1967 (1) TMI 25 - HC - Income Tax

Expenses Pre-Incorporation Not Deductible: High Court Decision on Director Remuneration

Shri Thakurji Engineering Works Pvt. Limited Versus Commissioner of Income-Tax, UP

Shri Thakurji Engineering Works Pvt. Limited Versus Commissioner of Income-Tax, UP - [1968] 67 ITR 515 Issues:1. Deductibility of remuneration paid to directors for a specific period under the Income-tax Act.Detailed Analysis:The case involved a reference under section 66(2) of the Indian Income-tax Act of 1922 regarding the deductibility of remuneration paid to directors for a specific period. The Tribunal sought the opinion of the High Court on whether the remuneration paid to the directors for the period April 7, 1951, to July 13, 1951, was a permissible deduction under the Income-tax Act.The facts of the case revealed that a private limited company was incorporated on July 13, 1951, taking over two businesses previously carried on by a Hindu undivided family. The shareholders of the company approved a monthly salary of Rs. 600 for four directors from April 7, 1951. However, the Income-tax Officer disallowed the balance of the remuneration as unreasonable and excessive, allowing only Rs. 225 per month based on a subsequent resolution reducing the salary.The Tribunal, in its decision, allowed the remuneration claimed by the assessee from the date of incorporation to the end of the accounting year but refused to consider the payments made for the period before the company's incorporation. The Tribunal held that the business belonged to the Hindu undivided family before incorporation, and the directors could not be considered as such for that period.The High Court analyzed the unilateral action of the assessee in claiming assessment as a company and emphasized that the expenses incurred before incorporation could not be considered as business expenses of the company. The Court held that the deductions under section 10(2)(xv) of the Act could not be made for the period when the business was still under the Hindu undivided family.Ultimately, the High Court answered the reference question in the negative, ruling against the assessee. The Court also directed the assessee to pay costs of the proceedings to the income-tax department. The judgment highlighted the importance of adhering to legal provisions and the unilateral nature of actions taken by the assessee in determining tax liabilities.