1987 (1) TMI 195 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of a sum of Rs. 28,000 paid to Directors as sitting fees.
2. Applicability of Section 40A of the Income Tax Act.
3. Reasonableness of the sitting fees in relation to the business needs and benefits.

Issue-wise Detailed Analysis:

1. Disallowance of a sum of Rs. 28,000 paid to Directors as sitting fees:
The assessee, a private limited company engaged in the manufacture of cement pipes, contested the disallowance of Rs. 28,000 paid to its Directors as sitting fees. The Income Tax Officer (ITO) and the Commissioner of Income Tax (Appeals) [CIT(A)] had disallowed this amount on the grounds that it was not laid out for the purpose of business. The Directors were actively involved in the company's activities, and the sitting fees were increased over the years as the company's financial position improved. The ITO compared the company to public limited companies, which typically have a substantial office managerial staff and a ceiling on sitting fees, and found the fees excessive.

2. Applicability of Section 40A of the Income Tax Act:
The ITO did not explicitly invoke Section 40A but applied its principles, questioning the legitimacy and reasonableness of the expenses. The CIT(A) also referred to Section 40A, suggesting that the payments had elements of personal or non-business expenditure. The Tribunal, however, found that the ITO's approach was flawed as it did not consider the unique circumstances of the assessee, such as the lack of a substantial office establishment and the significant contributions of the Directors to the company's growth.

3. Reasonableness of the sitting fees in relation to the business needs and benefits:
The Tribunal noted that the Directors had qualifications and expertise relevant to the business and were involved in day-to-day operations. The fees were increased gradually and were justified by the company's improved financial performance. The Tribunal rejected the ITO's and CIT(A)'s comparisons to public limited companies, noting that there is no statutory ceiling on sitting fees for private companies and that the fees paid were reasonable given the Directors' contributions. The Tribunal emphasized that the overall picture, including the company's turnover, profits, and the Directors' qualifications and work input, supported the reasonableness of the fees.

Conclusion:
The Tribunal concluded that neither Section 37 nor Section 40A could be invoked to disallow any portion of the sitting fees. The claim of Rs. 28,000 was found to be reasonable, and the appeal was allowed, reducing the income by this amount. The Tribunal's decision was based on a pragmatic view of the facts and the legitimate needs and benefits to the business.