TaxTMI 
TaxTMI 
1991 (11) TMI 9
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....dance with law ? 4. Was the Tribunal justified in determining the total remuneration of the directors having proceeded only on the basis of the salaries?" Shortly stated, the facts of the case are that the assessee is a closely held company which was incorporated on April 6, 1979. The shareholders of the company are the four directors and their respective wives. Prior to the formation of the said company, the directors were partners of the firm styled "Sonar Airotech Co." which, came into existence on January 1, 1974. The partnership business was taken over as a going concern by the assessee-company in terms of an agreement dated August 8, 1979. The business which the firm carried on was the same as that of the assesseecompany, namely, the manufacture and sale of sophisticated plant and instruments required in various major industries for air handling and gas treatment plants as well as pollution control equipment. The dispute in this case pertains to the disallowance of a part of the directors' remuneration in respect of the assessment years 1981-82 and 1982-83. There were in all four directors who were employed on whole time basis in the assessee-company. These directors were ....
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....------------------------------------------------- 1975-76 4.5 0.46 1976-77 11.01 1.00 1977-78 0.13 1.13 1978-79 11.70 1.23 1979-80 19.51 1.23 1980-81 11.79 0.62 (6 months only) 1981-82 34.23 2.59 1982-83 31.61 2.41 ------------------------------------------------------------------------------------------------------------------------------------------------ According to the Tribunal, the remuneration fixed for the directors was excessive considering the qualification of the directors as also the services rendered by them. The Tribunal noted that for similar type of work and with similar qualification every director drew much less salary in the erstwhile partnership firm. The Tribunal also found that although there had been an increase in the turnover of the business during the previous year relevant to the assessment years 1981-82 and 1982-83, the profits shown were less than the profits disclosed in the previous year relevant to the assessment year 1979-80. The Tribunal, therefore, held that the remuneration paid by the assessee-company to its directors was, excessive having regard to the business needs of the assessee-company. Taking an overall vi....
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....rgins. The margin drawn is arbitrary and without a nexus with any materials affording a basis. There is one more factual inaccuracy that vitiates the Tribunal's decision. The allegation that has weighed with the Tribunal very heavily is that the profit shown for the assessment year 1981-82 is less than the profit disclosed by the same unit as a partnership firm for the assessment year 1979-80. This is contrary to the facts brought out by the first appellate authority which clearly indicate that the profit for the assessment year 1979-80 was Rs. 3,17,590 while the aggregate salary paid to these very directors as the erstwhile partners was Rs. 1,22,000, the profit to the exclusion of the partners' remunerations being around Rs. 1,96 lakhs. The assessee-company's profit for the instant assessment years was Rs. 2.41 lakhs and Rs. 2.34 lakhs (after reduction of the directors' remuneration) for 1981-82 and 1982-83, respectively. On the contrary the income of the erstwhile firm in the assessment year 1979-80 after payment of the remuneration to these very directors as partners was in the neighbourhood of Rs. 1,96,000. This actually belies the Tribunal's observation that the profit show....
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....experience cannot be ignored in considering the legitimate business needs of the company. In this case, it bears repetition to say that, it has been found as a matter of fact by the Tribunal as well as by the lower authorities that each of the four directors had long experience. They were also employed in Flakt India Ltd. Since January, 1971, they were the partners of the firm styled "Sonar Airotech Co.", whose business was ultimately taken over as a going concern by the assessee-company in terms of the agreement dated August 8, 1979. It was nobody's case that the services of these four directors were not required by the assessee-company. The legitimate business needs of the company must be considered not as a tax collector but as a prudent businessman before disallowing any part of the remuneration paid to them. The finding of the Tribunal was that the turnover had vastly increased. It was clearly noted by the Tribunal that the turnover of the business was Rs. 19.51 lakhs in, the previous year relevant to the assessment year 1979-80, whereas during the two years under reference the turnover had gone up to Rs. 34.23 lakhs and Rs. 31.61 lakhs, respectively. The Tribunal disallowe....