1983 (5) TMI 9 - HC - Income Tax

Summary

Issues:
1. Whether the commission paid by the assessee to its directors could be curtailed by the Tribunal as excessive or unreasonable.
2. Whether the Tribunal was justified in disallowing part of the commission paid to the directors of the assessee-company for the assessment year 1975-76.

Analysis:
The High Court considered whether the commission paid by the assessee to its directors could be curtailed by the Tribunal as excessive or unreasonable. The Tribunal disallowed part of the commission paid to the directors for the assessment year 1975-76. The assessee, engaged in the export business, claimed a deduction for payments made to its directors for whole-time work and promotion of export. The Income Tax Officer (ITO) disallowed the deduction, stating it was "not for business purposes but other considerations." The Commissioner (Appeals) upheld this decision, noting that the payment to directors far exceeded the company's profit, and the commission was not related to specific services rendered. The Tribunal, however, found that the payment of commission was for commercial expediency, and the main issue was whether it was excessive. The Tribunal also considered the history of the company, the directors' past remuneration, and the benefit derived by the company from the payments.

Further, the Tribunal found that the company's profits increased significantly in subsequent years, reducing the ratio between net profit and payments to directors. Despite this, the Tribunal expressed concerns that a major portion of profits was taken by the directors. The High Court emphasized that the reasonableness of payments to directors should be viewed from the perspective of a prudent businessman. Referring to precedents, the court highlighted that the legitimacy of business needs and benefits derived by the company should guide the assessment of excessiveness or unreasonableness in such payments. Citing a Supreme Court decision, the court noted that payments to directors were not excessive when considering turnover and total staff expenditure.

Ultimately, the High Court ruled in favor of the assessee, stating that the Tribunal was not justified in disallowing part of the commission paid to the directors for the relevant assessment year. The court awarded costs to the assessee and concluded the judgment in their favor.