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Issues Involved:
1. Allowability of remuneration paid to the manager under section 37(1) and section 40(c) of the Income-tax Act, 1961. 2. Deductibility of interest as revenue expenditure for the assessment years 1967-68, 1968-69, and 1969-70. Issue-wise Detailed Analysis: 1. Allowability of Remuneration Paid to the Manager: The first issue concerns whether the remuneration of Rs. 2,000 per month paid to the manager for the assessment years 1967-68, 1968-69, and 1969-70 is allowable under section 37(1) of the Income-tax Act, 1961. The Income Tax Officer (ITO) initially allowed only Rs. 10,000 per year, disallowing Rs. 14,000 for each year. The Appellate Assistant Commissioner (AAC) later modified this, allowing Rs. 18,000 per annum and disallowing Rs. 6,000. The Tribunal, however, held that the full remuneration of Rs. 24,000 per year was reasonable and allowable. The Tribunal's decision was based on the volume of sales, the total salary bill, and the nature of the services rendered by the manager. Despite the manager being a relative of a director, the Tribunal found no evidence suggesting that the remuneration was not commercially justified. The Tribunal emphasized that the ITO had not applied a fresh judicial mind to the facts and circumstances of the relevant year but had mechanically followed an earlier assessment order. The court reframed the first question to focus on whether the Tribunal was correct in holding that the manager's remuneration was allowable for the said assessment years. The court noted that section 40(c) has an overriding effect over section 37(1) and that even if the expenditure is wholly and exclusively for business purposes, it can be disallowed if it is excessive or unreasonable under section 40(c). The court found that the ITO did not objectively consider the facts and merely followed an earlier order without providing reasons for disallowance. The AAC had considered the manager's long-term contribution to the company, including the increase in turnover and the manager's lack of additional benefits like commissions. The Tribunal found that the remuneration was not excessive or unreasonable. The court concluded that the Tribunal had correctly considered the relevant circumstances and answered the first question in the affirmative, in favor of the assessee. 2. Deductibility of Interest as Revenue Expenditure: The second issue pertains to whether the interest paid on borrowed funds used for constructing house properties is deductible as revenue expenditure. The ITO disallowed interest amounts of Rs. 10,545 for 1967-68, Rs. 23,624 for 1968-69, and Rs. 39,723 for 1969-70, arguing that the construction of house properties was not part of the assessee's business. The AAC upheld this disallowance, stating that the house property was not a business asset. The Tribunal, however, deleted the disallowance for 1967-68 and reduced it by Rs. 12,000 for the subsequent years, reasoning that the paid-up capital of Rs. 1 lakh should be presumed to have been used first for the construction, with only the excess being from borrowed funds. The court found this presumption by the Tribunal to be without evidence, noting that the ITO had established that borrowed funds were used for construction. The court emphasized that the Tribunal should not have made assumptions without factual basis. It noted that the Tribunal did not ascertain whether the business receipts or other funds were sufficient to cover the construction investments. Given the lack of necessary facts on record, the court declined to answer the second question and directed the Tribunal to dispose of the matter in light of the observations made in the judgment. Conclusion: The court affirmed the Tribunal's decision on the allowability of the manager's remuneration but found fault with the Tribunal's handling of the interest disallowance issue. The Tribunal was directed to re-examine the interest disallowance matter based on the court's observations. There was no order as to costs.
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