Case: M/s. Mund &amp; Samont Company Private Limited Vs. Commissioner of Income Tax, Bihar &amp; Orissa

2. The assessee is a private limited company carrying on business in "Mica Mining". Under Article 42 of its Article of Association, remuneration payable to the Managing Director and the Deputy Managing Director of the assessee was fixed at 30% of the annual net profits subject to the minimum of Rs.In the year of account ending June 30, 1958, the assessee debited an amount of Rupees 66,106/paid to the Managing Director and the Deputy Managing Director. For the assessment yearax Officer while computing the taxable income in exercise of his power under Section 10tax Act allowed only Rs. 54,670/as remuneration for the Managing Director and the Deputy Managing Director, and disallowed the balance of Rs.He was of the view that the allowance paid to the two Directors was excessive or unreasonable having regard to the legitimate business needs of the Company and the benefit derived by or accruing to it therefrom. The Appellate Assistant Commissioner confirmed the order. In second appeal, the Tribunal held that theOfficer had jurisdiction under Section 10The Tribunal referred the following question to the High Court of Patna for opinion:"Whether in the facts and circumstances of the case, the Tribunal was correct in applying the provisions of Section 10tax Act to the case of the assessee and in disallowing Rupees 11,436/out of the remuneration paid to the Managing Director and Deputy Managing Director in accordance with the provisions of the Articles of Association of the Company?"The High Court held that theOfficer had jurisdiction under Section 10to disallow a part of the remuneration, and that the disallowance of a part of the claim cannot be said "to be unjustifiable or illegally disallowed by the authorities".4. In an application filed by the assessee the High Court certified the case under Section(2) stating that "as regards the value and nature of the case, it fulfils the requirements under Section(2) of theAct, 1922, and is a fit case for appeal to the Supreme Court."

Court's reasoning:
We have accepted the undertaking given by the Advocate on record to file a special leavethe Articles of Association, the rate of remuneration to be paid to the Managing Director and the Deputy Managing Director was fixed. The case was clearly covered by the terms for Section 10 (4A), and theOfficer had jurisdiction to consider whether the allowance was excessive or unreasonable having regard to the legitimate business needs of the Company and the benefit derived by or accruing to it therefrom.It appears that theOfficer had, for the assessment years59 disallowed a part of the remuneration paid to the Directors. The matter was carried to the Tribunal. For the assessment yearthe Tribunal allowed the claim in full: in respect for the yearthe Tribunal allowed an amount of Rs. 48,000/as against the claim for Rs.The assessment orders for the years59 are not before the Court. In his order relating to the assessment yearax Officer adopted the reasons recorded in his previous order relating to the earlier years, and held that the remuneration paid to the Directors was excessive or unreasonable having regard to the legitimate business needs of the Company and the benefit derived by and accruing to it therefrom. The Appellate Assistant Commissioner agreed with that view. He rejected the contention of the Company that the Managing Director and the Deputy Managing Director "had practically built up the business and it was due to theirservice and effort that large profits were earned by the Company." Apparently there was no evidence in support of such a case. He agreed with theOfficer that the remuneration allowed to the Directors should be at an average rate of the last three years. The Tribunal held that even though it was not proved that the remuneration was "influenced bytax Officer had determined the appropriate allowance by striking an average of remuneration charged in the account for the immediate preceding threeis however for theo establish by evidence that a particular allowance isno evidence was tendered by the assessee relating to the duties of the Managing Director and the Deputy Managing Director, the services rendered by them, the manner in which the profits earned by the assessee were enhanced by reason of their special aptitude or qualifications, the legitimate business needs of the assessee and the benefit derived by or accruing to the assessee in consequence of the services rendered by the Managing Director and Deputy Managing Director. In the absence of any such evidence, the finding recorded by theOfficer and confirm by the Appellate Assistant Commissioner and the Tribunal must be accepted.We are unable to agree with counsel for the assessee that even if thedoes not produce any evidence in support of the claim for allowance, theOfficer must independently collect evidence and decide that the allowance claimed is excessive or unreasonable having regard to the legitimate business needs of the assessee before the power under Section 10may be exercised.