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TMI Blog1993 (7) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... ices to Boeing Company of U. S. A. for promotion of their sales of various types of aircraft as per agreement. In return, the assessee-company was to receive a commission on sale of aircraft. The Boeing Company of U. S. A. used to remit substantial amounts to the assessee-company as service charges in order to enable the assessee-company to meet various overhead expenses in canvassing sale of aircraft in any particular year. During the calendar year 1983, the assessee-company received service charges amounting to Rs. 25,50,000 from the Boeing Company of U. S.A. The assessee-company claimed various expenses against the service charges so received. One such expenditure as claimed by the assessee-company was payment of consultancy fee of Rs. 7,25,000 to Sri K. N. Tapuria in terms of an agreement entered into by the assessee-company with Sri Tapuria on January 19, 1983. In fact, Sri Tapuria was also appointed as one of the directors of the assessee-company on the very day on which the agreement for payment of consultancy fee was entered into by the assessee-company with him. The Income-tax Officer applying the provisions of section 40(c)(i) of the Income-tax Act, 1961, disallowed a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omotion of the sale of various types of Boeing aircraft in India. Sri Tapuria agreed to render all possible assistance to the Boeing Company on the assessee's behalf in carrying out negotiations with various prospective purchasers including Air India and Indian Airlines in connection with the sale of Boeing aircraft. Sri Tapuria was also appointed a director of the assessee-company on the same date, i.e., January 19, 1983. This was done with a view to enabling Sri Tapuria to finalise the negotiations with the Boeing Company and execute the formal agreement with them on behalf of the assessee-company. It was clearly understood that Sri Tapuria would be able to secure a final agreement with the Boeing Company within April, 1983, and with retrospective effect from January 1, 1983, as was originally proposed by the Boeing Company. On February 7, 1983, the assessee-company wrote to the Boeing Company confirming, inter alia, that it will be possible for the assessee-company to secure and provide to the Boeing Company the personal services of Sri Tapuria including the benefit of his vast experience and skill in this line of business. Sri Tapuria negotiated with the Boeing Company on behal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a director on January 19, 1983, was only for the sake of convenience to enable him to finalise the negotiations and execute the final agreement for and on behalf of the assessee-company under which the Boeing Company paid Rs. 25,50,000 to the assessee-company for rendering various services. The Commissioner of Income-tax (Appeals) noted that the object of section 40(c) of the Act is to prevent the directors from misusing their influence over the company to their advantage. He noted that Sri Tapuria was not a director of the company when negotiations were made with him for rendering specific services to the Boeing Company. The Commissioner of Income-tax (Appeals) also noted that the assessee-company did not pay any remuneration to any of its other directors for looking after the day to day business of the assessee-company. The Commissioner of Income-tax (Appeals) was of the opinion that the assessee-company was able to enter into the consultancy agreement with the Boeing Company of U. S. A. only because it was able to ensure the personal services of Sri Tapuria as an adviser and consultant being made available to the Boeing Company. The Commissioner of Income-tax (Appeals) felt that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... director or to a person who had a substantial interest in the company or to a relative of the director or of such person, if in the opinion of the Income-tax Officer any such expenditure is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. The opinion should be formed objectively from the point of view of a prudent businessman and after taking into account the statutory criteria and all relevant circumstances, and should not be influenced by immaterial considerations. The Income-tax Officer may under this clause disallow the expenditure in computing the profits of the company notwithstanding that any amount so disallowed is included in the total income of the recipient. In a case covered by this clause, the aggregate of the expenditure and allowance deductible in the assessment on the company cannot exceed Rs. 72,000 per annum. The object behind the provisions of clause (c) of section 40 was to discharge and disallow payment of high salaries and remunerations which go ill with the norms of an egalitarian society. The Supreme Court in Bharat Beedi Works Pvt. Ltd. v. CIT (C. A. No. 1452 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a matter of fact that the Boeing Company would not have appointed the assessee-company for rendering necessary services in India unless the assessee-company was able to ensure the personal services of Sri Tapuria being made available to the Boeing Company as an adviser and consultant. It is also an admitted fact that Sri Tapuria had considerable experience in the aforesaid line of business and had also good contact with the officials of the Boeing Company in the U. S. A. and it was with his personal efforts that in spite of keen competition the company was able to secure the consultancy contract for rendering various services with the Boeing Company of U. S. A. The subsequent letter of the Boeing Company addressed to the assessee-company on February 15, 1986, makes it quite clear that they were highly appreciative of the valuable services rendered by Sri Tapuria and they expressed their desire to further renew the agreement only on the understanding with the assessee-company to the effect that the assessee-company must ensure the continued personal services of Sri Tapuria being made available to the Boeing Company. These facts found by the Commissioner of Income-tax (Appeals) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate. This principle has analogy with the principle which the Supreme Court has enunciated in Bharat Beedi Works Pvt. Ltd.'s case [1993] 201 ITR 1063. It is an admitted fact that the retention of Mr. Tapuria was a necessary condition of the agreement which the foreign party entered into with the assessee-company. His appointment as a director, therefore, could be said to be a step taken by the company towards ensuring direct and closer association with Mr. Tapuria who is pivotal to the entire business of the company. The fact that the same amount of consultancy fee was to be paid to him even if he was not brought in as the director clearly shows that the fee paid has nothing to do with his holding the office of director. The appointment as director would have conceivably the only object of securing the consultant as an insider as well to eliminate the element of uncertainty for the success of the business but whatever further benefit or services the company received by having Mr. Tapuria as a director is not in effect remunerated by any extra sum. This is also a pointer that the payments received by him from the company were not for the services that he rendered as its director ..... X X X X Extracts X X X X X X X X Extracts X X X X
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