Remunerations of director not in violation of 40(2) if the director is a relative and expenses not proved as excessive and unreasonable as per ITAT Delhi


Facts of the case:-

The Income Tax Appellate Tribunal (ITAT) Delhi has held that remunerations given to a company director, who happens to be a relative do not fall as a disallowance under section 40(2) of the Income Tax act if such expense is not proved to be excessive and unreasonable.

In the said case of Kushal Infra project Industries, out of the payees, one of them namely Smt. Veena Rana was not an employee, but a Director of the company. Instead of a salary, the Director’s remunerations in the shape of a one-time payment of Rs.2 Lakhs was made to her towards the end of the accounting period considering prospects of good income of the company and valuable contribution made by the said Director towards the business of the company.

This payment was duly supported by the Board’s resolutions. However, owing to an inadvertent mistake on the part of the Accountant, this payment was shown and accounted for as salary instead of the Director’s remuneration.


The assessee company maintained proper records along with Attendance Register, Leave Record, evidence of Payments to the employees, etc. All the payments towards salary are well accounted for in the books of account and are properly vouched. Payments are made through cheque through the banking channel, therefore, the correctness of the same was not doubted.

Interpretation and Conclusion:-

The Assessing Officer disallowed the salary payment because the recipients are relative of the Director Shri Kushal Rana and applied section 40(2) of the Income Tax Act. It was submitted that to engage relatives for work and to pay them for the same is nowhere banned or prohibited in the Income Tax Act. The Commissioner of Income Tax Appeals considered the material and facts of the case and deleted the addition. This was challenged by the Revenue before the Income Tax Appellate Tribunal (ITAT) Delhi. The bench co

The bench consisting of Judicial member, Bhavnesh Saini, and accountant member Dr B.R.R Kumar upheld the order of the CIT(A) and held, “ before applying the provisions of Section 40A(2), A.O. should have proved expenditure is excessive or unreasonable.” In the absence of any such finding by the A.O, there was no justification to disallow salary.”

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