Directors' Salary Disallowance Upheld Based on Sister Concern Turnover Ratio

The Tribunal upheld the disallowance of salary and commission paid to directors for assessment year 1999-2000, based on turnover ratio between sister concern and assessee company. The disallowance was deemed justified as directors provided services to both entities, and payment allocation was proportionate. The Tribunal found no fault in the CIT(A)'s decision and dismissed the appeal, citing the intention to reduce taxable income and the directors' dual roles.

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Issues:
1. Disallowance of salary and commission paid to directors.
2. Applicability of Section 309 of the Companies Act.
3. Disallowance based on turnover ratio between sister concern and assessee company.

Issue 1: Disallowance of salary and commission paid to directors
The appeal was against the disallowance of Rs.2,11,858/- out of the salary and commission paid to the appellant's directors for assessment year 1999-2000. The AO observed that the directors were working for both the assessee and a sister concern, incurring common expenses. The disallowance was based on the turnover ratio between the companies. The appellant argued that the disallowance was unjustified as the payments were for services rendered and were wholly for business purposes. The AO and CIT(A) upheld the disallowance, stating that the intention was to reduce taxable income, citing the decision in Mc Dowells V/s CIT. The Tribunal found the disallowance justified, as the directors rendered services to the sister concern as well, and the salary allocation was proportionate based on turnover.

Issue 2: Applicability of Section 309 of the Companies Act
The appellant claimed that the salary and commission were within the limit prescribed under Section 309 of the Companies Act. However, the AO contended that Section 309 applied to public limited companies, and the appellant failed to explain why the directors provided free services to the sister concern. The Tribunal noted that the directors indeed provided services to the sister concern and that the salaries were not debited in the sister concern's accounts. Therefore, the payment allocation was not exclusively for services to the assessee company.

Issue 3: Disallowance based on turnover ratio between sister concern and assessee company
The appellant argued that the disallowance was unjust as it was based on a comparison with the sister concern and the companies were separate legal entities. The Tribunal found that the directors worked for both companies, incurring common expenses. The disallowance was upheld as the salary payment was not solely for services to the assessee company. The Tribunal declined to interfere with the CIT(A)'s decision and dismissed the appeal.

In conclusion, the Tribunal upheld the disallowance of salary and commission paid to directors, considering their services to the sister concern and the turnover ratio between the companies. The Tribunal found no fault in the CIT(A)'s decision and dismissed the appeal.

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