1979 (9) TMI 112 - AT - Income Tax

Summary

Issues:
1. Disallowance of commission paid to the Chairman and two Directors by the ITO.
2. Justification for commission payments and resolution passed by the general body of the company.
3. Interpretation of Section 40(c) regarding excessive or unreasonable expenditure on remuneration or benefits to directors.
4. Comparison with relevant legal precedents and decisions.

Analysis:

1. The main issue in this case was the disallowance of commission paid to the Chairman and two Directors by the ITO. The ITO disallowed the commission paid in excess of the annual salary in each case, totaling to Rs. 91,183. The contention was that the commission payments were excessive.

2. The assessee contended that the remuneration and commission were in line with a resolution passed by the general body of the company. The Directors were experienced and responsible for the company's prosperity. The commission was seen as an incentive for higher profit earning linked to the net profit. The AAC observed that good management played a significant role in profit-making, and there was no necessity to disallow any part of the commission.

3. The interpretation of Section 40(c) was crucial in determining whether the commission payments were excessive or unreasonable. The Department argued that the payments were excessive within the meaning of the section. However, the assessee argued that the commission payments were reasonable and linked to the profits earned, providing an incentive for the Directors to maximize profits. The Tribunal found the basis of commission payment reasonable, considering the decline in profits in the succeeding year.

4. The Tribunal compared the case with relevant legal precedents, including the decision of the Supreme Court in CIT vs. Edward Keventer Pvt. Ltd. The Tribunal noted that the Department failed to demonstrate that the payments were excessive in light of legitimate business needs or comparable cases. The Tribunal upheld the AAC's order, concluding that no interference was warranted.

In conclusion, the Tribunal dismissed the appeal, affirming the decision that the commission payments to the Chairman and Directors were reasonable and in line with the company's legitimate business needs, as per the resolution passed by the general body of the company.