Director commission linked to profits was not excessive where shareholder approval and business needs supported the payments.

Commission paid to the Chairman and two Directors was examined under section 40(c) of the Income-tax Act for excessiveness or unreasonableness. The payments were sanctioned by shareholder resolution, linked to net profits as a performance incentive, and reduced when profits fell. As the Department did not show that the remuneration was excessive having regard to the company's business needs or any comparable case, the disallowance was not justified and the commission was held not liable to be treated as excessive or unreasonable.

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Issues: Whether commission paid to the Chairman and two Directors was excessive or unreasonable under section 40(c) of the Income-tax Act, 1961 and therefore liable to disallowance.

Analysis: The commission was sanctioned by shareholder resolution and was linked to net profits as an incentive to secure higher performance. The company's turnover and profits had increased substantially, the claim for commission had not been made in the loss year, and the subsequent reduction in profits was reflected in a corresponding reduction of commission. The Department did not establish that the payments were excessive having regard to the legitimate business needs of the company or by reference to any comparable case.

Conclusion: The disallowance was not justified and the commission payments were not liable to be treated as excessive or unreasonable; the issue was decided in favour of the assessee.

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