Law: Income Tax Act (XI of 1922)

Section: 2

Income tax Act (XI of 1922)-----   ------ Ss. 2(6 C)(fl), (iii) & 10(4 A)(a)Business expenditure Salary Amount paid as salary to Director having substantial interests in Company Whether can be disallowed or reduced.   The assessee which was the managing agent of a company received Rs. 1,000 per mensem as remuneration from its managed company as per the managing agency agreement. According to its Articles of Association the assessee paid Rs. 1,000 per mensem as salary to its director in charge who had substantial interest in the company. The assessee claimed deduction of Rs. 12,000 as amount expended for the purposes of the business. The Department contended that the arrangement had been devised with a view to escape the corporate tax and allowed only Rs. 200 per mensem as allowance, which was later increased to Rs. 500 by the Tribunal:   Held, that the salary of Rs. 1,000 per mensem paid to the director in charge of the assessee company was an allowance in respect of an expenditure falling within section 10 (4 A) (a) of the Income tax Act, 1922, and the assessee was not entitled to have the entire amount deducted under section 10(2).   The expenditure incurred by a company in paying a "salary" to its director or a person substantially interested in the company may be disallowed wholly or in part under section 10 (4 A)(a). A reference in section 10(4 A) (a) to section 2 (6 C) (iii) is only for the purpose of the definition of "substantial interest in the company" and for no other purpose. The word "allowance" in section 10 (4 A)(a) is used in the meaning of a deduction allowable by the Income tax Authorities and not an expenditure incurred by a company, because the allowance has to be in respect of any expenditure by the company.   STATEMENT OF CASE   The assessment year under consideration is 1956-57, the previous year being the year ending on 30th November, 1955. The assessee is a private limited company carrying on the business of working as managing agent to another private limited company known as the Narain Cold Storage Co. Ltd., Amritsar. Both the companies came into existence in the year…