1974 (8) TMI 2 - HC - Income Tax

Income Tax Act, Legal Representative, Minor Admitted To Benefits Of Partnership, Share Income

Summary

Issues:
Interpretation of Section 10(4A) of the Indian Income-tax Act, 1922 regarding disallowance of salary to a director. Application of s. 10(4A) in disallowing part of the director's salary. Validity of disallowance under s. 10(4A) based on the nature of expenditure incurred. Consideration of disallowance under s. 10(4A) in relation to allowable expenditure under s. 10(2)(xv).

Analysis:
The case involved a reference under s. 66(2) of the Indian I.T. Act, 1922, questioning the correctness of disallowing part of the salary paid to a director under section 10(4A). The company claimed a deduction for the director's salary, but the Income Tax Officer (ITO) disallowed a portion of it under s. 10(4A) for being excessive. The Appellate Assistant Commissioner (AAC) allowed only 25% of the claim, following previous decisions. The Tribunal upheld the disallowance, leading to the reference to the High Court.

The primary contention was whether the disallowance under s. 10(4A) applied to the salary paid to a director. The assessee argued that the section referred to expenses resulting in remuneration or benefits, not the salary itself. The counsel relied on principles of statutory interpretation to support this argument. Additionally, the assessee contended that the disallowance should apply to benefits or perquisites, not the salary directly.

The second issue addressed the application of s. 10(4A) in disallowing part of the director's salary. The AAC disallowed the expenditure based on the extension of business activities, which the Tribunal upheld. However, the High Court found that the disallowance did not meet the requirements of s. 10(4A) as the expenditure was not capital in nature and did not fall under s. 10(2). The revenue's argument that the disallowance was based on s. 10(2)(xv) was rejected due to lack of consideration by the ITO.

Ultimately, the High Court ruled in favor of the assessee, stating that the disallowance under s. 10(4A) was not valid in this case. The court held that the considerations for applying s. 10(4A) did not align with the facts of the case. As a result, the question was answered in the negative, and the assessee was awarded costs for the reference. Both judges, Sabyasachi Mukherji J. and Janah J., concurred with this decision.