TMI Blog1985 (1) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... e claimed deduction of Rs. 24,000 being the salary paid to the manager for each of the assessment years 1967-68, 1968-69 and 1969-70. The ITO allowed the claim to the extent of Rs. 10,000, following his order for the assessment year 1966-67 and disallowed Rs. 14,000 for each of the said assessment years. All the three assessments were completed on 28th February, 1972. On appeal, the AAC, after taking into account the cumulative effect of all evidence and facts and circumstances, held that the payment of Rs. 18,000 per annum was reasonable and sustained the disallowance to the extent of Rs. 6,000 for each of the said assessment years. The assessee appealed before the Tribunal. The Revenue relied upon the order of the AAC and pointed out that when the manager was the son of director and brother of another director of the assessee-company, remuneration was not paid wholly for commercial reason. According to the Tribunal, there was no material to hold that the services rendered by the manager was not worth Rs. 24,000 to the assessee. It considered the volume of sales, total salary bill, the nature of the services rendered by the manager of a concern of the nature of the assessee and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be allowed in computing the income of the company. The object of s. 40(c) is to have a check in respect of expenditure which relates directly or indirectly in the provision of any remuneration, benefit or amenity to privileged persons. It is not open to the ITO to mechanically follow an earlier assessment order without applying a fresh judicial mind to the facts and circumstances of the relevant year. In this case, the ITO merely followed his earlier order and he did not give any reason for disallowance. It is for the ITO to consider the entire position objectively and to find out whether any part of the remuneration paid to the manager, who happens to be relative of a director, is justified on the facts and in the circumstances of the case. The reasonableness or excessiveness of the salary paid to the manager cannot be judged subjectively. The AAC took into consideration the fact that the manager was appointed for the first time in 1958 on salary of Rs. 500 per month when the turnover of the company was Rs. 4,11,489. Gradually by dint of his labour and efficient administration, the turnover of the company has since been increased in the year 1962 to Rs. 8,79,975 and in consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances. The ITO did not consider any of the facts objectively and from the view-point of a prudent businessman. He has acted in a routine manner without applying his mind to the facts of the case. He has merely followed his earlier order without considering the facts of the case. Even if the earlier order has some bearing or relevance, it is the duty of the ITO to come to his finding on the materials which are available for the assessment years in question. On the facts of this case, it must be held that the assessee has established by evidence that the allowance in question is justifiable and it is neither excessive nor unreasonable having regard to the legitimate business needs of the assessee and the benefit resulting to the company. The overall circumstances established a link between the remuneration and the benefit resulting to the company. The question whether any amount claimed as expenditure or allowance is excessive or unreasonable having regard to the legitimate business needs of the assessee and the benefit derived by or accruing to it therefrom has to be decided on the facts and in the light of the circumstances of each case. The Tribunal has given reason for its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business as the assessee company had invested a part of the borrowal for construction of a house property. It was further contended that in any event the Tribunal was not right in restricting the disallowance to Rs. 12,000 for two years on the ground that out of the total investment for the construction of the house property, rupees one lakh was invested out of the paidup capital. It is contended that there is no material for such conclusion. The ITO found that the assessee obtained the loan for the purpose of the business. Since a substantial portion of the said loan had been utilised by the assessee for the purpose of construction of house property, the ITO disallowed proportionate interest on the investment made on such construction. The AAC upheld the finding of the ITO on the ground that part of the borrowed capital was not utilised for the purpose of carrying on the business and the house property which was constructed was not a factory building but merely an investment and the assessee company by letting out the house property derived rental income assessable as income from house property under s. 23. Under s. 36(1)(iii) of the Act, interest on capital borrowed for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e interest on this amount at 12% as taken by the ITO comes to Rs. 12,000. We find that the capital on which interest at 12% was disallowed by the ITO was more than rupees one lakh in each of the three years under consideration. In the first year, the ITO has disallowed Rs. 10,545. As this amount is less than Rs. 12,000, up to which no disallowance is called for, we delete this addition. In the second year as well as in the third year we reduce the disallowance by Rs. 12,000." There is no evidence before the Tribunal to hold that the paid up capital of the assessee company was first spent for construction of the house property and the excess over the said amount, if any, incurred in the said construction alone was spent out of the borrowed funds. On the contrary, it was found by the ITO that the assessee invested Rs. 1,25,892, Rs. 71,353 and Rs. 46,970 on the house property for the assessment years 1967-68, 1968-99 and 1969-70 respectively. The assessee could not specify the funds which had been utilised for the purpose of construction and as such the ITO held that a part of the assessee's borrowings have been utilised for the construction of the house property. The Tribunal had ..... X X X X Extracts X X X X X X X X Extracts X X X X
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