| Case ID |
de74f65e-ae45-462a-bcf3-77b1f0bf8557 |
| Body |
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| Case Number |
IT REFERENCE NO. 290 OF 1983 |
| Decision Date |
Sep 02, 2003 |
| Hearing Date |
|
| Decision |
The Tribunal was not legally justified in disallowing the amount out of remuneration payable to the directors of the assessee-company. The decision restated that it is not for the Income-tax authorities to determine what would be commercially expedient, and that is the function of the company or the firm. The order of the Commissioner (Appeals) was restored, emphasizing that the increase in directors' salaries was justified due to the company's performance and sales increase. The case highlights the principle that the Assessing Officer must evaluate from the perspective of a prudent businessman, considering commercial expediency rather than personal judgment. |
| Summary |
This case revolves around the interpretation of Section 40(c) of the Income-tax Act, 1961, concerning the disallowance of excessive remuneration paid to directors. The Allahabad High Court ruled that it is not within the jurisdiction of the Income-tax Officer (ITO) to determine what constitutes a reasonable salary for company directors unless such salaries are clearly exorbitant or fictitious. The court emphasized that the assessment should be made from the viewpoint of a prudent businessman, focusing on the commercial expediency of the expenditures incurred. The judgment reinstated the earlier decision of the Commissioner (Appeals), effectively allowing the salary increases based on the company's improved sales performance. This case is significant for understanding the limits of tax authority in scrutinizing corporate remuneration practices and reinforces the principle of allowing legitimate business expenses. |
| Court |
Allahabad High Court
|
| Entities Involved |
|
| Judges |
M. Katju,
Umeshwar Pandey
|
| Lawyers |
Vikram Gulati,
R.K. Gulati
|
| Petitioners |
Abbas Wazir (P.) Ltd.
|
| Respondents |
Commissioner of Income tax
|
| Citations |
2003 SLD 3219 = (2003) 265 ITR 77
|
| Other Citations |
CIT v. Edward Keventer (P.) Ltd. [1972] 86 ITR 370 (Cal.),
CIT v. Edward Keventer (P.) Ltd. [1978] 115 ITR 149 (SC),
Pioneer Spring & Steel Concern (P.) Ltd. v. CIT [1982] 135 ITR 522 (Cal.),
Extrusion Process (P.) Ltd. v. CIT [1979] 119 ITR 287/2 Taxman 64 (Bom.),
Natesan & Co. (P.) Ltd. v. CIT [1964] 51 ITR 386 (Mad.),
Newtone Studios Ltd. v. CIT [1955] 28 ITR 378 (Mad.),
CIT v. Arcuttipore Tea Co. Ltd. [1992] 197 ITR 588 /[1993] 68 Taxman 398 (Cal.),
Sassoon J. David & Co. (P.) Ltd. v. CIT [1975] 98 ITR 50 (Bom.),
CIT v. Machinery Mfg. Corpn. Ltd. [1992] 198 ITR 559/[1993] 66 Taxman 143 (Cal.),
Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 T.C. 155 (HL),
Morgan v. Tate & Lyle Ltd. [1954] 26 ITR 195 (HL),
Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC),
CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC)
|
| Laws Involved |
Income-tax Act, 1961
|
| Sections |
40(c),
40A(2)
|