1981 Supreme(SC) 282

SUPREME COURT OF INDIA
P.N. BHAGWATI AND E.S. VENKATARAMIAH, JJ.
M/s. Ganga Saran and Sons Pvt. Ltd., Calcutta Appellant
Versus
The Income-tax Officer and others, Respondents.
Civil Appeal No. 1146 of 1973, D/- 23-4-1981.
Advocates appeared
Dr. Debi Pal, Sr. Advocate (Mr. A. K. Verma and Mr. K. J. John, Advocates with him), for Appellant; Mr. V. S. Desai, Sr. advocate (Mr. Champat Rai and Miss A. Subhashini, Advocates with him), for Respondents.

Headnote:

Indian Income-tax Act, 1961 – Sections 148, 147(b), 147 (a) – Quashing of Order – Claim of Deduction in payments - Income-tax Tribunal - Income-tax Officer while assessing assessee to tax for assessment year 1949-50 disallowed claim of assessee for deduction in respect of payments made to managing director and other directors on account of commission and bonus - On appeal by assessee Appellate Assistant Commissioner disagreed with view taken by Income-tax Officer and allowed entire amount paid to managing director and other directors by way of commission and bonus - So far as Deo Datt Sharma is concerned Appellate Assistant Commissioner observed that having regard to fact that this very business was carried on by Deo Datt Sharma prior to its taking over by assessee and it was a prosperous business earning on an average about per year and after taking over of business by assessee Deo Datt Sharma continued to be in sole management of business of Delhi Branch aggregate amount paid to him could not at all be regarded as excessive and was allowable as a permissible deduction - Thus entire amount paid by assessee to managing director and other directors was allowed by Appellate Assistant Commissioner as a deduction in computing taxable income of assessee - Assessee had thereafter no difficulty in claiming deduction of amount paid to managing director and other directors on account of salary commission and bonus but again in assessment year 1956-57 Income Tax Officer disallowed a substantial portion of remuneration paid to managing director and assessment made by Income Tax Officer was confirmed in appeal by Appellate Assistant Commissioner and in further appeal by Income Tax Tribunal - This led to making of a reference and High Court answered question referred to it in favour of the assessee and held that he disallowance of a portion of remuneration paid to managing director was not justified - While making assessment for assessment year 1957-58 Income Tax Officer once again disallowed a part of remuneration paid to managing director as also amounts of interest paid to directors on balances lying to credit of their respective accounts with assessee on account of undrawn remuneration - Held, Deo Datt Sharma was carrying on same business prior to incorporation of assessee as a private limited company and this business was yielding him an average profit of about per year - When the assessee, on incorporation, took over business as a going concern from Deo Datt Sharma it appointed Deo Datt Sharma as a director and placed him in sole charge of management of Delhi Branch of business - In fact it could not be disputed on behalf of Revenue that Deo Datt Sharma was looking after business of Delhi branch of assessee in same manner in which he was doing when he was sole proprietor of business and for this work done by him Deo Datt Sharma was paid salary at rate of per month commission at rate of one per cent on sales of Delhi branch and bonus equivalent to three months salary - Amount of remuneration paid to Deo Datt Sharma was thus not without consideration in fact it was paid for valuable services rendered by Deo Datt Sharma in solely managing business of Delhi branch of assessee - Now once it is conceded that Deo Datt Sharma was in sole charge and management of business of Delhi branch of assessee and was rendering full time service to assessee in that capacity it is difficult to see how anyone could reasonably come to belief that payment of remuneration made to him was sham and bogus - Surely Income-tax Officer could not expect Deo Datt Sharma to devote his full time and energy to business of Delhi branch of assessee without any remuneration whatsoever. The actual remuneration paid to Deo Datt Sharma was in fact found to be genuine and reasonable by Appellate Assistant Commissioner while disposing of appeal of the assessee for assessment year 1949-50 as also by Income-tax Tribunal while disposing of appeal for assessment year 1957-58 - It is true that Deo Datt Sharma was the brother-in-law of Ganga Saran Sharma, managing director of the assessee but this circumstance cannot by any stretch of imagination lead to an inference that payment of remuneration to Deo Datt Sharma who was solely managing and looking after business of Delhi Branch of assessee was sham and bogus – Court may point out that in fact statements of account of Deo Datt Sharma with assessee for relevant accounting year as also the previous years were with Income-tax officer at the time of original assessment and these statements of account clearly showed that out of the amount of remuneration credited to his account he had made a gift of to son of Ganga Saran Sharma on and given a loan of Rupees to Ganga Saran Sharma on 1958, and Income-tax Officer was fully aware that Ganga Saran Sharma was Managing Director of assessee - It is possible and Court may assume it in favour of Revenue that subsequent gifts made by Deo Datt Sharma to the wife and daughters-in-law of Ganga Saran Sharma were not disclosed to Income-tax Officer at time of original assessment but these gifts being subsequent to relevant accounting year assessee was not bound to disclose same to Income-tax Officer - Appeal allowed