1993 (7) TMI 12 - HC - Income Tax

Summary

Issues Involved:

1. Applicability of Section 40(c)(i) of the Income-tax Act, 1961, to the consultancy fee paid to a director.
2. Reasonableness and legitimacy of the consultancy fee under Section 40A(2)(a) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Applicability of Section 40(c)(i) of the Income-tax Act, 1961:

The primary issue was whether the consultancy fee of Rs. 7,25,000 paid by the assessee-company to a director, Mr. K. N. Tapuria, fell within the purview of Section 40(c)(i) of the Income-tax Act, 1961. The Income-tax Officer had disallowed Rs. 6,53,000 of this fee, deeming it excessive under Section 40(c)(i), which limits the deductible remuneration for directors to Rs. 72,000 per annum.

The Commissioner of Income-tax (Appeals) and the Tribunal found that the payment was made to Mr. Tapuria not in his capacity as a director, but as a consultant and adviser who rendered specific services to the Boeing Company. The appointment of Mr. Tapuria as a director was for convenience to facilitate the finalization of negotiations and execution of agreements with Boeing. The facts indicated that the consultancy fee was essential for securing the service contract with Boeing, which resulted in substantial service charges for the assessee-company.

Both the Commissioner and the Tribunal concluded that Section 40(c)(i) did not apply since the fee was not paid for his role as a director but for his consultancy services. The Tribunal upheld the Commissioner's view that the payment was made for special services rendered by Mr. Tapuria, which were crucial for the company's business with Boeing.

2. Reasonableness and Legitimacy of the Consultancy Fee under Section 40A(2)(a):

The Commissioner of Income-tax (Appeals) also examined whether the consultancy fee could be disallowed under Section 40A(2)(a), which addresses the reasonableness of expenditure. The Commissioner noted that the reasonableness of expenditure should be judged from the perspective of a prudent businessman. Given the substantial benefits derived by the assessee-company from securing the consultancy contract with Boeing, the payment of Rs. 7,25,000 was deemed neither excessive nor unreasonable.

The Tribunal upheld this view, noting that the consultancy fee was justified by the legitimate business needs and the benefits accrued to the assessee-company. The Tribunal emphasized that the payment was essential for securing the consultancy agreement with Boeing, which was facilitated by Mr. Tapuria's expertise and contacts.

Conclusion:

The High Court affirmed the findings of the Commissioner of Income-tax (Appeals) and the Tribunal. It held that the consultancy fee paid to Mr. Tapuria did not fall within the purview of Section 40(c)(i) of the Income-tax Act, 1961, as it was paid for his consultancy services, not for his role as a director. The fee was also not disallowable under Section 40A(2)(a) as it was reasonable and justified by the business needs and benefits derived by the assessee-company.

The court noted that dual capacities of a director, acting in roles other than that of a director, are recognized in corporate law. The consultancy fee was paid for services rendered in a capacity extraneous to his directorship, and thus, the ceiling limit of Rs. 72,000 under Section 40(c)(i) did not apply.

The judgment concluded by answering the question in the affirmative, in favor of the assessee, and without any order as to costs.