1985 (8) TMI 32 - HC - Income Tax

Summary

Issues:
1. Reasonableness of remuneration paid to employees under section 40(c) of the Income-tax Act, 1961.
2. Justification of disallowing part of the salary paid to employees during the assessment year 1970-71.
3. Application of section 37(2A) of the Income-tax Act, 1961 on entertainment expenditure.

Analysis:

Issue 1: Reasonableness of Remuneration
The case involved the assessment of remuneration paid by an assessee company to two individuals, sons of the director. The Income-tax Officer found the salaries excessive and unreasonable under section 40(c) of the Income-tax Act, 1961. The Appellate Assistant Commissioner upheld the decision. However, the Tribunal considered a salary of Rs. 750 per month for each individual as reasonable. The High Court affirmed the Tribunal's decision, stating that the finding of unreasonableness was based on factual evidence. The court relied on precedent to establish that such determinations are factual and supported by the available record. Thus, the court answered this question in favor of the Department.

Issue 2: Disallowance of Part of Salary
The Tribunal disallowed the excess amount of salary paid to the two individuals beyond Rs. 750 per month. The High Court, after considering the facts and evidence, agreed with the Tribunal's decision. The court emphasized that the Tribunal's finding was based on available material, thus justifying the disallowance under section 40(c) of the Act. Consequently, the court answered this question in favor of the Department.

Issue 3: Application of Section 37(2A) on Entertainment Expenditure
The third question regarding the application of section 37(2A) on entertainment expenditure was deemed covered by a Full Bench decision in favor of the Department. The court, based on the precedent, answered this question in favor of the Department and against the assessee.

In conclusion, the High Court upheld the Tribunal's decisions on all three issues, ruling in favor of the Department and against the assessee. The court found the remuneration paid to the employees excessive and unreasonable, justifying the disallowance under relevant sections of the Income-tax Act, 1961.