Professional fees paid to directors of a company will be disallowed if it is not in excess of market rate?

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The assessee, engaged in the business of health club and fitness services, filed its return declaring a total income of Rs.3,56,370/-.In scrutiny assessment proceedings, the AO disallowed payment of professional fees Rs.6,35,656/- paid to the Directors and donations of Rs.6,000/- paid during Ganesh Utsav. The assessee submitted that it had entered into an MoU with Khar Gymkhana on 14/05/2014 for providing the professional physical fitness programme of Crossfit Inc., a global brand for fitness services. The assessee provided equipment and specialised professional training at Khar Gymkhana.
The appellant vide Board Meeting, resolved to pay Rs.20,000/- per month to each of the directors for the professional services. Further, the assessee paid Rs.97,828/- to both the directors for the personal training programme. The AO and the CIT(A) observed that no documents were placed on record to substantiate that there was an agreement between the assessee and Khar Gymkhana for providing and managing Gym at the said club, and made disallowances. On appeal, the ITAT on an issue as to whether professional fees paid to directors of the company shall not be disallowed if it is not in excess of market-rate held as under:
the payment of professional fees has been disallowed primarily for the reason that the assessee has not supported his contentions with documentary evidence. The assessee has field MoU with Khar Gymkhana. An examination of MOU reveals that the assessee was to extend the professional physical fitness programme of ‘CrossFit Inc.’ for the benefit of Khar Gymkhana Members. The assessee was responsible for establishing and operating fitness programmes, providing qualified experienced professionals for fitness services, being liable for payment of wages and compensation to staff/trainers deployed at Khar Gymkhana fitness centre, sourcing necessary materials, products & equipment for the training programme, etc. For the services rendered, the assessee was entitled to receive a 70% share in charges (excluding service tax) collected by Khar Gymkhana from its members and 80% of charges collected from non-members.
The said MOU clearly indicates that the assessee was to extend professional fitness services to Khar Gymkhana. The assessee has also furnished a copy of Board Resolution allowing payment of Rs.20,000/- per month to each of the directors of the assessee company i.e. Dheepesh Ashvin Bhatt and Payal Gaurav Goel for the services rendered at Khar Gymkhana. The documents on record clearly indicate that the assessee was to provide fitness services at Khar Gymkhana, the payments were made to the directors in accordance with the Board Resolution for professional services rendered at Khar Gymkhana. The assessee has filed sufficient evidence in the form of educational/professional qualification certificates of the directors to show that the directors were professionally qualified to provide the services. It is not the case of Revenue that the professional fees paid to the directors is in excess of the market rate. Therefore, the disallowance of payment of professional fees to the directors is unjustified.

Akshit Gadhia

Author of Tax Concept. Also, he is the Owner of Gadhia  Associate. The author is an avid reader and the author likes to write on various regulatory compliances. Currently, the Author Is pursuing CS, LLB, and ACCA. He has vast experience in Company Law and Roc Filings, Direct and Indirect Tax, Accounts, and Audits, and many other regulatory forms filings.

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