9911796707
TMI Blog1978 (2) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... d here that Sri J. H. Somerville held most of the shares of the assessee-company and was the managing director of the company till his retirement on 30th April, 1968. On 1st May, 1968, Sri J. D. Somerville, who was his son and director of the company till 30th April, 1968, became the managing director with effect from 1st May, 1968. It was further claimed that for the assessment years 1967-68 and 1968-69, Sri J. H. Somerville, the then managing director, was paid a bonus of Rs. 9,000 in cash for two years. Similarly, in the case of the other director, Sri J. D.. Somerville, it was claimed by the assessee-company that he was paid a bonus of Rs. 4,560 for the assessment year 1967-68 and also Rs. 6,300 for each of the two assessment years 1968-69 and 1969-70. The ITO considered all the facts and circumstances of the case and held that there was no justification for any increase in the remuneration of the then managing director, Sri J. H. Somerville, or the other director, Sri J. D. Somerville. He also held that on the retirement of Sri J. H. Somerville, there was no justification whatsoever on his being paid the same amount as pension which he was drawing as salary prior to retirement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor he should be given a salary of Rs. 3,000 per month. The disallowance of excess over these amounts which were claimed as deduction was confirmed by the AAC. He also confirmed the disallowance of bonus claimed to have been paid by the assessee-company to these persons. There were further appeals to the Tribunal. The Tribunal came to the conclusion that provisions of s. 40(c) of the I.T. Act, 1961, were applicable. The Tribunal took into consideration all the facts and circumstances of the case in order to hold, looking at the legitimate business needs of the company and the benefit derived by it that the salary and bonus paid to these directors as worked out by the AAC was reasonable and the excess was rightly disallowed under the provisions of s. 40(c) of the I.T. Act, 1961. The Tribunal also upheld the disallowance of bonus paid to these persons under the provisions of s. 40(c) of the I.T. Act, 1961. On an application made, the Tribunal has referred, under s. 256(1) of the I.T. Act, 1961, the following question to this court: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the disallowance out of payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d proviso to clause (a) of sub-section (5) of section 40A shall not be taken into account for the purposes of sub-clause (A) or sub-clause (B), as the case may be. Explanation.-The provisions of this clause shall apply notwithstanding that any amount not to be allowed under this clause is included in the total income of any person referred to in sub-clause (i)." On behalf of the assessee, it was urged that s. 40(c) ; in the facts and circumstances of the case, would have no application. It was submitted that in case of payment of salary or other amounts in the shape of bonus or pension, this would not be an expenditure which resulted directly or indirectly in any remuneration or benefit or amenity to the director. When the sub-section speaks of resulting " in any remuneration " the expenditure must be such other than the remuneration. The expenditure in the shape of remuneration or benefit or amenity, according to counsel for the assessee, could not be termed as something which resulted in the remuneration or benefit or amenity to a director. It was submitted that on a proper construction of the section, the disallowance that was spoken of in the sub-section was not in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributed to it in the first. In my opinion, there is no change in the meaning that is intended. " An identical contention was raised before this court in the case of the present assessee in Income-tax References Nos. 271 272 of 1968 (Eastern Scales P. Ltd. v. CIT . In that case while dealing with this contention, I had observed that it was not necessary to rest our decision on this contention in the view we had taken on the other contentions urged in that matter. It was, however, observed that the points raised on behalf of the assessee were substantial. In the instant reference before us, counsel for the assessee has again urged for acceptance of this contention. On a closer examination of this argument, it appears to us that the same cannot be accepted. The sub-section speaks of disallowance of the expenditure. The expenditure would be incurred by the company. The company's expenditure would result in the benefit either in the shape of remuneration or benefit or amenity. Therefore, where the remuneration of a director is increased or other benefit or amenity is given to a director of the company, the expenditure incurred by the company would cause that result. The expressi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , urged that the revenue authorities had proceeded on erroneous basis. It was further submitted that so far as item No. (5), viz., Rs. 10,113, out of the salary of Sri J. D. Somerville including perquisites was concerned, this should have, in any event, been allowed because the disallowance by the Tribunal in the earlier years had not been sustained by the High Court subsequently. This question will now have to be viewed in the light of the decision of the Supreme Court, as mentioned hereinbefore, in the case of Nund Samont Co. P. Ltd. v. CIT [1970] 78 ITR 268. There, the Supreme Court was dealing with s. 10(4A) of the Indian I.T. Act, 1922, which was in identical terms with the present s. 40(c) of the Income-tax Act, 1961. The Supreme Court observed that in any enquiry under s. 10(4A) of the Indian I.T. Act, 1922, into excessiveness or unreasonableness of an allowance resulting in the provision of any remuneration or benefit or amenity to a director or a person who had a substantial interest in the assessee-company, it was for the taxpayer to establish by evidence that a particular allowance was justifiable. If the taxpayer did dot produce any evidence in support of the claim fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oldings of the concerned company. It has also to be borne in mind that there was no evidence of payment of any bonus in any earlier year or to other employees of the company. There was no tangible evidence also of any difference in the quality of work done as a result of the payment of bonus. Similarly, in the case of pension to the managing director it has to be borne in mind that there was no scheme of pension in this company as a result of which this payment was made. This pension was not paid as a matter of a scheme which would attract better people to the company, nor was this pension announced to the directors concerned at the beginning of their careers with the company so as to be an inducement to make them work better. In this background and in the absence of any further evidence if the Tribunal has considered all the evidence adduced by the assessee, and in the instant case there is no grievance that any further evidence adduced by the assessee had been neglected or not considered by the revenue authorities, then it cannot be said that there has been misapplication of the provisions of cl. (c) of s. 40 of the Act. Counsel for the assessee drew our attention to the observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Madras High Court had to consider whether bonus formed part of the salary and it was held that it had formed part of the salary in terms of s. 40(c)(iii) as it stood as at the relevant time. Our attention was also drawn to the decision of the Gauhati High Court in the case of CIT v. India Carbon (P.) Ltd. [1977] 106 ITR 107, but in view of the facts and circumstances of that case, which were different from the case before us, it is not necessary to discuss the said decision in any detail. For the principles mentioned before, we have, therefore, to uphold the order of the Tribunal. So far as the arguments with regard to item No. 5 in the order of the ITO for the assessment year 1967-68 and similar orders in the subsequent two assessment years are concerned, it appears that the ITO has proceeded on the basis that one-fourth was disallowed by the Tribunal in the earlier years. Now, in the earlier years, one-fourth had been disallowed on the ground that the same were capital expenditure being expenditure incurred for expansion of the existing business. But, in this case, all the increments had been considered by the Tribunal in the light of the evidence adduced by the two yardsti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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