1981 (7) TMI 82 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of remuneration under Section 40(c) of the Income Tax Act.
2. Inclusion of commission in remuneration for the purposes of Section 40(c).
3. Grant of relief under Section 80J of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Remuneration under Section 40(c):

The assessee, a limited company, paid Rs. 2,40,000 to its managing directors during the relevant assessment year. The Income Tax Officer (ITO) disallowed Rs. 96,000 under Section 40(c). This disallowance was confirmed by the Commissioner (A), who rejected the assessee's contention that Section 40(c) applies only if the ITO finds the expenditure excessive or unreasonable. The Commissioner (A) concluded that the remuneration was excessive based on the company's profit and loss from 1966 to 1974.

The assessee's counsel argued that Section 40(c) can only be invoked if the ITO is satisfied that the expenditure is excessive or unreasonable. The monetary limits in sub-clauses (a) and (b) apply only after such a determination. The counsel emphasized the term "such expenditure" in the section, which refers to expenditure deemed excessive or unreasonable.

The Tribunal agreed with the assessee's counsel, stating that Section 40(c) aims to prevent excessive and unreasonable remuneration. The ITO must first determine the excessiveness or unreasonableness of the expenditure before applying the monetary limits. The Tribunal noted that the Commissioner (A) had jurisdiction to examine the reasonableness of the expenditure, but on the facts, the Commissioner (A) did not correctly conclude the reasonableness. The matter was remitted back to the Commissioner (A) to allow the assessee to present its case regarding the reasonableness of the payment.

2. Inclusion of Commission in Remuneration for the Purposes of Section 40(c):

The assessee alternatively claimed that the commission received by the managing directors should not be included in the remuneration for the purposes of Section 40(c). The counsel referred to case law and definitions to support this argument.

The Tribunal rejected this claim, stating that commission is a mode of computing salary and should be included in remuneration. The Tribunal distinguished between commission paid to partners in a firm and commission paid to employees or directors. The Tribunal concluded that the ITO correctly included the commission as part of the remuneration.

3. Grant of Relief under Section 80J:

The ITO rejected the assessee's claim for relief under Section 80J, noting that details were not furnished. The IAC approved this rejection, stating that the claim was previously rejected for the assessment years 1973-74 and 1974-75 because it was an expansion and not a new unit, and profits were not ascertainable due to the lack of separate books.

The Commissioner (A) sent the matter back to the ITO for further investigation on the facts of the assessee's case for relief under Section 80J. The Tribunal saw no reason to interfere with this part of the Commissioner's order, as the matter was still under investigation.

Conclusion:

The appeal was partly allowed, with the Tribunal remitting the issue of the reasonableness of the remuneration back to the Commissioner (A) for further consideration, while upholding the inclusion of commission in remuneration and the Commissioner's order regarding the investigation of the claim under Section 80J.