Law:

Section:

SECTION 40(c) OF THE INCOME-TAX ACT, 1961 - BUSINESS DISALLOWANCE - IN CASE OF COMPANIES - WHETHER MERELY BECAUSE MANAGER OF ASSESSEE-COMPANY WAS A RELATIVE OF ONE OF ASSESSEE'S DIRECTORS, A PART OF SALARY PAID TO SAID MANAGER BY ASSESSEE COULD BE DISALLOWED AS UNREASONABLE AND EXCESSIVE BY FOLLOWING ASSESSMENT ORDER FOR PRECEDING ASSESSMENT YEAR WITHOUT CONSIDERING LEGITIMATE BUSINESS NEEDS OF ASSESSEE AND BENEFIT DERIVED BY OR ACCRUING TO ASSESSEE THEREFROM - HELD, ON FACTS, NO Facts The assessee-company claimed deduction of Rs. 24,000 being the salary paid to its manager for each of the assessment years 1967-68 to 1969-70. The ITO, however, following his order for the preceding assessment year 1966-67, allowed the assessee's claim to the extent of Rs. 10,000 only for each of the said assessment years. On appeal, the AAC, after taking into account the cumulative effect of all evidence, held that the payment of Rs. 18,000 per annum was reasonable and, therefore, he sustained the disallowance to the extent of Rs. 6,000 for each of the relevant assessment years. On second appeal by the assessee before the Tribunal, the revenue pointed out that when the manager was the son of a director and brother of another director of the assessee, remuneration was not paid wholly for commercial reasons. The Tribunal, however, after considering the volume of sales, total salary bill and the nature of the services rendered by the manager of a concern of the nature of the assessee, held that the remuneration paid to the aforesaid manager was not excessive or unreasonable and, therefore, it allowed the full claim of the assessee. On reference : Held Under section 40(c), if in the opinion of the ITO any expenditure or allowance to a person specified therein is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to the company therefrom, such excessive expenditure shall not be allowed in computing the income of the company. It is, however, not open to the ITO to mechanically follow an earlier assessment order without applying a fresh judicial mind to the facts and circumstances of the relevant year. In the…

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