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1971 Supreme(Cal) 156
High Court Of Calcutta
S.P. Mitra, A.N. Sen, JJ.
Commissioner Of Income-Tax – Appellant
Versus
Edward Keventer (Private) Ltd. – Respondent
Income-Tax Reference 85 of 1963
Decided On: June 22, 1971
Advocate Appeared:
B.L.Pal, Chandan Banerjee, Ashoke Sen, S.K.Acharya, P.K.Pal, S.K.Gupta
The Income-tax Officer must exercise the power to disallow remuneration or benefits to directors under Section 10(4A) of the Indian Income-tax Act, 1922, judiciously and must consider the entire position dispassionately and objectively from the view-point of a reasonable and honest person in business.
Headnote:
INCOME TAX - Section 10(4A) - Applicability - Remuneration paid to directors - Whether excessive or unreasonable - Factors to be considered - Legitimate business needs of the company - Benefit derived by the company - Opinion of the Income-tax Officer - Principles governing the exercise of power under Section 10(4A).
Fact of the Case:
The assessee, a private limited company, paid remuneration to its directors, including the chairman of the board of directors, who was also the widow of the late majority shareholder. The Income-tax Officer disallowed a portion of the remuneration paid to the directors, holding that it was excessive or unreasonable under Section 10(4A) of the Indian Income-tax Act, 1922. The assessee appealed to the Appellate Assistant Commissioner and the Appellate Tribunal, both of whom allowed the appeals and deleted the disallowance. The department referred the question of whether the disallowance of the remuneration was justified to the High Court under Section 66(1) of the Act.
Finding of the Court:
The High Court held that the Income-tax Officer did not properly exercise his jurisdiction and power under Section 10(4A) and did not apply the correct principles in forming his opinion as to the reasonableness of the sums paid to the directors. The court held that the Income-tax Officer had considered the matter essentially from the angle of a tax collector and had not applied his mind to the basic questions dispassionately and objectively from the view-point of a prudent businessman. The court also held that the Income-tax Officer had not given proper consideration to the legitimate business needs of the company and had been mainly influenced by the kind of physical or hard labour done by the directors in assessing the benefit derived by the company.
Issues: Whether the Income-tax Officer was justified in disallowing a portion of the remuneration paid to the directors under Section 10(4A) of the Indian Income-tax Act, 1922.
Ratio Decidendi: The court held that Section 10(4A) of the Indian Income-tax Act, 1922, empowers the Income-tax Officer to disallow any allowance in respect of any remuneration or benefit or amenity to a director or a person who has a substantial interest in the company, if the Income-tax Officer is of the opinion that any such allowance is excessive or unreasonable, having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. However, the court held that the Income-tax Officer must exercise this power judiciously and must consider the entire position dispassionately and objectively from the view-point of a reasonable and honest person in business. The court also held that the legitimate business needs of the company must be judged from the view-point of the company itself and must be viewed from the point of view of a prudent businessman, and that the benefit derived or accruing to the company must also be considered from the angle of a prudent businessman.
Final Decision: The court answered the question raised in the affirmative, in favour of the assessee and against the department, holding that the disallowance of the amounts paid to the directors by recourse to Section 10(4A) was unjustified.
A.N. Sen, J.
1. THIS reference under Section 66(1) of the Indian Income-tax Act, 1922, raises the question of applicability of the provisions of Section 10(4A) of the said Act to the remuneration paid to the directors of Edward Keventer Pvt. Ltd. which happens to be the assessee in the instant case.
2. THE assessee is a private limited company of which at the material times there were only 5 members, all of whom, except Sri K.A. Dikshit, were also directors of the company. THEy are :
(1) Rani Jagadamba Kumari Devi who holds 65% of the total shares.
(2) Sri A.C. Roy Chowdhury who holds 10.5% of the total shares.
(3) Sri J.C. Chowdhury who holds 10.5% of the total shares.
(4) Sri S. Das Gupta who holds 10.5% of the total shares.
(5) Sri K.A. Dikshit who holds 3.5% of the total shares.
It may be noted that the assessee was originally a Swedish concern which was taken over in 1949. Lt. Genl. Madan Shumshere Jung Bahadur Rana of Nepal, since deceased, made the largest investment and purchased the majority of shares. The Rana during his lifetime had been a director of the company and the chairman of the board of directors. Rani Jagadamba Kumari Devi is the widow of the late Rana and upon the death of the Rana she inherited the shares and succeeded to the office of the chairman of the board of directors of the company.
3. THE articles of association of the company at the material times, inter alia, provided :
Article 109.
"Sri Animesh Chandra Roy Chowdhury, Sri Jagadish Chandra Chowdhury and Sri Sukhomoy Das Gupta or their nominees or successors in the board, as the case may be, each, shall successively by rotation, become managing director of the company, each to hold office for a maximum of two years at a stretch."
Article 110.
"THE remuneration of the directors shall be as follows :
THE board of directors shall from time to time fix the remuneration of the directors, but in no case shall be less than Rs. 4,000 per month as office allowance and an amount equivalent to 10% of the net profit of the com pany earned in the previous year. This amount shall be distributed as follows :
(1) Lt. Genl. Madan Shumshere Jung Bahadur Rana or his nominee or successor in the board, 40%.
(2) Sri Animesh Chandra Roy Chowdhury or his nominee or successor in the board, 20%.
(3) Sri Jagadish Chandra Chowdhury or his nominee or successor in the board, 20%.
(4) Sri Sukhomoy Das Gupta or his nominee or successor, 20%.
Besides the above remuneration the directors who will be in the active management of the company shall be entitled to such conveyance allowances as may be fixed by the directors from time to time."
Article 111.
"THE directors may, from time to time, confer upon a managing director for the time being such of the powers exercisable under these presents by the directors as they may think fit and may confer such powers for such time and to be exercised for, such objects and for the purposes, and upon such terms and conditions and. with such restrictions as they think expedient, and they may confer such powers either collaterally with or to the exclusion of and in substitution for all or any of the powers of the directors in that behalf, and may from time to time revoke, withdraw, alter or vary-all or any of such powers."
Article 120.
"If any director being willing shall be called upon to perform extra service or to make any special exertion in going or residing away from Calcutta for any of the purposes of the company or in giving special attendance to the business of the company as a member of the committee of directors, the company may remunerate the director so, doing either by a fixed sum or by a percentage of profits or otherwise as may be determined by the directors, and such remuneration may be either in addition to or in substitution for his or Her share in the remuneration above provided for the directors."
4. ON the basis of the articles, the directors have been receiving their shares of the remuneration. The said Articles 109, 110 and 111 alon
