Law:

Section:

Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] - Business expenditure - Allowability of - Assessment years 1952-53 and 1953-54 - Whether proper test to find out whether a particular expenditure is wholly or partly justified is to find out whether businessman when he expended money was acting reasonably in interest of his own business uninfluenced by any irrelevant or extraneous considerations - Held, yes - Whether, therefore, when amount expended or paid by way of salary to a director is correlated to service rendered by him, mere fact that person receiving money is a relation of majority of members of company is of no value - Held, yes [Matter remanded to Tribunal] FACTS The board of directors passed a resolution fixing the remuneration of the managing director at Rs. 32,500 per year and of the technically qualified director, at Rs. 17,500 per year who was previously getting only Rs. 11,400 per year. For the assessment years in question the department allowed only part of remuneration. The disallowance was affirmed on appeal by the AAC and on further appeal by the Appellate Tribunal. On reference : HELD As the years of assessment were prior to the enactment of the Finance Act of 1956, the provisions of section 10(4A) of 1922 Act will not apply and the only question was whether the expenditure could be regarded as one wholly devoted for the purpose of the business. There was no dispute about the facts. N, the managing director, had acquired great experience in the business of plying motor buses and has been guiding the entire concern since its inception. During the course of a number of years the company was granted permits for a number of routes. The ITO himself had realised this. The expansion of the assessee's business would undoubtedly require greater effort and efficiency on the part of persons in management and would necessarily involve greater work on their part. This was recognised by the department when it progressively increased the allowances paid towards the directors' remuneration. So far as K was concerned, he was a technically qualified director. With the expansion of the bus…

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