawed. We concur with the following findings of the CIT(A) : “8.2 Ground no 2 and 3 relates to the disallowance under section 40A(2) (b) of the Act. The AO attempted to disallow the claim of remuneration paid by having a scale with reference to the qualification of the next highest paid employee in the organization. The approach on the part of the AO to quantify the disallowance as the said payment was found to be unreasonable or excessive is challenged by the appellant with reference to the facts and figures and the legal precedents governing the disallowance. It needs to be conceded that the AO did not bring on record any comparable case to justify that the payment made is excessive or unreasonable. The reliance upon the qualification alone cannot be the sole criterion in such cases and much homework needs to be done by the AO on this score by bringing on records comparable cases of persons engaged in similar industry. For these reasons, in the light of the facts marshalled and presented by the appellant coupled with the legal precedents, the AO is directed to delete the disallowance made.” 9. There is nothing on record to support the finding returned by the Assessing Officer that the remuneration paid to the managing director was either excessive or unreasonable in terms of Section 40A(2)(b) of the Act. Accordingly, we decline to interfere with the findings returned by the CIT(A). Accordingly, Ground No.2 raised by the Revenue is dismissed. ITA No.5664/MUM/2024 Assessment Year: 2015-2016 9 10. In result appeal preferred by the Revenue is dismissed. Order pronounced on 19.03.2025. Sd/- Sd/- (Amarjit Singh) Accountant Member (Rahul Chaudhary) Judicial Member मुंबई Mumbai; िदनांक Dated :19.03.2025. Milan, LDC ITA No.5664/MUM/2024 Assessment Year: 2015-2016 10 आदेश की Ůितिलिप अŤेिषत/Copy of the Order forwarded to : 1. अपीलाथŎ / The Appellant 2. ŮȑथŎ / The Respondent. 3. आयकर आयुƅ/ The CIT 4. Ůधान आयकर आयुƅ / Pr.CIT 5. िवभागीय Ůितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai 6. गाडŊ फाईल / Guard file. आदेशानुसार/ BY ORDER, सȑािपत Ůित //True Copy// उप/सहायक पंजीकार /(Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, मुंबई / ITAT, Mumbai "