NITCO ROADWAYS LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) 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.

(2.) 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.

(3.) 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 stated 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.