TaxTMI 
TaxTMI 
1981 (7) TMI 82
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee has pointed out that the provisions of s. 40 (C) can be invoked only in circumstances specified t herein viz. that the ITO is satisfied about the expenditure or allowance being excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by and accruing to it therefrom. The limit laid down in sub-cls. (a) & (b) of Rs. 72,000 per year or Rs. 6,000 per month would come in only after the ITO has come to a clear conclusion about the excessiveness or unreasonableness of the remuneration. If the remuneration is reasonable having regard to the work performed by the director or person having substantial interest in the company and cannot by objective standards be regarded as excessive from the point of view of the company's business, s. 40(c) does not apply and the subsequent provision in the same clause dealing with a limitation on remuneration does not also apply. The ld. counsel has laid stress on the words "such expenditure" obtaining in the last line of the section. It could refer only to the expression "such" the earlier part of the sentence. The latter would clearly be governed by the criteria of excessiveness or unreasonableness....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he ground of reasonableness and the ITO's or derivatively the Commr. (A) power to decide the question of reasonableness. 4. Alternatively it is claimed that at any rate the commission received by the assessee at the rate of 5 per cent on the net profit of the company should not be included in the remuneration for the purposes of s. 40(c). In support of his case reference is made to the decision in Avon Cycle's case (1980) 18 CTR (P&H) 231 : (1980) 126 ITR 448 (P&H). Referring to the definition of remuneration obtaining in Kohler's Dictionary 4th Edition page 92, it is pointed out that this clearly excludes an item like commission. Analogously the provisions of other sections like s. 36(1)(ii) also support the assessee's case. According to the ld. counsel for the assessee the decisions in (1980) 121 ITR 551 (Kar) and (1973) 90 ITR 439 (Mad) also support his case. 5. For the Department stress is laid on the orders of the authorities below. The ld. counsel has pointed out that the purpose of cl. (c) of s. 40 being to limit remuneration to a particular extent consistent with the Directive Principles of the Constitution the limit of Rs. 72,000 has been fixed. Whether the remuneratio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e thing as was referred to earlier. What is referred to earlier is expenditure which in the opinion of the ITO is excess or unreasonable. A naturally corollary of this is that unless there is a finding of unreasonableness the provisions of s. 40(c) are not attracted at all. And it is only when s. 40(c) comes into operation the monetary limits are to be applied. 7A. There must be no incongruity in this interpretation of the provisions as suggested by the ld. counsel for the Department. The object of the clause is to restrict payment where it is not reasonably necessary for the business having regard to its legitimate need etc. The test to be applied by the ITO or on appeal by the Appl. Authorities is bound to be subjective to some extent and however much they would try to be objective likely to lead to estimates. It is not unfair that in such a case having found excessiveness or unreasonableness in the remuneration the scope given to the authorities for the purpose of exercising their discretion is limited to the monetary figure of Rs. 72,000. Where there is a genuine case of an assessee requiring the services of an outstanding person who could not be availed of for a lesser remun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....He has of course referred to the profit or loss for the various years and the remuneration granted to the managing directors. There are several other criteria which justify payment of remuneration or would go to indicate the legitimate business needs of the company and benefit derived by or accruing to it therefrom. The Commr. has neither applied any test on these points nor given the assessee an opportunity to substantiate their claim for the payment of the remuneration they paid On this point we therefore remit the matter back to the Commr. to give an opportunity to the assessee to present his case as to the reasonableness of the payment and case if the assessee is not able to establish his case of reasonableness to apply the provisions of s. 40(c). The Commr. should give an opportunity to the ITO also. 7D. We would like to mention that the alternate ground of the assessee that commission should not be included in remuneration so called cannot be accepted. Apart from the decisions cited the main claim made is that cl. (b) of s. 40 does separately refer to commission and remuneration. In cl. (c) also therefore the two should be separately identified. We do not think this inferen....