Law: Income Tax Act, 1922

Section: 10(4A)

Section 40(c) of the Income-tax Act, 1961 [Corresponding to section 10(4A) of the Indian Income-tax Act, 1922] - Business disallowance - Remuneration, etc., paid in excess, in case of company of prescribed limit, etc. - Assessment year 1956-57 - Assessee-company returned an income of Rs. 2,316 after deducting a sum of Rs. 24,750 as salary and remuneration to directors - ITO disallowed part of said salary and remuneration on ground that it was excessive because 90 per cent of profits of company was absorbed in shape of remuneration and salary - Tribunal upheld action of ITO - Whether there was no infirmity in impugned order - Held, yes FACTS The assessee-company had three shareholders X, Y and Z who were also directors of the company. The first of them was also the managing director. On and from 1-4-1955, the directors claimed to be paid remuneration at the rate of Rs. 500 per month for each director. The managing director claimed an additional salary of Rs. 1,250 per month from that date. This salary and remuneration were not drawn by the directors each month but were adjusted at the end of the calendar year 1955. For the assessment year 1956-57, the assessee claimed the total payment of salary and remuneration, Rs. 24,750, as permissible allowance in computing its profit. The ITO allowed the claim in respect of the payment of Rs. 11,250 as salary to the managing director but disallowed the rest of the claim on the ground that it was excessive because 90 per cent of the profits of assessee were absorbed in the shape of remuneration and salary. The AAC took the view that the assessee's claim was well-founded. The Tribunal agreed with decision of the ITO and set aside the order of the AAC. On reference : HELD The finding of the Tribunal that the two directors, Y and Z did not work for the assessee or devoted their time and energy for running the assessee's affairs had not been shown to be erroneous on the materials on record. It was certainly significant to note that almost the entire income of the assessee had been taken hold of by the directors in the shape of remuneration and salary. Section 10(4A) of 1922 Act was introduced into the statute book under section…

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