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Issues Involved:
1. Whether the findings of the Tribunal regarding the excessiveness of directors' salaries were supported by evidence. 2. Whether the Tribunal's judgment was vitiated by a perverse finding regarding the profits of the business. 3. Whether the determination of the directors' remuneration by the Tribunal was in accordance with law. 4. Whether the Tribunal was justified in determining the directors' total remuneration based solely on their salaries. Detailed Analysis: Issue 1: Excessiveness of Directors' Salaries The Tribunal concluded that the salaries paid to the directors were excessive considering their qualifications and the services rendered. It noted that the directors received significantly lower salaries when they were partners in the erstwhile partnership firm. However, the High Court found that the Tribunal adopted a subjective standard of reasonableness, which is not permissible. The reasonableness of remuneration must be considered from a businessman's perspective, not an armchair view. The High Court emphasized that the Tribunal's reductions in salaries appeared arbitrary and lacked an intelligible basis. Issue 2: Perverse Finding on Profits The Tribunal's finding that the profits for the assessment year 1981-82 were less than those for the assessment year 1979-80 was deemed perverse by the High Court. The High Court noted that the Tribunal overlooked the fact that the profits for 1981-82 and 1982-83, after reducing the directors' remuneration, were comparable to the profits from the previous years. The Tribunal's decision was based on incorrect facts, leading to a wrong premise and exceeding its power under section 40(c) of the Income-tax Act. Issue 3: Determination of Remuneration The High Court held that the Tribunal cannot disallow a part of the directors' remuneration based on subjective standards. The Tribunal's approach of reducing salaries by arbitrary amounts without a clear rationale was criticized. The High Court reiterated that the business needs and benefits derived from the directors' services must be considered objectively, not influenced by an obsession for higher tax revenue. Issue 4: Justification of Total Remuneration The Tribunal's justification for determining the total remuneration based solely on salaries was found to be flawed. The High Court highlighted that the directors had substantial experience and their efforts significantly contributed to the company's increased turnover. The Tribunal's focus on profits as the sole measure of benefit was misplaced. The High Court emphasized that benefits derived by the company from the directors' services should be assessed in a broader context, including factors like turnover and the nature of the business. Conclusion: The High Court found that the Tribunal's findings regarding the excessiveness of directors' salaries were perverse and not supported by evidence. The Tribunal's judgment was vitiated by incorrect findings on the company's profits. The determination of remuneration by the Tribunal was not in accordance with law, as it adopted a subjective standard and arbitrary reductions. The High Court answered the relevant questions in favor of the assessee, emphasizing the need for an objective assessment of directors' remuneration based on business needs and benefits derived.
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