1979 (2) TMI 68 - HC - Income Tax

Summary

Issues: Assessment of managing director's remuneration, disallowance of loan amount as undisclosed income.

Assessment of Managing Director's Remuneration:
The case involves the assessment of a private limited company's managing director's remuneration for the assessment year 1961-62. The managing director, Mr. Patel, received a salary and commission based on sales. The Income Tax Officer (ITO) disallowed a portion of the commission and increased salary, deeming it unreasonable. The Appellate Assistant Commissioner (AAC) upheld the disallowance, citing lack of commercial reasons for the increment. However, the Appellate Tribunal reversed this decision, considering the company's increased turnover and profit. The Tribunal calculated a reasonable increment and directed the ITO to allow a portion of the increase. The High Court found the Tribunal's subjective standard for assessing the remuneration unreasonable, stating that the increase was justified by the company's growth and workforce expansion. The Court held that the Tribunal erred in disallowing a part of the increased remuneration.

Disallowance of Loan Amount as Undisclosed Income:
The ITO disallowed a loan amount of Rs. 2,500 borrowed by the company, treating it as undisclosed income. Both the AAC and Tribunal upheld this decision, questioning the necessity of the loan and the lender's credibility. The Tribunal found it implausible for a company with significant transactions to borrow such a small amount, deeming the interest paid unnecessary. The High Court noted the assessee's argument that all relevant information was provided to the ITO and contested the inference of undisclosed income. However, due to the insignificant amount involved, the Court did not address this issue further. Ultimately, the Court ruled against the revenue on the first question regarding the managing director's remuneration and did not answer the second question regarding the loan amount.