1. The following question of law has been referred under Section 256(1) of the Income-tax Act, 1961, by the Income-tax Appellate Tribunal (hereinafter referred to as the Tribunal):
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the order of the Appellate Assistant Commissioner allowing full amount of remuneration paid to the managing director for the assessment years 1965-66, 1966-67, 1967-68 and 1968-69 in view of the provisions of Section 40(c) of the Income-tax Act, 1961 ?'
2. The facts of the case are as follows :
The assessee-company was incorporated in 1961, with technical collaboration of M/s. Great Lakes Carbon Corporation of U.S.A. to undertake the manufacture of calcined petroleum coke, calcined anthracite coke, chemicals and chemical products. The company was established at Noonmati in Gauhati in 1962 with an initial capacity of 30,500 tons per annum. The Income-tax Officer, in the course of assessment for the assessment year 1965-66, found that the company had claimed a deduction of Rs. 69,378 being the remuneration payable to the managing director of the company, Shri B. Himatsingka, who in terms of the company's resolution passed on 4th December, 1962, was to get a remuneration at the rate of 5% of the net profit of the company. This remuneration had earlier been approved by the Government of India in the Department of Company Law Administration. This approval had been given under the provisions of Section 269 of the Companies Act, 1956, and approval had been granted subject to the condition that if the company proposed to appoint any selling agents in future and if the managing director or his wife and/or son(s) are interested in the selling agency, directly or indirectly, the appointment of the selling agents shall be made only after obtaining the prior approval of the Central Government. Later on, it was also provided that the managing director was to get a minimum remuneration of Rs. 30,000 per year. The Income-tax Officer found that there were no reasons given in the company's resolution for fixing the remuneration at the above rate. Before the Income-tax Officer it was represented that the managing director was looking after the Calcutta office of the company and used to visit the factory at Gauhati in connection with the management of the company affairs. The Income-tax Officer further found that Shri Himatsingka was aged 44 years and was a commerce graduate of the Calcutta University. It was claimed that Shri Himatsingka had considerable business experience in various capacities in certain companies, namely, M/s. Bharat Plastics Ltd. and M/s. Himatsingka Timbers Ltd. The Income-tax Officer, however, was not satisfied about the nature of service rendered by Shri Himatsingka in the above company and he was also not satisfied about the payment of remuneration at a fixed percentage of net profit in a 'fast developing monopoly concern' as the assessee was. The Income-tax Officer further noted that the company was a pioneer in calcined coke manufacturing industry in India and had the monopoly of the supply of these raw materials to the aluminium industry. Hiving regard to the special position, the managing director had hardly any scope to render any service for capturing the market or for any other purpose ancillary to the sale of its products. He further remarked that the company had already entered into a 5 years' agreement with the Indian Oil Corporation Ltd. for the monopoly right of purchases of the raw petroleum coke, which is a by-product of the petroleum industry. The Income-tax Officer further remarked that for the manufacturing operations of the company it had a large number of highly paid employees stationed at Gauhati and the managing director had hardly anything to do in that process. In view of this, the Income-tax Officer was of the view that the remuneration was not justified having regard to the benefits derived by the company from the services rendered by him. According to him, as Shri Himatsingka's group held about 20% of the shares of the company and there was no other controlling group, such high remuneration could be sanctioned without any difficulty. The remuneration, according to him, was fixed for benefiting the Himatsinghka family. Thus, applying the provisions of Section 40(c) of the Income-tax Act, 1961, the Income-tax Officer held the remuneration paid to be excessive and fixed the reasonable remuneration at Rs. 4,000 per month. On this basis Rs. 48,000 was allowed as deduction and the balance of Rs. 21,378 was disallowed.
3. Similarly, for the assessment years 1966-67, 1967-68 and 1968-69, the assessee had claimed deductions in respect of managing director's remuneration at Rs. 90,836, Rs. 1,04,878 and Rs. 2,47,326. The Income-tax Officer in these years had allowed the remuneration at the rate of Rs. 4,200 and Rs. 4,300 per month, respectively, and disallowed the balance under the provisions of Section 40(c) of the Income-tax Act.
4. The assessee preferred appeals before the learned Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner considered the facts of the approval given by the Company Law Administration, the business experience and abilities of Shri Himatsinghka, and that preference shares of Rs. 10,00,000 were owned by the Government of Assam which constituted about 1/5th of the company's capital and came to the view that it was not very easy for Shri Himatsingka to have got the resolution passed in his favour. The Appellate Assistant Commissioner also did not agree with the view of the Income-tax Officer that in the line of business of the assessee-company much managerial skill was not required for running the business. Having thus held, the Appellate Assistant Commissioner allowed the remuneration as claimed by the company and passed a consolidated order for the assessment years 1965-66 and 1966-67 and two other separate orders for the assessment years 1967-68 and 1968-69.
5. The department preferred appeals against the orders of the learned Appellate Assistant Commissioner before the learned Income-tax Appellate Tribunal. The submission made on behalf of the department as well as on behalf of the assessee was considered by the learned Tribunal as appears from the statement of facts.
6. In its judgment the Tribunal took into consideration the fact that the resolution had been passed fixing remuneration of 5% of the net profit at a time when the profit of the company was rather uncertain and it could not be said with certainty whether the company would be successful in achieving its targets in such a new business, and that there could always be a possibility of the company not doing so well as it had actually done. The minimum remuneration as per resolution was Rs. 30,000 per annum. The Tribunal found that it was not a case where the remuneration once fixed has been increased without there being a business need for that. But the fixation of the remuneration itself was after considering the legitimate business needs of the company and the benefits derived by the company from the payment of this remuneration. The Tribunal in its judgment also noticed the qualifications and the background of Shri Himatsingka and the interest taken by him in organising the business of the company.
7. Considering the facts and circumstances of the case the Tribunal held that the remuneration of the managing director at 5% of the profits could not be held to be excessive nor could it be held that it was from consideration other than business as alleged by the Income-tax Officer. For these reasons, the Tribunal upheld the order of the Appellate Assistant Commissioner.
8. We have perused the judgment of the Tribunal and it is found that the Tribunal has considered all the facts and circumstances of the case as
appear from the record and has come to the definite finding that the approval of the remuneration of the managing director at 5% of the net profits could not be held to be excessive or it could not be held that it was from any consideration other than business as alleged by the Income-tax Officer.
9. On perusal of the judgment of the Tribunal we find that the above finding of the Tribunal is based on materials on record and the finding cannot be said to be otherwise perverse. If a finding of fact is arrived at without any materials on record or if a finding of fact arrived at on the materials on record cannot be said to have been arrived at by any reasonable person such a finding may be said to be perverse. If a finding of fact is contrary to law applicable to the facts of the case then also such a finding may be said to be perverse. In the instant case, however, we find that the Tribunal's finding referred to above cannot be said to be perverse in any view of the matter and that being so the finding of fact is binding on this court. We also find that the question of law referred is concluded by the finding of fact arrived at by the Tribunal in the instant case.
10. That being so, the question of law referred is answered in the affirmative and against the revenue.
D.M. Sen, J.
11. I agree.