This was precisely the issue before the ITAT mumbai in the case of Mascot Lifestyle Pvt Ltd Vs ITO, ITA NO.4456/MUM/2019

In this case, Assessee’s appeal was partly allowed.

Short Overview of the case: 

The assessee, engaged in the business of health club and fitness services, filed its return declaring 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 a MoU with Khar Gymkhana on 14/05/2014 for providing 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 towards 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 company shall not be disallowed if it is not in excess of market rate held as under:

the payment of professional fee 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 professional physical fitness programme of ‘CrossFit Inc.’ for the benefit of Khar Gymkhana Members. The assessee was responsible for establishing and operating fitness programme, provide qualified experienced professionals for fitness services, liable for payment of wages and compensation to staff/trainers deployed at Khar Gymkhana fitness centre, source necessary materials, products & equipment for training programme, etc.

For the services rendered, the assessee was entitled to receive 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, disallowance of payment of professional fee to the directors is unjustified.