Law:

Section:

Section 40(c) of the income tax act, 1961-Amounts not deductible-Disallowance in case of company-Assessee-company paid salary to its managing director in excess of prescribed limits of Rs. 36,000 for performing dual functions as managing director and director-Whether disallowance of excess salary under section 40(c) is justified-Held, on facts, no Facts For the assessment years 1973-74 and 1974-75, the assessee-company agitated before the Tribunal, inter alia, on the issue of curtailment of the allowable deduction in respect of the managing director's salary of Rs. 42,350 to the limit of Rs. 36,000 prescribed in section 40(c). It contended (i ) that its managing director was performing not only his own functions but also that of the director, who retired on 1-5-1968; and (ii) that since the Tribunal had not considered this fact while rendering its decision for the earlier years, the same required reconsideration. The Tribunal, however, sustained the impugned disallowance of Rs. 6,350 observing (i) that no material was available to prove the necessity for the appointment of any director, other than the managing director, since the assessment year 1970-71; and (ii) that the managing director had also not been able to show any improvement in the business of the company. On reference: Held Prior to retirement of a director on 1-5-1968, there were two directors while in the assessment years under question there was only one director undertaking the job and responsibility of the two directors which was a material factor for the business needs of the company. In order to form correct opinion about the reasonableness of the amounts paid to the director, two tests were to be applied, viz., legitimate business needs of the company and the benefit derived by or accruing to the company. The legitimate business needs must be judged from the point of view of the company itself and these needs as also the element of benefit should also be considered from the angle of a prudent businessman and it is not for the ITO to dictate such business needs. Having regard to these tests, the Tribunal had erred in upholding the impugned disallowance under section 40(c). Cases Referred to…

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