1982 (7) TMI 96 - AT - Income Tax

Summary

Issues:
1. Disallowance of remuneration paid to an employee under section 36(1)(ii) of the Income Tax Act.
2. Applicability of section 37 over section 36(1)(ii) in determining the claim of the assessee.
3. Reasonableness of payment of remuneration based on commercial expediency.
4. Disallowance of rickshaw charges without sufficient reasons.

Analysis:

1. The appeal concerned the disallowance of a portion of remuneration paid to an employee, Shri V.P. Pithwa, under section 36(1)(ii) of the Income Tax Act. The Income Tax Officer (ITO) found the remuneration excessive and unreasonable, restricting the allowance and disallowing the balance. The Commissioner(A) upheld the disallowance, citing lack of commercial expediency and a collusive agreement. The assessee contended that the remuneration was justified and incurred out of business necessity.

2. The assessee argued before the Appellate Tribunal that section 37 should apply instead of section 36(1)(ii) in determining the claim. They relied on a Gujarat High Court decision and contended that the payment was reasonable and based on commercial expediency. The Tribunal agreed with the assessee, emphasizing the distinction between bonus/commission and salary, and the concept of commercial expediency. They found no evidence to support the CIT(A)'s view of the agreement as collusive, deleting the disallowance of remuneration.

3. The Tribunal highlighted the importance of commercial expediency in judging the reasonableness of remuneration payments. They emphasized that the burden lies on the department to prove any ulterior motives behind agreements, and found no evidence to support the CIT(A)'s conclusion. The Tribunal noted the consistency in remuneration rates over the years and the actual utilization of the remuneration by the employee, ultimately deleting the disallowance as it was based on erroneous application of law and facts.

4. Additionally, the Tribunal addressed the disallowance of rickshaw charges, finding the ITO's reasoning insufficient and unsupported by evidence. They deleted the disallowance, allowing the appeal in its entirety based on the lack of convincing reasons for disallowances made by the authorities.

Overall, the Tribunal ruled in favor of the assessee, emphasizing the importance of commercial expediency in determining the reasonableness of remuneration payments and expenses claimed, and highlighting the necessity for taxing authorities to provide substantial evidence to support disallowances.