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Judgment
The question of law raised in all these appeals, barring ITA No. 4/2004, is whether the opinion expressed by the Assessing Officer, that extra
expenditure incurred for payment of enhanced salaries to the Directors of the Appellant Assessee and their relatives was excessive or
unreasonable, having regard to services rendered by them to the Assessee for which excess salary was paid, was correct or not, in the facts and
circumstances of the case. It was contended that in order to express such opinion, it was obligatory to take note of the facts justifying the
legitimacy of the need of the business for making such payment, which was not attempted to be done.
Learned Counsel appearing on behalf of the Revenue submitted that the legitimacy of the need of business, justifying such payment, is not alone
the criteria for expressing such opinion. He added that the opinion may be formed on the basis of benefit derived by the Assessee by making such
payment. It was contended by him that on the facts, as found and which are not in dispute, neither there was any legitimacy for the payment as a
need of the business of the Assessee, nor the payment made accrued any benefit in favour of the Assessee.
The facts of the case suggest, to which there appears to be no controversy, that remuneration payable to the Directors of the Assessee was
increased to Rs. 67,73,383 during the assessment year 1998-99 from Rs. 34,77,890 paid in the assessment year 1997-98, in addition to
substantial increase of remuneration of employees related to the Directors of the Assessee. There is also no dispute that highest increase given to
an employee, who was not related to the Directors of the Assessee, was 40%. The Assessee justified such increased payment of remuneration on
the ground that it, being a deemed Public Limited Company since July 28, 1969, could not pay remuneration to its Directors beyond a particular
amount mentioned in Schedule 13 to the Companies Act and, accordingly, they were being paid remuneration within that ceiling until the said
Schedule to the Companies Act was altered. It was contended that as the ceiling prescribed in the said Schedule was altered during the relevant
assessment year, the Assessee could increase remuneration payable to its Directors and, as such, remuneration, which remained locked up for
more than four years, had been increased. It was contended that having regard to the increase in salaries given even to the Government employees,
taking note of inflation then prevalent, the increase given was not unjustified, nor can be said to be excessive. It was slated that such increased
salary was for the legitimate need of the business of the Assessee, inasmuch as those Directors and employees would have had left the Assessee, if
their remuneration had not been increased despite being authorised to increase the same in view of the alteration in Schedule 13 to the Companies
Act. The Assessing Officer found that a genuine worker of the Assessee unrelated to any of the Directors of the Assessee, by dint of his efforts
and merits, could secure a maximum increase in his remuneration to the tune of 40% and, accordingly, felt that, in such circumstances and in
particular when salaries were not increased for four years, increase of remuneration of Directors and other employees of the Assessee related to
the Directors, was justified only up to 40% and beyond that was needless, excessive and unreasonable expense shown by the Assessee in its
return. He, accordingly, concluded the matter.
The Appellate Commissioner felt, when remuneration was paid within the permissible limit as prescribed in the Companies Act, it cannot be said
that increase thus effected in the remuneration was excessive or unreasonable. The Appellate Commissioner did not go into the question of need or
benefit. As it appears, the same was done in view of a decision of the Income Tax Appellate Tribunal rendered in the case of the self same
Assessee for the assessment years 1991-1992 and 1992-93.
When the matter went before the Tribunal, the Tribunal noted its earlier decision rendered in the case of the Assessee for the assessment years
1991-1992 and 1992-1993, where it was categorically held that, in order to bring any amount within the four corners of Section 40 A(2)(a) of the
Income Tax Act, a duty has been cast upon the Assessing Officer to show that the payment is really excessive and unless such duty is discharged,
there can not be any question of making the disallowance. The Tribunal found, as a fact, that in the instant case the increase of remuneration did not
reflect any significant increase in the volume of business or in the income of the Assessee and, accordingly, concluded that excess remuneration
paid was not wholly justified for legitimate need of the business of the Assessee, nor the same wholly benefited the Assessee. The Tribunal,
however, found, as a fact, that remuneration of the Directors and their relatives was not increased in the earlier four years as well as in the
subsequent years. Taking note of the same, the Tribunal felt that, instead of 40%, 60% increase in such remuneration was justifiable.
We are also at adi dem with the Tribunal to that effect for the assessment years 1998-1999 and 1999-2000. We, however, feel that 70%
increase in the remuneration should be deemed to be justified for the assessment year 2000-2001, inasmuch as gross turnover of the Assessee
stood increased to Rs. 59, 31, 33, 464 in the assessment year 2000-2001 from Rs .49,73,37,989 and, at the same time, 80% of such increase
would be justified for the subsequent assessment years in respect whereof appeals have been preferred, which are being disposed of under this
order, as the same also raise the same question, as has been raised in the first appeal dealt with herein, inasmuch as the gross turnover stood
increased to Rs. 70,80,74,974 in the assessment year 2002-2003 and to Rs. 72,38,08,725 in the assessment year 2003-2004.
The appeals are, thus, disposed of. ITA No. 4/2004 is de-linked and be listed in its turn.