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1978 Supreme(Cal) 615
High Court Of Calcutta
S. C. Deb, Sudhindra Mohan Guha
CALCUTTA ART STUDIO (PVT.) LTD. - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 152 Of 1976
Decided On : 11/17/1978
AJIT SEN GUPTA, APARNA DUTTA, PRABIR MAJUMDAR, SANJOY BHATTACHARJEE
The disallowance of a portion of the salaries of the managing director and the director under Section 40(c)(i) of the Income Tax Act, 1961, was held to be perverse in the absence of consideration of legitimate business needs and benefit derived by the company.
Headnote:
INCOME TAX ACT, 1961 - SECTION 40(C)(I) - SALARIES PAID TO MANAGING DIRECTOR AND DIRECTOR - EXCESSIVENESS - PERVERSE FINDING - TRIBUNAL'S FINDING THAT SALARIES WERE EXCESSIVE HELD PERVERSE IN THE ABSENCE OF CONSIDERATION OF LEGITIMATE BUSINESS NEEDS AND BENEFIT DERIVED BY THE COMPANY.
Fact of the Case:
The assessee, a private limited company, took over the business of a firm in which Shri Surendra Nath Biswas and Shri Biswanath Biswas were partners. Shri Surendra Nath Biswas became the managing director of the assessee-company and Shri Biswanath Biswas became a director. The ITO disallowed a portion of their salaries under Section 40(c)(i) of the Income Tax Act, 1961, on the ground that they were excessive. The AAC and the Tribunal upheld the disallowance.
Finding of the Court:
The High Court held that the Tribunal's finding that the salaries were excessive was perverse. It held that the authorities below failed to consider the legitimate business needs of the company and the benefit derived by the company from the services of the managing director and the director. It also held that the Tribunal erred in stating that it was not concerned with the experience of the directors, as their experience was relevant in considering the legitimate business needs of the company.
Issues: Whether the Tribunal's finding that the salaries paid to the managing director and other director were excessive was perverse.
Ratio Decidendi: The High Court held that the Tribunal's finding was perverse because: * The authorities below failed to consider the legitimate business needs of the company and the benefit derived by the company from the services of the managing director and the director. * The Tribunal erred in stating that it was not concerned with the experience of the directors, as their experience was relevant in considering the legitimate business needs of the company.
Final Decision: The High Court answered the question in the affirmative and in favor of the assessee.
( 1 ) THIS reference, under Section 256 (2) of I. T. Act, 1961, arises out of the assessment proceedings for the assessment year 1969-70, and the question before us is as follows :"whether, on the facts and in the circumstances of the case, the Tribunal's finding that the salaries paid to the managing director and other director were excessive, is perverse ?"
( 2 ) THE assessee is a private limited company carrying on the business of lithographic printing which it took over in the assessment year 1967-68, from Calcutta Art Studio, a firm in which there were several partners.
( 3 ) SHRI P. K. Biswas, Shri S. M. Biswas and Shri Biswajit Biswas were some of the partners of the aforesaid firm and they became the employees of the assessee-company. The AAC in the appeal filed by the assessee-company has allowed the salary paid to them but we are not directly concerned with it in this reference.
( 4 ) THE senior partner of the aforesaid firm was Shri Surendra Nath Biswas. He is a qualified artist and an expert in litho-printing. He became the managing director of the assessee-company on a monthly salary of Rs. 1,500.
( 5 ) SHRI Biswanath Biswas was also a partner of the aforesaid firm. He is an expert in off-set printing and has vast experience in it as appears from para. 9 of the order of the AAC which forms part of the statement of case. He became the other director of the assessee-company on a monthly salary of Rs. 1,000. It may now be noted here that there is a mistake in para. 3 of the statement of case and the said mistake is that Shri Surendra Nath Biswas was an expert in off-set printing.
( 6 ) BEFORE the assessee-company took over the business of the aforesaid firm the total sales of the firm were Rs. 3,76,077 in the assessment year 1965-66 and Rs. 2,89,136 in the assessment year 1966-67. Thereafter, the total sales of the assessee-company were Rs. 5,43,079 in the assessment year 1967-68, Rs. 5,42,828 in the assessment year 1968-69 and Rs. 5,53,872 in the assessment year 1969-70. The profit in the assessment year 1967-68 of the assessee was Rs. 3,897 and in the assessment year 1968-69 was Rs. 4,283, whereas there was a loss in the assessment year 1969-70 and the amount was Rs. 14,552.
( 7 ) THE ITO has disallowed Rs. 8,000 out of the total salary of Rs. 18,000 paid to Shri Surendra Nath Biswas and Rs. 6,000 out of the total salary of Rs. 12,000 paid to Shri Biswanath Biswas under Section 40 (c) (i) of the I. T. Act, 1961.
( 8 ) THE AAC has, however, allowed Rs. 12,000 in the case of Shri Surendra Nath Biswas and has disallowed the balance amount. Similarly, he has allowed Rs. 7,000 in the case of Shri Biswanath Biswas and has disallowed the balance amount. As to the salary of Shri Surendra Nath Biswas the order of the AAC reads, inter alia, as follows:"it is thus obvious that in the first two years, the appellant has shown negligible amounts of profit and in the third year, it has shown a huge amount of loss. This means that the appellant-company has not been benefited to any marked extent as a result of the services of the managing director. This thing is further obvious from the fact that the gross profit in the assessment year 1969-70 has gone down to 19. 5% as against the profit of 22'7% shown in the first year. After considering the trading results and business needs of the appellant-company I feel that the remuneration of Rs. 18,000 paid by it to the managing director was certainly excessive and unreasonable. After taking into account the previous experience of these persons and other circumstances of the case, I feel that a remuneration of Rs. 12,000 will be reasonable for this person. Thus, there shall be a disallowance of Rs. 6,000 only in each of the years. This will mean a relief of Rs. 2,000 in each of the assessment years 1967-68 and 1968, 69 and Rs. 1,000 in the assessment year 1969-70. "
( 9 ) AND, respecting the salary of Biswanath Biswas, the AAC says thus:"on a discussion of the matter with t
