1978 (11) TMI 46 - HC - Income Tax

Summary

Issues Involved:
1. Reasonableness of salaries paid to the managing director and executive director under section 40(c) of the Income-tax Act.
2. Disallowance of development rebate on machinery let out on hire.

Detailed Analysis:

1. Reasonableness of Salaries Paid:
The first issue pertains to whether the Income-tax Appellate Tribunal misdirected itself by focusing on what salary was reasonable instead of determining if the salaries paid to the managing director and executive director were unreasonable and excessive as per section 40(c) of the Income-tax Act.

Findings and Arguments:
- The assessee, a private limited company, appointed Shri P. N. Mayor as managing director with a salary of Rs. 3,000 per month and his son, Shri Ravi Mayor, as executive director with a salary of Rs. 2,500 per month.
- The Income Tax Officer (ITO) disallowed the entire salary paid to Shri P. N. Mayor, stating he was not actively working for the company. For Shri Ravi Mayor, the ITO deemed Rs. 1,000 per month as reasonable, disallowing the excess amount.
- On appeal, the Appellate Assistant Commissioner (AAC) found Rs. 2,000 per month reasonable for Shri P. N. Mayor and Rs. 1,500 per month for Shri Ravi Mayor.
- The Tribunal further modified this to Rs. 2,000 per month for Shri Ravi Mayor but upheld the AAC's decision regarding Shri P. N. Mayor.
- The High Court referred to precedents, notably J. B. Bottling Co. (P.) Ltd. v. CIT, emphasizing that the Tribunal's findings on salary reasonableness are factual and not to be interfered with unless unreasonable or capricious.

Conclusion:
The court concluded that the Tribunal did not misdirect itself and answered the first question in the affirmative, favoring the revenue and against the assessee-company.

2. Disallowance of Development Rebate:
The second issue involves whether the Tribunal was correct in law to uphold the disallowance of development rebate to the assessee.

Findings and Arguments:
- The ITO disallowed the development rebate on machinery worth Rs. 1,55,048 let out on hire, reasoning that letting machinery was not the assessee's business.
- The AAC upheld the ITO's decision.
- The assessee argued that letting machinery was part of its business as per the memorandum of association, specifically para. 3(a)(iii).
- The High Court analyzed the intention behind the machinery purchase, referencing the statement of Shri P. N. Mayor, which indicated the machinery was initially meant for manufacturing but was let out due to lack of space.
- The court cited Supreme Court precedents, including Dalmia Cement Ltd. v. CIT, emphasizing that the dominant intention at the time of purchase is crucial.
- The court found that the primary intention was manufacturing, not hiring out machinery, thus supporting the disallowance of the development rebate.

Conclusion:
The court answered the second question in the affirmative, against the assessee and in favor of the revenue, affirming that the machinery was not intended for hire as a business activity.

Summary:
The High Court upheld the Tribunal's decisions on both issues. It found that the Tribunal did not misdirect itself regarding the reasonableness of salaries under section 40(c) and correctly upheld the disallowance of the development rebate, as the machinery was not intended for hiring out as a business activity. Both questions were answered in favor of the revenue and against the assessee.