1967 (1) TMI 31 - HC - Income Tax

Assessee a company, fixed remuneration of two directors, who were also share holders of the company by passing resolution - in view of the provisions of s. 10(4A) the remuneration allowed by the Tribunal to directors is not an allowable business expenditure u/s 10(2)(xv)

Summary

Issues:
Interpretation of section 10(2)(xv) of the Income-tax Act, 1922 regarding allowable business expenditure for remuneration of directors. Application of section 10(4A) in determining the legitimacy of remuneration paid to directors. Consideration of whether remuneration to directors was justified as a return for financing the enterprise or as a means to distribute expected profits.

Analysis:
The case involved a reference made by the Income-tax Appellate Tribunal regarding the allowability of remuneration paid to directors under section 10(2)(xv) of the Income-tax Act, 1922. The Tribunal questioned whether the remuneration of Rs. 500 per month to two directors was a legitimate business expenditure. The directors in question were students residing in a different city and had no substantial background to justify the remuneration. The Tribunal allowed the remuneration based on the premise that they were entitled to some amount for financing the enterprise.

The Appellate Assistant Commissioner found the resolution fixing the remuneration to be irregular and intended to distribute profits to director-shareholders to avoid income tax. However, he allowed a portion of the remuneration as fees for attending board meetings. The Tribunal, on the other hand, upheld the allowance of Rs. 500 per month to each director, considering them as financiers who needed compensation for their investment in the company.

The High Court analyzed the provisions of section 10(2)(xv) and 10(4A) of the Act. Section 10(2)(xv) allows for the deduction of expenditure incurred exclusively for the business, while section 10(4A) restricts allowances for excessive or unreasonable remuneration to directors. The Court concluded that the remuneration to the directors was not warranted by business considerations but seemed to be a means of distributing profits. As such, the Court held that the remuneration was not an allowable business expenditure under the Act.

In summary, the Court ruled against the assessee-company, stating that the remuneration to the directors was not a legitimate business expenditure under section 10(2)(xv) of the Income-tax Act, 1922. The Court emphasized that the remuneration was not justified by business needs and appeared to be a method of distributing profits. Consequently, the Court directed the assessee to pay costs to the department and answered the question against the company.