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 - Directors of appellant-company were receiving directors' fee at rate of Rs. 100 per month - Subsequently, assessee-company passed a resolution entitling directors to receive commission at rate of one per cent of net profits of company in addition to their fees - Tribunal, however, recorded finding that commission was paid to directors for extra commercial reasons and was not wholly and exclusively made for purpose of business - High Court affirmed Tribunal's decision - Whether having regard to Tribunal's finding, it could be concluded that payment of commission made by appellant-company to directors was not eligible for deduction under section 10(2)(xv) of 1922 Act - Held, yes FACTS The appellant-company was managed by a firm of managing agents. The managing agents were entitled to certain monthly remuneration and commission of 10 per cent at the net profits. Two of the directors of the appellant-company were the nominees of the managing agents and were also the directors of the managing agents. Under article 118 of the articles of association of the appellant-company, the five directors were entitled during the accounting year to director's fees at the rate of Rs. 100 per month to each director besides travelling expenses for attending the meetings. During the relevant accounting year, the directors of the appellant-company proposed to amend article 118 by providing that the directors should be paid a commission at the rate of 1 per cent of the net profits of the company, after providing for necessary expenses and charges. This recommendation was adopted at an extraordinary general meeting of the shareholders of the company by a special resolution by which article 118 was amended. Accordingly, the directors became entitled to additional payment. The appellant-company claimed said payment as business expenditures. The ITO disallowed the claim of the appellant-company on the ground that the directors had not rendered any extra service so as to entitle them to the additional remuneration. On appeal the AAC…

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