Law: Income-tax Act (XI of 1922)

Section: 10(2),10(xvi)

Income-tax Act (XI of 1922), S. 10(2)(xvi)-Expenses incurred by increasing salaries of Directors-Deduction-Justifi cation or allowance-No material to show that increase was made for extra-commercial consideration or considerations other than those for purpose of business-Devotion of more time and attention by Directors in affairs of company established by increase in business and appreciation of profitsConduct of business and fixation of reasonable remuneration for Directors, within rights of assessee-Taxing authorities admitting factum of payment but applying own standard of reasonableness-Disallowance of part of increase in remuneration of Directors-Held, not justified in circumstances.   Date of hearing: 10th November 1965,  JUDGMENT   MUHAMMAD FAZLE GHANI, J.-The Tribunal was called upon to refer the following question of law under section 66(2) of the Income-tax Act, 1922:-   "Whether on the facts and in the circumstances of the case, the disallowance of Rs. 18,000.00 (Mr. Yusuf Rs. 12,000.00 and Mrs. Brentford Rs. 6,000.00) out of the expenses incurred by the applicant-company for payment of remunerations to the two Directors is permissible under the provisions of section 10 (2) (xvi) of the Act?"   The assessee, a private limited company, claimed under section 10 (2) (xvi) deduction of Rs. 36,003.00 and Rs. .12,000.00 paid to their Directors Mr. Yusuf and Mrs. Brentford respectively, for the assessment years 1954-55 and 1955-56 as remuneration. In the, preceding assessment year 1953-54 Mr. Yusuf was paid Rs. 12,000.00 and Mrs. Brentford Rs. 3,000.00 only and this amount was allowed by the Income-tax Officer. For the relevant charge year, the assessing authority rejected the claim on the ground of inordinate increase in the salaries of these two Directors although the income of the Company had proportionately increased in that year. The Appellate Tribunal found that the increase in the remunerations was motivated by extra commercial reasons and was not wholly and exclusively for the purposes of the business. Nevertheless by a subjective standard of reasonableness the increase of remuneration to Rs. 24,000 in case of Mr.…