1976 (2) TMI 80 - AT - Income Tax

Summary

Issues Involved:
1. Non-allowance of development rebate at a higher rate of 25% for equipment used by the assessee.
2. Justification for increased remuneration to directors.
3. Disallowance of certain expenses claimed by the assessee.

Detailed Analysis:

1. Non-allowance of Development Rebate:
The primary issue concerns the non-allowance of development rebate at a higher rate of 25% for the machinery used by the assessee in manufacturing A.D. Carbon Cells. The assessee claimed this higher rate under section 33(1)(b)(B)(I) of the Income Tax Act, 1961, arguing that their machinery qualifies as "equipment" under item (7) of the Fifth Schedule. The Income Tax Officer restricted the claim to the usual rate of 15%, and this decision was upheld by the Appellate Assistant Commissioner.

The assessee's counsel contended that the equipment indeed generates electricity and is used in railway signals, thus meeting the criteria of item (7). The Department's counsel argued that the assessee does not produce electricity and thus does not qualify for the higher rebate.

Upon review, it was concluded that the equipment manufactured by the assessee does qualify under item (7) as it generates and transmits electricity, similar to other equipment like transformers and transmission towers. The argument that the equipment must be heavy or must generate electricity continuously was rejected. The Tribunal held that the machinery used by the assessee is entitled to the higher rate of development rebate.

2. Increased Remuneration to Directors:
The second issue concerns the justification for the increased remuneration to the directors of the assessee company. During the relevant assessment years, the directors received significantly higher remuneration despite a decline in the company's business. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the excess remuneration, deeming it not wholly and exclusively for business purposes.

The assessee argued that the increase was due to the directors' extra efforts in counteracting reduced orders and exploring new markets. However, the Tribunal noted that the business had declined, and the directors did not possess unique qualifications or patents that would justify such high increments. It was also observed that other employees received much lower increments.

The Tribunal upheld the disallowance, stating that the increased remuneration was not justified by business needs and was likely influenced by the directors' ownership of the company.

3. Disallowance of Certain Expenses:
The final issue pertains to the disallowance of Rs. 14,621 out of the expenses claimed for the assessment year 1974-75. The assessee contested this, particularly seeking allowance for Rs. 1,130 spent on presentation articles and expenses for tea and food for staff and customers.

The Tribunal found no reason to allow the expenditure on presentation articles like cycles and briefcases. However, it allowed Rs. 2,000 for the expenditure on tea and food, recognizing that it partly benefited the staff. The rest of the disallowed expenses were upheld.

Conclusion:
The appeal for the assessment year 1973-74 was allowed, granting the higher rate of development rebate. The appeal for the assessment year 1974-75 was partly allowed, with partial relief on disallowed expenses but upholding the disallowance of increased remuneration to directors.