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Interpretation of section 40(c) of the Income-tax Act, 1961 regarding remuneration paid to managing director. Detailed Analysis: The case involved a dispute over the remuneration paid to the managing director of an assessee-company for the assessment years 1965-66, 1966-67, 1967-68, and 1968-69. The Income-tax Officer disallowed a portion of the remuneration under section 40(c) of the Income-tax Act, 1961, considering it excessive. The Officer fixed a lower reasonable remuneration amount, leading to a deduction disallowance. The company appealed to the Appellate Assistant Commissioner, who, after considering various factors like the approval given by the Company Law Administration and the business experience of the managing director, allowed the full remuneration claimed by the company for all the assessment years in question. The department then appealed to the Income-tax Appellate Tribunal, which considered the submissions from both sides. The Tribunal noted that the remuneration was fixed at 5% of net profits when the company's success was uncertain and found that the managing director's qualifications and business contributions justified the remuneration. The Tribunal concluded that the remuneration was not excessive and was based on legitimate business needs and benefits derived by the company. Therefore, the Tribunal upheld the Appellate Assistant Commissioner's order. Upon reviewing the Tribunal's judgment, the High Court found that the Tribunal had thoroughly considered all facts and circumstances, concluding that the managing director's remuneration was not excessive and was justified by business considerations. The High Court emphasized that the Tribunal's finding was based on the evidence on record and was not perverse. Consequently, the High Court held that the Tribunal's decision was binding and answered the referred question of law in favor of the assessee, against the revenue department. In a concurring opinion, another judge agreed with the decision and reasoning of the Chief Justice. The judgment highlights the importance of considering legitimate business needs and benefits derived by a company in determining the reasonableness of remuneration paid to key personnel, such as managing directors.
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