1980 (6) TMI 17 - HC - Income Tax

Summary

Issues:
1. Whether the Income-tax Appellate Tribunal was correct in deleting the addition of remuneration made by the Income-tax Officer for the assessment years 1973-74 and 1974-75 under sec. 40(c) of the Income-tax Act, 1961?
2. Whether the Income-tax Appellate Tribunal was justified in holding that the salary paid to the managing director was just and reasonable, considering the business needs and benefits of the company?
3. Whether the findings of the Income-tax Appellate Tribunal were reasonable and not perverse in the absence of comparative cases provided by the Income-tax Officer?

Analysis:
The judgment pertains to two connected references made to the High Court by the Income-tax Appellate Tribunal regarding the same company for the assessment years 1973-74 and 1974-75. The primary issue in both references was the deletion of additions made by the Income-tax Officer under sec. 40(c) of the Income-tax Act, 1961, concerning the remuneration paid to the managing director of the company.

For the assessment year 1973-74, the Income-tax Officer disallowed a sum of Rs. 18,000 as he deemed the salary paid to the managing director to be excessive and unreasonable. The Tribunal, however, held that the burden of proof was on the assessee to establish the reasonableness of the remuneration. The Tribunal's decision was based on the qualifications of the managing director presented by the company, despite the lack of comparative cases provided by the Income-tax Officer. The High Court disagreed with the Tribunal's approach, emphasizing that the burden of proof lay with the taxpayer to justify the allowance, and the lack of evidence supporting the reasonableness of the remuneration rendered the Tribunal's decision unjustified.

Similarly, for the assessment year 1974-75, the Income-tax Officer disallowed Rs. 15,000 of the remuneration paid to the managing director. The Tribunal, once again, relied on the qualifications of the managing director provided by the company to justify the payment as just and reasonable. However, the High Court reiterated that the onus was on the assessee to prove the reasonableness of the remuneration, and the absence of evidence supporting this rendered the Tribunal's decision erroneous.

In conclusion, the High Court held that the Tribunal's decisions to delete the additions made by the Income-tax Officer were not justified. The Court emphasized that the burden of proof rested with the assessee to demonstrate the reasonableness of the remuneration paid to the managing director, and in the absence of such evidence, the disallowances were deemed appropriate. The Court ruled in favor of the revenue, answering the questions against the assessee and upholding the disallowances made by the Income-tax Officer.