TMI Blog1988 (8) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of section 40(c) of the Income-tax Act, 1961, relating to the assessment year 1972-73 ?" The assessee in the case is an industrial estate, Pheros Co. Pvt. Ltd., at Gauhati. The company has two factories, one at Gauhati and the other at Faridabad near Delhi which was established in 1971. In the two factories, the estate forges steel sheets, iron nails, fencing posts, steel angles, steel joints and cast sheets. The question referred relates to the assessment year 1972-73. The private company has only four shareholders, one among them being F. C. Agarwal. He is the managing director. His spouse and their two daughters are the other three shareholders. The question relates to the payment of remuneration to the managing director. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 1970-71, there was a loss of Rs. 4,319. The remuneration, therefore, paid was Rs. 24,000 only. In the assessment year 1971-72, the net profit was Rs. 10,876. The remuneration paid was Rs. 24,697. Relevant to the assessment year 1972-73, the net profit was Rs. 24,531 and the remuneration paid was Rs. 37,292. The question on the above facts arises under section 40(c) of the Income-tax Act, as to whether, having regard to the benefit that accrued to the company, the payment of remuneration to the managing director at Rs. 3,000 per month or Rs. 36,000 per year was or was not warranted. The next aspect of the question is whether payment of Rs. 36,000 was excessive or unreasonable. Though we have stated the question in its three as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ria. Therefore, it may not be proper to judge from the point of view of history of profit or loss as to whether remuneration paid was excessive or unreasonable. How then is it to be judged ? The Revenue authorities should judge the reasonableness of the payment to a managing director from the point of view of services rendered and benefit accrued. We may here mention and agree with the Allahabad High Court in Kashiprasad Carpets (P.) Ltd. v. CIT [1984] 148 ITR 710 (All), at page 713, wherein it is held that the opinion as to the reasonableness or otherwise of the amount spent must be formed having regard to the legitimate business needs of the company and the benefit derived by the company or accruing to the company from the said sum expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pects were considered for determining the remuneration paid to the management personnel. We have considered the decisions and the test laid down especially the one where producing centres and quantum of work were involved was considered. We hold that those are the two relevant circumstances which should be taken into consideration for purposes of the case in hand. The managing director, in the instant case, it is seen, had established in 1971 another factory at Faridabad apart from the one at Gauhati and the sales in the former factory were Rs. 78,605 for the relevant assessment year. Among the four shareholders, the managing director alone is a male member and others are his two daughters and his wife. The profit which resulted in esta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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