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1. Disallowance of remuneration paid to directors under section 40(c) of the Income Tax Act, 1961. Detailed Analysis: The judgment by the High Court of Allahabad involved the disallowance of remuneration paid to directors of a private limited company under section 40(c) of the Income Tax Act, 1961. The company, engaged in manufacturing electronic wires, paid remuneration to its directors, including Dr. Jagmohan Garg, Sri N. L. Garg, and Smt. Leelavati Garg. The Income Tax Officer (ITO) disallowed a portion of the remuneration paid, considering it abnormally high. The Assistant Commissioner (AAC) disagreed with the ITO on the remuneration to Dr. Jagmohan Garg but upheld the disallowance regarding Smt. Leelavati Garg. The Tribunal later upheld the disallowance, leading to an appeal before the High Court. The primary argument raised was that the ITO exceeded jurisdiction by questioning the management's decision on remuneration. The Tribunal found that Smt. Leelavati Garg lacked technical qualifications and experience relevant to the company's operations, receiving a salary partly due to her relationship with other directors. Section 40(c) of the Act was cited, which allows disallowance of excessive or unreasonable expenditure on remuneration to directors. The court compared the current provision with its precursor in the 1922 Act, emphasizing the need for expenditure to align with legitimate business needs. The court distinguished previous cases under different sections of the Income Tax Act, noting the altered landscape due to the introduction of section 40(c). It highlighted the importance of factual analysis in determining the reasonableness of remuneration, citing specific cases like Natesan and Co. (P.) Ltd. v. CIT and Carlton Hotel (P.) Ltd. v. CIT. The judgment referenced the Delhi High Court's decision in T. B. Bottling Co. (P.) Ltd. v. CIT, aligning with the conclusion that the disallowance of excessive remuneration was justified based on the material available. Ultimately, the High Court upheld the Tribunal's decision, affirming that the remuneration paid to Smt. Leelavati Garg was unreasonable, and the disallowance was justified under section 40(c) of the Income Tax Act, 1961. The department was awarded costs, and the judgment favored the department against the assessee.
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