1. The question referred to us in this reference is as follows :
'Whether, on the facts and in the circumstances of the case, the remuneration of Rs. 57,600 paid to the directors and other persons of the assessee-company during the accounting period ended 31st December, 1963, relevant to the assessment year 1964-65 was reasonable having regard to the legitimate business needs of the company and was admissible as deduction from the assessee's business income ?'
2. The assessee before us is a private limited company and the assessment year in 1964-65. In the year 1963, i.e. the year under consideration, the company enlarged the ambit of its business activity as mentioned in the statement of case, with the result that it enhanced the remuneration payable to the managing director and other directors; it also appointed one Dinubhai G. Desai as a liaison officer and paid him a monthly remuneration of Rs. 1,400 for ten months. All these persons were concerned with the group controlling the company. The ITO considered that the remuneration paid to the following persons, viz., Smt. Khatau, R. D. Desai, S. D. Desai and Dinubhai G. Desai, was excessive having regard to the legitimate business needs of the company. The assessee contended otherwise, but these contentions were rejected and by his order dated 30th December, 1965, the ITO allowed only Rs. 23,400 out of the total amount of Rs. 57,600 claimed as deduction by the company. The disallowance was under s. 40(c) of the I.T. Act, 1961. The company took the matter in appeal to the AAC who confirmed the action of the ITO by his order dated 21st June, 1966. The matter was thereafter carried in further appeal to the Tribunal. The Tribunal went into the question of remuneration. It accepted the assessee's contention partly and increased the allowance to Rs. 28,500 and reduced the disallowance to Rs. 29,100. It is from this order of the Tribunal that the reference has been made to us.
3. It has been submitted before us that there was no basis for taking action by way of disallowance under s. 40(c) and the remuneration given to these persons could not by any stretch of imagination be regarded as excessive or unreasonable having regard to the legitimate business needs of the company. It was submitted that the opinion was required to be formed objectively from the point of view of a prudent businessman after taking into account the statutory criteria and all relevant circumstances and should not be influenced by immaterial considerations.
4. It was contended before us by counsel for the assessee that the authorities below has principally approached the question of remuneration by comparing the remuneration paid in this year with the remuneration earlier paid and ignoring or not sufficiently emphasising the change in the nature of the company's activity, which was such a tremendous change, that from the commercial point of view, enhanced remuneration as paid to all the persons was required to be paid and ought to have been allowed. It was further pointed out that the ITO has emphasised that if all such remuneration were allowed as necessary deduction, the amount of net taxable profits would come down to a very low figure as contrasted with the gross profits. It was submitted that such an approach was not justified.
5. As far as the Tribunal's order is concerned, it was submitted that although the Tribunal has dealt with the case of these four persons in paras. 10, 11, 12 and 13, respectively, the order of the Tribunal can hardly be regarded as satisfactory. In para. 10 of its order the Tribunal deals with the case of the managing director, Smt. Khatau. The Tribunal in this para refers to the large establishment of the firm of M/s. Dinubhai G. Desai & Co. as well as of another concern, Messrs. C &C.; Traders, which establishments were taken over by the assessee-company in the year under consideration. The Tribunal has emphasised this fact to suggest that since such a large establishment was taken over, there would not be any material change in the duties of the managing director, whereas the position may be exactly to the contrary. With an increase in the establishment there may be increase in the necessity of overall supervision over the employees. The sequitur assumed by the Tribunal does not appear to us to be a necessary sequitur assumed by the Tribunal does not appear to us to be a necessary sequitur of the fact earlier mentioned. Further, the Tribunal has allowed to the managing director an increase of Rs. 250 per month and while so doing the Tribunal seems to have substituted its own subjective assessment for the businessman's assessment, which is the proper criterion.
6. The same comments can be made with even greater emphasis for R. D. Desai and S. D. Desai, whose cases are dealt with in paras 11 and 12 of the Tribunal's order. Both were concerned in the firm which was taken over; the former was looking after the sales and was in constant contact with 30 textile mills from whom business was secured. He was looking after purchases from Inarco Ltd. and was also concerned with the recovery work. The Tribunal in his case has allowed remuneration at the rate of Rs. 1,000 per month without giving any cogent reason for the reduction from the amount paid by the company. Similar is the situation for S. D. Desai who was the branch manager at Ahmedabad. In his case, the Tribunal reduced his remuneration from Rs. 1,000 per month paid by the company to Rs. 700 per month.
7. In the case of Dinubhai G. Desai, who from the name appears to be the principal person concerned with the firm which was taken over, the Tribunal upheld the reduction from Rs. 1,400 per month paid by the company to Rs. 500 per month on the ground that his designation was liaison officer. The Tribunal in its order has not indicated or given any finding as to what work the said person was doing as liaison officer. It would be the nature of work- the extent of duties performed, and not the label which would determine whether the remuneration can be said to be excessive or not.
8. It may be pointed out that for the years following, the matter was considered in great by the ITO and by the relevant orders ultimately passed, the following monthly remuneration has been allowed to each of the persons as under :
Rs.Mrs. M.L. Khatau 1,400 p.m.R. D. Desai 980 p.m.S.D. Desai 980 p.m.Dinubhai G. Desai 840 p.m.
9. It was submitted by counsel on behalf of the assessee before us that in view of what has been subsequently allowed, the disallowance by the Tribunal in the amount of Rs. 29,600 of the total remuneration of Rs. 57,600 paid by the assessee-company was totally unjustified. He invited us to confirm that the disallowance should be restricted to the difference between the amount of Rs. 57,600 and what had been allowed in the subsequent year.
10. We, however, find ourselves in some difficulty in adopting the course as suggested by counsel on behalf of the assessee. Whether the remuneration is excessive in the circumstances or not is a matter primarily to be determined by the fact-finding body, viz., the Tribunal. It is possible to hold in this case that the Tribunal has not properly applied its mind to the various relevant considerations and the consideration which are to be found in its order cannot be regarded as wholly satisfactory. This, however, may not mean that we can assume to ourselves the jurisdiction which is that of the Tribunal. We were then invited to answer the question in a manner which would indicate to the Tribunal that the manner of disallowance made by it was defective and that the Tribunal should come to a proper conclusion bearing in mind the various relevant circumstances, considered even from a businessman's point of view, and also bearing in mind what was subsequently allowed as a deduction by the ITO. We think that, in the circumstances, this would be the proper course to adopt.
11. In the result, the question referred to us is answered as follows : We find from the order of the Tribunal that the disallowance of the amount of Rs. 29,100 out of the total remuneration of Rs. 57,600 paid to the directors and other persons of the assessee-company during the assessment year 1964-65 has not been properly considered, and we, accordingly, mind to the question afresh bearing in mind the relevant circumstances as indicated, adopting a proper approach and also taking into consideration what has been allowed as proper remuneration in the subsequent year.
12. The parties will bear their own costs of the reference.