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TMI Blog1988 (8) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 5,500 . . Rs. 83,500 The agreement in terms of which the aforesaid payments were made to Shri Dudeja is dt. 17th Sept., 1979 and it, inter alia, stipulated that Shri Dudeja would be appointed as Senior Executive at Calcutta office on the following terms and conditions as from 20th Sept., 1979: "(i) Basic Salary: Rs. 5000 per month. (ii) Servant allowance: Rs. 500 per month. In addition to the above, you will be entitled to: (1) Suitable accommodation inCalcutta, furnished/unfurnished; (2) Four weeks' leave per annum; (3) Leave travel facility for self and family. (4) Free medical facility for self and family and (5) Retirement or terminal gratuity as applicable to the senior staff of the company in accordance with rules and regulations in that behalf in force from time to time at rate not exceeding one-half month's salary for each completed year of service subject to a maximum of Rs. 30,000." As noted earlier, Shri Dudeja became the Managing Director of the company during this previous year and acted in that capacity for the first 11 months of the previous year. Apart from being Managing Director, he held 141 shares of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn over Rs. 6,83,554 which includes commission of Rs. 53,476 and other receipts. Keeping in view the turnover and profits of the company, it is considered that total remuneration (salary, allowances and other perquisites) at Rs. 4000 per month is much more reasonable keeping in view all the need of the company and balance amount of Rs. 35,500 is disallowed under s. 40(C) r/w s. 40A(5) as it is considered that sum of Rs. 35,500 is excessive payment which is not justified." 3. The ITO also pointed out that the facts of the present case have no similarity with those of CIT vs. Edward Kaventer Pvt. Ltd. (1978) CTR (SC) 164 : (1978) 115 ITR 149 (SC) on which the assessee had placed reliance. He further pointed out that there is no evidence regarding the duties and functions performed by Mr. Dudeja in the matter and how the profits of the company have been enhanced by the Special aptitude and qualification of Mr. Dudeja. He has been paid excessive salary only as he has 141 shares out of 502 shares and has substantial interest in the company. 4. In addition to the above disallowance, the ITO also disallowed Rs. 8736 on account of "excessive medical expenses incurred by Mr. Dudeja." Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... granted relief to the extent of Rs. 15,500 on account of salary and Rs. 8736 on account of medical expenses. 9. Both the assessee and the Revenue are aggrieved of the aforesaid order of the learned CIT(A). The assessee's contention is that so far as remuneration paid to Shr Dudeja is concerned, it is wholly justified taking into account his credentials and market price. According to the learned counsel, it was because of his services that the company was able to expand considerably its business. In his opinion, the disallowance in this case could not be questioned in terms of s. 40(C) of the IT Act, 1961 and that it was s. 40A(5) which alone should be applied in his case and under that section, payments to the extent of Rs. 72,000 could not be touched. It is only beyond that amount that the disallowance could be made. In support of the above proposition, reliance is placed by the learned counsel for the assessee on the judgment of the Hon'ble P H High Court in CIT vs. Avon Cycle Pvt. Ltd. (1980) 18 CTR (P H) 231 : (1980) 126 ITR 448 (P H) at 458. Reference is also made to the judgment of CIT vs. Patialal Flour Mills Co. Pvt. Ltd. (1980) 14 CTR (P H) 102 : (1980) 123 ITR 7 (P H). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to above are concerned, the sum of Rs. 803 should, in our opinion, be allowed as leave travel expenditure of Shri Dudeja. The bill mentions the purpose of the travel and, therefore, the amount is directly covered by the terms of employment of Shri Dudeja. The other expenses are not relatable to leave travel facility provided to Shri Dudeja. As such it is not possible to allow the same. 14. As regard the salary payable to Shri Dudeja, there is no merit whatsoever for the contention of the assessee that it is the provisions of s. 40A(5) which apply to the present case and not the provisions of s. 40(C). Clearly, Shri Dudeja being the Managing Director of the company as also the substantial share holder of the company is covered by the provisions of s. 40(C). Sec. 40A(5) would not come into play with regard to his salary. The decision of the P H High Court in CIT vs. Avon Cylce Pvt. Ltd. does not at all support the assessee's case as the learned counsel had tried to make it out. On the contrary, it is noticed that what the Lordships had stated was that "in case the provisions of s. 40(C) are applicable, the provisions of s. 40A will not apply." It is the reverse what the learned c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit has continued to be as small or has declined, the test in question would become operative. Legitimate business needs of the company is also an objective test and has to be examined with reference to the state of business of the company before the employment of the Director in question and the same has to be contrasted with the position with the state of the business as it developed after his employment. The orders of the authorities below do not appear to have undertaken the above exercise and comparative data for earlier years and the later years has not been placed on record before us. We are, therefore, unable to resolve this controversy due to the paucity of the relevant data. For this purpose, it would, in our opinion, be fair and just if the orders of the authorities below are set aside and the order is restored to the ITO with a view to examine this question afresh bearing in mind the twin principles laid down in s. 40(c). It takes care of ground No. 1 in Revenue's appeal. 16. Rs. 8736 represented medical expenses incurred by the assessee company on the treatment of Mr. Dudeja. The reason given by the ITO to reject the said claim has no validity for the doubts expresse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affidavits, returns statements, writtings and documents as may be necessary or expedient. (C) Supervision of all matters relating to insurance and the signing, and making of all documents relating thereto and realisation of claims and dues, thereunder. (D) To call all meetings of the Board of Directors of the Company and all General Meetings of the company and also to prepare the minutes of such meetings in the manner prescribed in the Companies Act. (E) To pay and be responsible for payment of all dividends declared by the company within the prescribed time. (F) Make, keep and file or caused to be made, kept and filed all such registers, returns and statements as statutorily required to we made, kept and filed." It was for rendering the above services that Rs. 2000 were being paid to the aforesaid company. This arrangement is again at arms length and there is no nexus of this payment with V. Dudeja as wrongly presumed by the authorities below. The payment has been made wholly and exclusively for the purpose of the assessee company's business. It has, therefore, to be allowed in full. Accordingly, we delete the addition in question. 19. With these observations, we trea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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