Law:

Section:

Section 40(c) of the Income-tax Act, 1961 - Business disallowance - Remuneration, etc., paid in excess of prescribed limit in case of company, etc. - Assessment year 1978-79 - Whether it is not for ITO to decide what would be correct salary of directors of company unless on face of it salary fixed is so exorbitant and absurd, that it can be clearly said to be fictitious and aimed at tax evasion - Held, yes - Assessee-company increased salary of its two directors during relevant assessment year - ITO disallowed said increase in salary - Commissioner (Appeals) reversed order of ITO and allowed claim of assessee - However, Tribunal allowed claim of assessee only in part - Whether in view of facts that there was increase in sales of assessee-company in relevant assessment year and such good performance was a result of very good and serious work by directors, Tribunal was not legally justified in disallowing part remuneration payable to directors of assessee-company - Held, yes FACTS The assessee-company had increased the salary of its directors during the relevant assessment year. The said increase in salary of the two directors of the assessee-company was disallowed by the ITO. The Commissioner (Appeals), however, reversed the order of the ITO and allowed the claim of the assessee. On further appeal, the Tribunal allowed the assessee's claim in part and disallowed a certain amount out of the remuneration paid to the directors. On reference: HELD Under section 40(c )(i), the Assessing Officer can disallow any payment to a director which in his opinion is 'excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom'. A similar provision exists in section 40A(2). [Para 5] Whenever a claim is made by the assessee before the ITO for allowing an expenditure as a legitimate business expenditure, the approach of the ITO (or other income-tax authority) has to be that he has to look at the matter from the view point of a prudent businessman, and not from his own view point, and then ascertain whether the said expenditure has been incurred for the purpose of commercial expediency or not. In…

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