1988 (8) TMI 132 - AT - Income Tax

Issues Involved:
1. Reasonableness of salary and allowances paid to Mr. Dudeja.
2. Disallowance of medical expenses incurred by Mr. Dudeja.
3. Disallowance of travelling expenses of Mr. Dudeja.
4. Disallowance of consultation fees paid to Doshi Gandhi & Associates.
5. Disallowance of secretarial services fees paid to W.H. Targett & Co. Ltd.

Issue-wise Detailed Analysis:

1. Reasonableness of salary and allowances paid to Mr. Dudeja:
The Income Tax Officer (ITO) disallowed Rs. 35,500 of the Rs. 83,500 paid to Mr. Dudeja, considering it excessive and not justified under Section 40(C) read with Section 40A(5). The ITO argued that the payment was not commensurate with the business needs, given the company's minimal profit of Rs. 2,573. The CIT(A) granted partial relief, allowing Rs. 15,500 of the salary. The Tribunal emphasized the need to apply Section 40(C) over Section 40A(5) for directors and persons with substantial interest in the company. The Tribunal set aside the orders of the authorities below, remanding the matter back to the ITO to re-examine the salary's reasonableness based on the legitimate business needs and benefits derived by the company.

2. Disallowance of medical expenses incurred by Mr. Dudeja:
The ITO disallowed Rs. 8,736 on medical expenses, questioning the genuineness of the expenditure. The CIT(A) reversed this disallowance. The Tribunal upheld the CIT(A)'s decision, noting that the expenses were genuinely incurred and reimbursed by the assessee company to Contemporary Tea Co. Ltd., thus justifying the claim.

3. Disallowance of travelling expenses of Mr. Dudeja:
The ITO disallowed Rs. 3,366 on travelling expenses due to lack of evidence showing the expenses were incurred for business purposes. The CIT(A) confirmed this disallowance. The Tribunal allowed Rs. 803 as leave travel expenses, finding it directly covered by the terms of employment. However, the remaining expenses were not related to leave travel facilities and thus were not allowed.

4. Disallowance of consultation fees paid to Doshi Gandhi & Associates:
The ITO disallowed Rs. 4,575 paid to Doshi Gandhi & Associates, arguing that the company already had another Chartered Accountant. The CIT(A) upheld this disallowance. The Tribunal deleted the disallowance, emphasizing that the payment was genuine and made wholly and exclusively for business purposes, irrespective of the company having another Chartered Accountant.

5. Disallowance of secretarial services fees paid to W.H. Targett & Co. Ltd.:
The ITO disallowed Rs. 24,000 paid to W.H. Targett & Co. Ltd., misunderstanding the payment as being for services rendered by Mr. Dudeja. The CIT(A) upheld this disallowance. The Tribunal deleted the addition, clarifying that the payment was for legitimate secretarial and other services rendered by W.H. Targett & Co. Ltd., as per the agreement, and was made wholly and exclusively for business purposes.

Conclusion:
The Tribunal partly allowed both appeals, remanding the issue of salary and allowances paid to Mr. Dudeja back to the ITO for re-examination, while upholding the CIT(A)'s decisions on medical expenses and deleting the disallowances related to consultation fees and secretarial services fees.

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