1974 Supreme(Cal) 310

HIGH COURT OF CALCUTTA
SABYASACHI MUKHERJI, R. N. PYNE
STEEL CONTAINERS LTD. - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 24  Of  1970
Decided On : NOVEMBER 27, 1974

The Tribunal has the power to disallow a portion of the remuneration paid to a company under Section 37 of the Income-tax Act, 1961, if it finds that the entire remuneration was not wholly and exclusively for the purpose of the assessee's business.

Headnote:

INCOME TAX - Section 37 and 40 (c) (i) - Whether the Tribunal was competent to disallow a portion of the remuneration paid to B. L. under Section 37 of the Income-tax Act, 1961, in the facts and circumstances of the case - Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the entire remuneration allowed to the secretaries was not laid out wholly and exclusively for the purpose of the assessee's business and in determining the allowable amount of such remuneration at Rs. 60,000 - Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the provisions of Section 40 (c) of the Income-tax Act, 1961, could not be invoked to disallow any portion of the remuneration paid to Messrs. Balmer Lawrie and Co. Ltd.

Fact of the Case:

The assessee-company took over the factory of I. G. at Bombay in consideration of which the assessee was allotted 1,40,000 ordinary shares of I. G. and thus became a subsidiary of I. G. and hence of B. L. The assessee-company commenced business on the 1st January, 1959. For the two years the assessee-company had no secretaries or managing agents though it was claimed on behalf of the assessee that B. L. was looking after its affairs as the assessee was one of its subsidiaries. On the 29th December, 1960, the board of directors of the assessee-company passed a resolution approving the execution of the agreement appointing B. L. as secretaries of the company for a period of five years from 1st January, 1961. The assessee paid Rs. 1,20,000 each in the calendar years 1961 and 1962, and these items were included as part of debit of Rs. 3,68,946 and Rs. 4,76,025 shown in the assessee's balance-sheet for the two years against the head " Miscellaneous expenses ". In addition to the above remuneration the assessee paid to B. L. sums of Rs. 41,319 and Rs. 38,991, respectively, for the aforesaid two previous years by way of reimbursement of expenses in respect of various services rendered by them to the assessee-company.

Finding of the Court:

The Tribunal found that the specialised services as per list given by the assessee did not amount to any variation of the normal duties of a secretary of a company. It was true, the Tribunal noted, that B. L. was reimbursed only for the services rendered by its staff but not towards the remuneration paid to its directors and senior executives but the Tribunal observed that B. L. was having several activities of its own and its directorial and top executive establishment was concerned with its own affairs and management. The expenses incurred in respect of the services rendered by the several departments of B. L. including those of taxation and personal officers and the Delhi representative were got reimbursed from the several companies. In fact, the Tribunal found the services of B. L. to the assessee for which they had to be remunerated under the agreement were in fact only those of a secretary of a company. Having regard to the facts that B. L. had got much less remuneration in the earlier two years, that their responsibilities as secretary were much less than before and there was no secretary of the company in the earlier two years, the Tribunal was of the opinion that the remuneration paid from 1961 onwards needed scrutiny. The Tribunal recorded that there was no evidence to support the assessee's contention that in the earlier years also B. L. was rendering services to the assessee as the managing agents of I. G. as claimed by the assessee. The Tribunal also noted that the assessee's establishment expenses had increased progressively and the Tribunal had given a break-up of the said increase in its order. The Tribunal referred to the annual reports of the assessee from which, according to the Tribunal, it appeared that the assessee's business, whether it was monopoly or not, needed no special impetus. The remuneration paid to a secretary, according to the Tribunal, should be much less than that paid to the managing agents or secretaries and treasurers and could be reasonably fixed at Rs. 2,000 to Rs. 3,000 per month. The Tribunal, however, took into account that there was a company which was acting as the secretary and there were pooled services available. In the premises, the Tribunal fixed the remuneration at Rs. 5,000 per month.

Issues: 1. Whether the Tribunal was competent to disallow a portion of the remuneration paid to B. L. under Section 37 of the Income-tax Act, 1961, in the facts and circumstances of the case. 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the entire remuneration allowed to the secretaries was not laid out wholly and exclusively for the purpose of the assessee's business and in determining the allowable amount of such remuneration at Rs. 60,000. 3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the provisions of Section 40 (c) of the Income-tax Act, 1961, could not be invoked to disallow any portion of the remuneration paid to Messrs. Balmer Lawrie and Co. Ltd.

Ratio Decidendi: 1. The Tribunal was competent to disallow a portion of the remuneration paid to B. L. under Section 37 of the Income-tax Act, 1961, in the facts and circumstances of the case. 2. On the facts and in the circumstances of the case, the Tribunal was justified in holding that the entire remuneration allowed to the secretaries was not laid out wholly and exclusively for the purpose of the assessee's business and in determining the allowable amount of such remuneration at Rs. 60,000. 3. On the facts and in the circumstances of the case, the Tribunal was correct in holding that the provisions of Section 40 (c) of the Income-tax Act, 1961, could not be invoked to disallow any portion of the remuneration paid to Messrs. Balmer Lawrie and Co. Ltd.

Final Decision: 1. Question No. 1 is answered in the affirmative and in favour of the revenue. 2. Question No. 2 is answered in the affirmative and in favour of the revenue. 3. Question No. 3 is declined to be answered.