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Issues: Assessment of director's remuneration for a private limited company for the assessment year 1971-72.
Analysis: The case involved the assessment of the deduction claimed by a private limited company for remuneration paid to its directors for the assessment year 1971-72. The Income Tax Officer (ITO) disallowed a portion of the claimed remuneration, finding it unreasonable due to a minimal increase in turnover compared to the increase in directors' remuneration. The company appealed to the Appellate Authority Commissioner (AAC), arguing that the increase in business volume and contributions from the foreign principal justified the increment in directors' remuneration. The AAC directed the ITO to allow an increment in remuneration for the directors. The company further appealed to the Income-tax Appellate Tribunal, emphasizing the increase in business and expenses reimbursed by the foreign principal. The Tribunal upheld the disallowance of a portion of the remuneration based on previous assessment years' decisions. The Tribunal's decision was challenged through an application under section 256(2) of the Income Tax Act, 1961. The company contended that the Tribunal erred in not considering new facts specific to the assessment year, such as increased agency commission, expense reimbursements, opening of a new branch, and appointment of a new director. The company argued that these new facts warranted a different decision than the one based on previous years' assessments. The revenue, on the other hand, relied on the Tribunal's previous order, highlighting factors like reimbursement of expenses by the foreign principal and lack of improvement in the company's financial position. The High Court, after reviewing the arguments and legal precedents, found that the Tribunal failed to adequately consider the new facts presented for the assessment year in question. The Court emphasized the need to assess director's remuneration based on legitimate business needs and benefits derived by the company. Referring to legal precedents, the Court highlighted that remuneration should be justifiable and assessed objectively from a prudent businessman's viewpoint. The Court concluded that the Tribunal should reconsider the matter, taking into account the new facts presented by the company and determining the remuneration in accordance with the law and relevant legal principles. The case was remanded to the Tribunal for proper reconsideration.
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