1983 (5) TMI 9

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....the major profit to the directors. Although, on facts found, the application under s. 256(1) of the assessee for referring the question of law arising out of the order passed by the Tribunal was rejected, it was allowed by this court under s. 256(2). Consequently, the Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, referred the following question of law : " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disallowing part of the commission paid to the directors of the assessee-company for the assessment year 1975-76 ? " In the return filed for the assessment year 1975-76, the assessee, carrying on business of export of carpets, claimed deduction of Rs. 86,158 paid by it to four of....

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....with profit to bold that it was excessive. ITO and Commissioner (Appeals) laboured under misapprehension that the assessee took over the business of M/s.Kashi Prasad and Sons. In fact the assessee-company was incorporated on July 3, 1971, when the firm, M/s. Kashi Prasad and Sons, was continuing and doing business of carpets and exports and was dissolved on November 3, 1971, only. The Tribunal found that two of the directors joined in October, 1971. Prior to this, they were working in their individual capacity and also as karta of their respective HUF. For this they were paid approximately Rs. 2,500 and Rs. 3,000 p.m. When they joined the company it was understood that they shall function as whole-time directors and shall not undertake in f....

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....rofit of the company and the payments made to the directors was reduced to 3/5ths and 2/5ths. Further, the Tribunal found that the assessee had not claimed any salary for its executives and if what was paid to them before they joined the company is taken into consideration, then, even after four years of untiring labour, they were getting nearly the same. But the Tribunal, despite recording all this finding, could not shake off the feeling that the major chunk of profits was taken away by the directors. In doing so, it omitted to consider that excessiveness or unreasonableness under s. 36(1)(ii) or s. 40(c) have to be considered from the standpoint of a prudent businessman. The company was incorporated in 1971. Since then its directors w....