1970 (5) TMI 5 - SC - Income Tax

Remuneration to director - AO disallowed the expenses holding that the allowance paid to the two directors was excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom - assessee plea that even if the taxpayer does not produce any evidence in support of the claim for allowance the ITO must independently collect evidence and decide that the allowance claimed is excessive or unreasonable is not accepted

Summary

Issues:
1. Interpretation of section 10(4A) of the Indian Income-tax Act, 1922 regarding the reasonableness of remuneration paid to directors.
2. Jurisdiction of the Income-tax Officer to disallow part of the remuneration under section 10(4A).
3. Application of section 66A(2) for appeal to the Supreme Court.
4. Requirement of evidence to support claims for remuneration under section 10(4A).

Analysis:
The judgment pertains to an appeal filed under section 66A(2) of the Indian Income-tax Act, 1922, concerning the reasonableness of remuneration paid to the managing director and deputy managing director of a private limited company engaged in mica mining. The Income-tax Officer, exercising power under section 10(4A), disallowed a portion of the remuneration as excessive or unreasonable, based on the company's articles of association. The Tribunal upheld this decision, leading to a reference to the High Court of Patna. The High Court affirmed the Income-tax Officer's jurisdiction under section 10(4A) to disallow part of the remuneration, emphasizing the officer's discretion in determining reasonableness based on business needs and benefits to the company.

Subsequently, the case was certified under section 66A(2) for appeal to the Supreme Court. However, a challenge was raised regarding the certificate's deficiency in specifying the substantial question of law. The Supreme Court, citing a previous case, deemed the certificate defective. Despite this, the court allowed the filing of a special leave petition. The court then delved into the merits of the appeal, analyzing the provisions of section 10(4A) which empower the Income-tax Officer to disallow excessive or unreasonable remuneration if it benefits directors disproportionately to the company's needs.

The court examined the history of disallowed remuneration in previous assessment years and the lack of evidence presented by the assessee to justify the claimed remuneration. It noted the Tribunal's decision to average remuneration over three years and the absence of evidence regarding the directors' contributions to the company's profits. The court emphasized the taxpayer's burden to provide evidence supporting remuneration claims under section 10(4A) and upheld the decisions of the taxing authorities and the Tribunal. The court rejected the contention that the Income-tax Officer must independently gather evidence to determine reasonableness in the absence of evidence from the taxpayer.

Ultimately, the court dismissed the appeal, affirming the decisions of the lower authorities regarding the disallowance of part of the remuneration under section 10(4A). The judgment highlights the importance of evidence in justifying remuneration claims and the discretionary power of the Income-tax Officer in assessing reasonableness based on business needs and benefits to the company.