The Delhi ITAT held that disallowance of director’s remuneration under section 40A(2)(b) cannot be sustained when it is based solely on a retracted and uncorroborated statement recorded under section 132(4), particularly when documentary evidence establishes the director’s active role and the remuneration is already taxed in the hands of the recipient, rendering the issue revenue neutral.
Facts of the Case
- A search under section 132 was conducted in the assessee-company’s group.
- During search proceedings, a director of the assessee company gave a statement under section 132(4) allegedly admitting that she was not actively involved in the business.
- The Assessing Officer disallowed director’s remuneration under section 40A(2)(b), treating it as excessive and unreasonable.
- Subsequently, the director retracted her statement and furnished:
- Evidence of professional qualifications
- Details of business functions performed
- Board resolutions and role descriptions
- It was also undisputed that the remuneration was fully offered to tax in the hands of the director.
Issues Before the Tribunal
- Whether disallowance under section 40A(2)(b) can be made solely on the basis of a retracted statement under section 132(4) without corroborative evidence.
- Whether such disallowance is justified when it is revenue neutral, as the income has already been taxed in the hands of the director.
Observations & Findings
- A retracted statement, by itself, has weak evidentiary value unless supported by independent and cogent material.
- The Assessing Officer failed to bring any material on record to disprove the documentary evidence showing the director’s involvement in the company’s affairs.
- No comparison was made with market-based remuneration to establish excessiveness under section 40A(2)(b).
- Since the remuneration was already taxed in the director’s hands at the same or higher rate, the disallowance resulted in revenue neutrality, which further weakened the Revenue’s case.
Decision
The ITAT held that:
- Disallowance of director’s remuneration under section 40A(2)(b) based solely on an uncorroborated and retracted section 132(4) statement is unsustainable.
- In the absence of any cogent evidence and considering revenue neutrality, the addition was unjustified.
Disallowance deleted. Appeal allowed in favour of the assessee.
Key Takeaways
- Section 132(4) statements must be supported by corroborative evidence to justify additions.
- Retraction supported by documentary proof cannot be ignored mechanically.
- Revenue neutrality is a strong persuasive factor against disallowance under section 40A(2)(b).
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AO must demonstrate excessiveness with proper benchmarking, not mere suspicion.