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1978 Supreme(Cal) 319
High Court Of Calcutta
DIPAK KUMAR SEN, C. K. BANERJEE
COMMISSIONER OF INCOME-TAX - Appellant
Versus
KARAM CHAND THAPAR AND BROS.(P.) LTD. - Respondent
Income-Tax Reference 290 Of 1972
Decided On : 04/27/1978
AJIT SEN GUPTA, B.L.PAL, Debi Pal, M.SEAL
The reasonableness of remuneration paid to directors is a question of fact to be determined on the basis of the facts and circumstances of each case, and the Tribunal's decision on this aspect will not be interfered with unless it is based on no evidence or is perverse.
Headnote:
INCOME TAX - Section 10 (4a) - Disallowance of excessive or unreasonable remuneration paid to directors - Tribunal's decision upholding the disallowance of a portion of the remuneration paid to a director on the ground that it was excessive or unreasonable was upheld by the High Court.
Fact of the Case:
The assessee, a private limited company, paid Rs. 1,00,777 to M. M. Thapar, son of the late managing director, as remuneration consisting of salary, allowance, and share of profits. The ITO disallowed a portion of the remuneration, holding that it was excessive or unreasonable and paid only because M. M. Thapar was the son of the managing director. The AAC upheld the disallowance. On appeal, the Tribunal allowed the assessee's appeal, holding that the remuneration was reasonable and justified.
Finding of the Court:
The High Court held that the Tribunal's decision was not erroneous and that there was sufficient material before the Tribunal to hold that the remuneration paid to the director concerned was reasonable and not excessive. The Court noted that the director had certain amount of technical qualification and experience, was supervising and in control of two mills which were in a stage of expansion, and was paid the same remuneration as that paid to the other directors. The Court also noted that the appointment of the director had been approved by the Company Law Board.
Issues: Whether the Tribunal erred in holding that the remuneration paid to the director was reasonable and justified, and whether the Tribunal was required to consider specific factors in determining the reasonableness of the remuneration.
Ratio Decidendi: The Court held that the Tribunal had duly considered the needs of the assessee and the benefits derived by it, and that the factors which were taken into account by the Tribunal were neither irrelevant nor insignificant. The Court also held that it was not necessary for the assessee to adduce evidence on all the items enumerated by the Supreme Court in Nund and Samont Co. P. Ltd. [1970] 78 ITR 268, as the Supreme Court had merely laid down that in the facts and circumstances of that case, no evidence had been furnished by the assessee on any of the points indicated which were relevant in deciding the issue.
Final Decision: The Court answered the question in the negative and in favor of the assessee, holding that the Tribunal's decision was not erroneous.
( 1 ) AT the instance of the Commissioner of Income-tax, West Bengal IV, Calcutta, this court has directed the Tribunal under Section 66 (2) of the Indian I. T. Act, 1922, to draw up a statement of case and refer the following question :"whether, on the facts and in the circumstances of the case and on a proper construction of Section 10 (4a) of the Indian I. T. Act, 1922, the payment of Rs. 1,00,777 to Shri M. M. Thapar by way of salary and profit commission was excessive or unreasonable so as to justify the disallowance of a portion thereof ?"
( 2 ) THE facts found and/or admitted in these proceedings are shortly as follows: Messrs. Karam Chand Thapar and Bros. (P.) Ltd. , Calcutta, the assessee, is a private limited company. In the assessment year 1961-62, the relevant previous year being the one ended on the 31st March, 1961, Rs. 1,00,777 paid to M. M. Thapar, son of late Karamchand Thapar, by way of remuneration consisting of salary, allowance and share of profits, came up for consideration during the assessment. M. M. Thapar had worked as a director of the assessee in the said assessment year. The ITO held that M. M. Thapar who had joined the assessee for a short period would not have been paid the same high remuneration as other experienced directors on business considerations and such remuneration was paid only because he was the son of the late Karam Chand Thapar, the managing director of the assessee at the relevant time. In the circumstances, the ITO allowed a part of the remuneration being Rs. 36,000 and disallowed the balance.
( 3 ) BEING aggrieved, the assessee preferred an appeal. The AAC noted that in the earlier assessment years 1959-60 and 1960-61, a portion of the remuneration paid to M. M. Thapar had been disallowed. He also took into account that the main income of the assessee was agency commission mostly received from Sri Gopal Paper Mills and Ballarpur Paper and Straw Board Mills Ltd. He found that M. M. Thapar had a diploma in textile engineering from the California University and was previously employed in Jagatjit Cotton Textile Mills Ltd. , a company managed by the assessee, at a salary of Rs. 1,000 per month and as such had no special qualifications for looking after the paper mills. He found further that profit commission was being paid only to the directors who were the members of the Thapar family and not to the other directors.
( 4 ) ON the basis of the aforesaid he held that there was no material to show that the remuneration paid to M. M. Thapar was justified in view of the legitimate business needs of the assessee and the benefits derived by it. Accordingly, he upheld the disallowance made by the ITO.
( 5 ) BEING aggrieved, the assessee preferred a further appeal to the ITA Tribunal. It was contended on behalf of the assessee in the appeal that the qualifications of M. M. Thapar were sufficiently high to justify the remuneration paid to him. It was also contended that no special post had been created for M. M. Thapar but he was appointed as a director in the usual course. It was contended further that remuneration and profits were being paid to all directors in the same proportion.
( 6 ) IT was brought to the notice of the Tribunal that at the time of appointment of M. M. Thapar, the two mills, namely, Jagatjit Cotton Mills and Sri Gopal Paper Mills, were in a stage of expansion and after his appointment substantial expansion was effected in the said concerns, M. M. Thapar was responsible for the actual supervision and control of these two mills. The correspondence which passed between the assessee and the ITO in this connection consisting of five letters written between February and November, 1964, were produced before the Tribunal and the Tribunal noted that the aforesaid submissions were contained in the said letters.
( 7 ) THE attention of the Tribunal was also drawn to the fact that the appointment of M. M. Thapar as a director of the assessee had been approved by the Comp
