9911796707
TMI Blog1972 (6) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... name, A.K.Ranganathan and Sons (P.) Ltd., on a remuneration of Rs. 1,000 p.m. together with a commission of 10% on the net profits. One A. R. Krishnamoorthy and A. R. Rajagopalan were the directors in the managing agency company. The managing agents resigned with effect from December 1, 1956. The directors of the company appointed the said two persons as the managing directors of the company. The articles of association was suitably altered and an agreement was entered between these two persons and the company on November 22, 1956, whereunder these two persons were to be managing directors for a period of 10 years from December 1, 1956, on a remuneration of Rs. 1,000 per month for each and a commission of 5% each on the net profits of the company. The share capital of the company was 3,500 preference shares of Rs. 100 each and 35,000 ordinary shares of Rs. 10 each. The shareholding of the above two persons and their father, A. K. Ranganathan, were as under : Ordinary Preference A. R. Krishnamoorthy 7,881 334 A. R. Rajagopalan 7,656 436 A. K. Ranganathan 3,200 16 ------------- -------------- 18,737 786 ------------- -------------- The father, A. K. Ranganathan, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment of bonus to the managing director who held a sizable number of shares in the company and who had also been given a commission of 5% each on the net profits of the company. The assessee appealed to the Appellate Assistant Commissioner contending that neither section 10(4A) of the old Act nor section 40(c)(i) of the new Act warranted the disallowance of either the remuneration or the bonus, that the view of the Income-tax Officer that the two managing directors lacked technical qualification and they owed their jobs to their father who was in effective control of the affairs of the company was not justified, that the two managing directors had considerable experience in the business, that it is only because of their efforts in starting new avenues of business they expanded the business of the company in various ways and that it is only in view of the improved profits of the company the enhancement of salary as well as bonus had been voted by the company. The Appellate Assistant Commissioner found that the remuneration of Rs. 1,000 each per month was fixed by the company as early as 1956, having regard to the conditions which then prevailed and that as the company has m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s alone. It was also contended that the bonus of Rs. 10,000 each for the first year and Rs. 15,000 each for the second year was below their four months' salary and that in calculating the monthly salary of the managing directors the commission payable to them has also to be included. Several decisions were cited before us in support of the contention that the managing directors are employees of the company, but it is not necessary to refer to all the decisions. We propose to refer to only a few of them. In K.L.Kothandaraman v. Commissioner, of Income-tax, this court dealt with the relationship between a managing director and a company and, after a consideration of the various decisions on the point, expressed the view that in that particular case having regard to the terms of the agreement and the functions assigned to the assessee as the managing director and the reservation to the board of directors of the right of superintendence, direction and control, the relationship between the managing director and the company was that of employer and employee. In Catherine Lee v. Lee's Air Farming Ltd., the Judicial Committee, while construing the scope of the definition of the word " wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause dealing with any expenditure not being in the nature of capital expenditure or personal expenses of the assessee laid out wholly and exclusively for the purpose of the business. When there is a specific clause dealing with commission in section 10(2)(x), it is not possible to say that the commission should be taken as part of the salary and brought in within section 10(2)(xv). It appears that in the case before the Supreme Court their Lordships were not called upon to decide whether the Income-tax Officer could proceed under section 10(2)(x) as the question referred by the Tribunal was only with reference to the claim of deduction made under section 10(2)(xv) and not under section 10(2)(x). The learned counsel also contends that bonus is a deferred wage, that the old concept that it is a gratuitous payment no longer survives and that, therefore, the bonus paid should be treated as part of the wages or salary paid to the managing directors. In this connection reference is made to Shyamlal Pragnarain v. Commissioner of Income-tax, where the following observations have been made at page 413 : " It does not appear to be necessary to enter into the history of the relations bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is court expressed the view that in exercising his power under section 10(4A) of the Indian Income-Act, 1922, to disallow such portion of the remuneration paid to a director as he excessive or unreasonable, the Income-tax Officer must apply his mind to the nature of the business of the company, the actual work done by the directors, the quantum of income earned by the company, the necessity to pay the remuneration to the director and to other allied considerations, to form an opinion whether or not the payment is reasonable or excessive and that the mere ipse dixit of the officer unrelated to the criteria laid down by the statute would not be a considered opinion, but dogmatic assertion, and that the statute does not permit the department to adopt such a course. In Nund and Samont Co. Pvt. Ltd. v. Commissioner of Income-tax, the Supreme Court had occasion to consider the scope of section 10(4A). There, the assessee-company had provided certain amounts in accordance with its articles of association as remuneration for its managing director and deputy managing director. The Income-tax Officer, in the absence of evidence in support of the company's claim for deduction of the entirety ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns laid down in section 10(2)(xv) but also the conditions contemplated in section 10(4A) and if the assessee fails to adduce evidence as to the legitimate business needs of the assessee and the benefit derived by the company in consequence of the services rendered by them, the Tribunal would be justified in going into the reasonableness of the bonus paid. According to the learned counsel the Tribunal itself has accepted the assessee's case, while considering the reasonableness of the salary paid, that it is by the efforts of the two managing directors considerable improvements in the financial stability had been effected, sales had increased considerably and new products had been put in the market and these findings which found acceptance by the Tribunal are themselves sufficient to hold that the bonus paid is reasonable and not excessive. It is also contended by the learned counsel that once the nexus is shown between payment of bonus and the business needs and the benefit of the company, the Income-tax Officer will have to perforce accept the amount of bonus paid as reasonable and that it is not open to him to go into its reasonableness. We find it very difficult to accept both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot willing to accept the contention of the assessee that the bonus has been paid with a view to bridge the gap in wages. As a matter of fact it found on facts that the technical director has also been paid a salary of Rs. 2,000 and that no bonus had been paid to him and the company did not think it necessary to provide for payment of bonus to him especially when 5% commission is not payable to him. On these facts the Tribunal thought that there is no question of bridging the gap in the wages, as the payment of Rs. 2,000 as salary per month and 5 p.c. commission on the net profits of the company are sufficient to constitute proper incentive for promoting efficiency to the managing directors. As a matter of fact in Nund and Samonta Co. (P.) Ltd. v. Commissioner of Income-tax, the articles of association of the company authorised payment of 30 per cent. of the net profits as the remuneration to directors and 30 per cent. was allowed by the income-tax authorities for some years. But, for the assessment year 1959-60, the income-tax authorities acting under section 10(4A) felt that the payment of remuneration to the directors of the company in the ratio of 30 per cent. of the net profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the bonus under section 10(4A). The assessee's contention that as bonus of four months' salary had been paid to the other employees by the company, it is entitled to pay the same bonus to the managing directors as well cannot also be accepted as tenable, for the bonus paid to the employees are only subject to the limitations provided under section 10(2)(x). But, any bonus paid to a managing director will attract also section 10(4A) and it has to satisfy the considerations laid down therein. If it is considered to be unreasonable or excessive, the Income-tax Officer has the discretion to disallow the same. Further, payment of bonus to the managing directors seems to be on an ad hoc basis and not on the basis of four months' salary. Even otherwise, the considerations which will weigh with the court in determining the reasonableness of the bonus paid to the employees and that paid to the managing directors will have to be naturally different, for while payment of bonus to workers may be necessary due to business considerations forgiving an incentive to them with a view to promoting efficiency and contentment and to have their services continued, payment of bonus to a managing direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployee should be allowed, the taxing officer must have regard to the provisions of section 10(2)(x) of the Income-tax Act and clause 12 of Schedule I to the Excess Profits Tax Act; and in assessing the reasonableness, consideration of commercial expediency must undoubtedly be taken into account, and that the deduction to be allowed does depend upon the objective satisfaction of the Excess Profits Tax Officer having regard to the requirements of the business, and in the case of payments for services, to the actual services rendered, that in considering whether the deduction has been properly claimed, the primary duty was vested by the legislature in the Excess Profits Tax Officer and that it is not open to the High Court to substitute its own view as to what might be regarded as reasonable and necessary. We find that section 10(4A) also vests the power to find out the reasonableness or excessiveness primarily on the Income-tax Officer and his decision is only subjsct to review by the Tribunal. The legislature having specially empowered the Income-tax Officer to find out the reasonableness or otherwise of an allowance claimed, giving certain criteria and that officer having considere ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
