1. In this reference we are concerned with the assessment of the assessee for the assessment year 1961-62. The assessee is a private limited company and carries on business of manufacture and sale of collapsible tubes. One Mr. M. L. Patel was appointed as the managing director of the assessee-company under art. 66 of the company's articles of association and in the relevant assessment year, he was paid a salary of Rs. 1,500 per month and commission at the rate of 1% on sales of the assessee-company amounting to Rs. 9,792. Originally Mr. Patel was paid a salary of Rs. 1,000 per month plus a commission of 1% on the sales of the company. Out of 1,100 shares of the company, Mr. Patel held 605 ordinary shares in his own name and some shares were owned by his wife and other relatives. In the assessment order for the assessment year 1961-62, the ITO disallowed the amount of Rs. 9,792 in the assessment of the company on the view that Mr. Patel was a managing agent within the meaning of s. 2(25) of the Companies Act. With regard to the increased remuneration, the increase being Rs. 500 per month, the ITO took the view that the increase was made solely out of considerations other than commercial ones. In the assessment year in question, the assessee had shown that a sum of Rs. 2,500 was borrowed from one Newandram Motumal on 2nd June, 1960. Newandram was examined by the ITO. The ITO, however, took the view on a consideration of the evidence of Newandram that the hundi loans introduced in the name of Newandram was nothing but the company's profits from undisclosed sources of income.
2. The assessee filed an appeal before the AAC. The AAC took the view that the remuneration payable to the managing director had been linked with the sales of the company and increase in business would naturally result in extra commission and the managing director was, therefore, compensated in the form of increased commission in the relevant previous year in view of higher turnover in the business. He, therefore, agreed with the ITO that the increment of Rs. 500 per month given to Mr. Patel was unreasonable in terms of the provisions of s. 10(4A) of the Indian I. T. Act, 1922. He also took into account the fact that Mr. Patel was working as a managing director of a company called 'Lans Metal & Enamel Works Pvt. Ltd. ' from where also he was drawing a remuneration of Rs. 1,200 per month. With regard to the disallowance of the loan amount of Rs. 2,500 from Newandram Motumal, the AAC endorsed the finding of the ITO and held that the ITO was justified in assessing a sum of Rs. 2,500 as the assessee's income from undisclosed sources. It may be stated that the AAC had reversed the decision of the ITO with regard to the amount of Rs. 9,792 and he had held that the commission paid to Mr. Patel was reasonable.
3. The revenue was aggrieved by the decision of the AAC with regard to the amount of Rs. 9,792 and the revenue filed an independent appeal before the Appellate Tribunal. In that appeal, the Tribunal took the view that the payment on account of commission was made for commercial expediency in view of the large increase in the volume of turnover and gross profit. The assessee had also filed an appeal before the Appellate Tribunal. With regard to the disallowance of the increased amount of remuneration of the managing director, the Tribunal took the view that the facts of the case showed that the turnover and profit and work had considerably increased and even taking into account the facts that the managing director was getting commission from the company and also remuneration from another company, on an overall consideration, according to the Tribunal, the managing director deserved some increment. With regard to the quantum of the increased salary of the managing director, the Tribunal observed as follows :
'Basing on an annual increment of Rs. 100 for earlier 3 years during which period there was no increment it would amount to Rs. 300 and the increase would amount to Rs. 3,600 for the year. Therefore, to meet the ends of justice, half of the increase of Rs. 6,000 now granted to him will be a reasonable allowance.'
4. With these observations, the Tribunal directed the ITO to allow Rs. 3,000 by way of increased remuneration. With regard to the loan of Rs. 2,500, the Tribunal observed that the questions with regard to the necessity of borrowing could not be satisfactorily answered on behalf of the company. The Tribunal found that for a company with such large transactions, it was difficult to appreciate why it should pay an idle interest for a partly sum of Rs. 2,500 for which there was no need and which, if really needed, the company could have managed to borrow otherwise. The Tribunal further held that in view of the circumstance and also in view of the fact that the money-lender has not shown by evidence other than his oral statement the fact of his having advanced the amount, the AAC was fully justified in confirming the order of the ITO.
5. The assessee having sought a reference in respect of the disallowance of a part of the increased remuneration of the managing director and the loan of Rs. 2,500, the following two questions have been referred to this court at his instance :
'(1) Whether, on the facts and in the circumstances of the case, the disallowance out of the remuneration of the managing director of a sum of Rs. 3,000 (Rupees three thousand) is right in la
(2) Whether there was any evidence at all to support the Tribunal's view that the sum of Rs. 2,500 (Rupees two thousand and five hundred) borrowed by the assessee-company from Mr. Newandram Motumal, which loan was admitted by the lender, could be treated as the undisclosed income of the assessee-company ?'
6. So far as the first question is concerned, Mr. Dastur, the learned counsel appearing on behalf of the assessee, has urged that the Tribunal having taken the view that an increment in the remuneration of the managing director was necessary, it could not have gone on to determine the quantum of the increase in the remuneration. In any case, it is contended that the statement with regard to the staff salaries and the increased expanded business of the company, which is now taken on record as annex.'E' to the statement of the case, was sufficient to indicate that the burden of work on the managing director had considerably increased in the assessment year in question and, therefore, the Tribunal should have upheld the increase in the remuneration of the managing director wholly. However, the Tribunal itself having found that the increase in the remuneration was called for, it is really not necessary for us to go into the items set out in the statement, annex.'E' to the statement of the case, though it does show that in the relevant accounting year there were only five persons who were employed on remuneration, yet the business had considerably increased and there was also an increase in the assets of the company. As compared with the accounting year ending 31st December, 1959, in the accounting year ending 31st December, 1960, sales had gone up by more than Rs. 2,50,000. The profits in the accounting year ending 31st December, 1959, were Rs. 1,14,376. These profits in the next year were Rs. 95,640 and it is possible that this fall in the profits is due to the increase in wages and remuneration as is sought to be explained because while in the earlier year there were only 23 workers, in the accounting year in question, the number of workers was 77. All these circumstances justified the view of the Tribunal that an increase in the remuneration was called for. But once that finding is reached, it is difficult to see how the Tribunal could adopt a subjective standard of reasonableness of the increase in the remuneration and disallow a part of the increase in the managing director's remuneration on the ground that it is unreasonably large. The reasonableness of the remuneration has to be considered from the point of view of the businessman and, in our view, it was not open to the Tribunal to adopt a subjective standard with regard to the proper remuneration which should have been paid to the managing director. In our view, the Tribunal was clearly in error in holding that only a part of the increased remuneration for the assessment year in question should be allowed.
7. So far as the second question is concerned, it is vehemently contended by Mr. Dastur in the course of his arguments that all the materials that was possible to be produced by the assessee was produced before the ITO and if the ITO wanted to be satisfied about the financial status and capacity of Newandram to advance loans, he should have sent for the income-tax assessment file of the said Newandram. According to the learned counsel, in the context of the circumstances, the statement of Newandram should have been fully accepted because there was nothing to show that he was not speaking the truth. Mr. Dastur seriously contested the inference drawn by the income-tax authorities that the said amount of Rs. 2,500 represented undisclosed income of the assessee. After having argued on the second question for some time, Mr. Dastur, however, stated that having regard to the smallness of the amount involved, the assessee does not require the court to answer the reference in respect of the second question. It is not, therefore, necessary for us to consider the arguments advanced on behalf of the assessee.
8. In the view which we have taken, the answer to the first question is in the negative and against the revenue. The second question is not answered. Parties to bear their own costs.