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TMI Blog1965 (12) TMI 148X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed a deduction of ₹ 66,106, being the remuneration paid to the managing director, Shree A.K. Samonta, and the deputy managing director, Shree B. Samonta. The said amount of remuneration was paid to the two directors in accordance with article 42 of the articles of association of the company, which authorised payment of thirty per cent. of the net profits before depreciation. The managing director and the deputy managing director each received a sum of ₹ 33,053, being fifteen per cent. of the net profits of the company, before making any allowance for depreciation. Originally, under article 42 of the articles of association of the company, the entire thirty per cent. of the annual net profits of the company was to be paid by way of remuneration to the managing director only, with a minimum guarantee of ₹ 5,000. By a special resolution of the board of directors, passed on the 29th December, 1950, a deputy managing director was also appointed in accordance with article 40 of the articles of association and the remuneration of thirty per cent. was split up in equal proportion to be paid to the two directors. From the assessment year 1951-52 up to the assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the Appellate Tribunal was legally correct in applying the provisions of section 10(4A) of the Act on the ground that the question had not been raised before the Tribunal, they answered the second part of the question, as framed, in favour of the assessee, that is to say, the answer given by the Bench in that case was that the Appellate Tribunal was not legally justified in disallowing a portion of the remuneration paid to the two directors in accordance with the provisions of the articles of association of the company. But the said answer was given with reference to the particular facts of the case of that year as, in the final portion of the order, it was also observed: It will, however, be open to the department to re-examine, if they so choose, the question of reasonableness, excessiveness or otherwise of the allowance claimed by the assessee under the head 'remuneration paid to directors' for the assessment year 1958-59 in the light of the observations made above and come to its own conclusions in regard to that matter. We are, therefore, of the opinion that the earlier case was decided by this Bench with reference to the facts of that case and on the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne director and 10% of the net profits for all the directors in accordance with section 309 of the Indian Companies Act, 1956, although that provision did not apply to private limited companies. The Income-tax Officer, therefore, inferred that the said directors being in virtual control of the company, their remuneration had been fixed to their best advantage and without regard to the legitimate needs of the company. Apart from the other grounds mentioned by the Income-tax Officer, we would pointedly refer to ground No. (c). It is no doubt true that section 309 of the Indian Companies Act, 1956, applies to the case of a public limited company and not to a private limited company, but some guidance can legitimately be had from the provision of the proviso to sub-section (3) of section 309 of the Indian Companies Act, 1956. In principle, therefore, if the income-tax authorities think that payment of remuneration to the directors of the private limited company on the ratio of thirty per cent. of the net profits, when the company is making more profits is excessive and unreasonable, regard being had to the legitimate business needs of the company and the benefit derived by o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho has a substantial interest in the company within the meaning of sub-clause (iii) of clause (6C) of section 2, or (b) any allowance in respect of any assets of the company used by any person referred to in clause (a) either wholly or partly for his own purposes or benefit, if in the opinion of the Income-tax Officer any such allowance is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. It would be noticed that the word allowance mentioned either in sub-clause (a) or (b) has got reference to the word allowance mentioned in sub-section (2) of section 10, which says, such profits or gains shall be computed after making the following allowance, namely..... , and, then, it is provided in sub-section (4A) that, in the computation of the profits and gains of the company, the allowance in respect of any remuneration paid to a director or a person who has a substantial interest in the company is not to be allowed in full under certain conditions. It is manifest, therefore, that the remuneration paid to a director and claimed by way of allowance by the company in the computati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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