1. In this reference by the Income-tax Appellate Tribunal, Bombay Bench D, at the instance of the Commissioner of Income-tax, Bombay City-III, under s. 256(1) of the I.T. Act, 1961, the following two questions haves been referred to us for our opinion :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that payments made by the assessee-company to its directors by way of commission were made only for services rendered by them to the assessee-company ?
(2) Whether, on the facts and in the circumstances of the case, the Income-tax, Officer was justified in disallowing payment of commission to the directors of the assessee-company under section 40(c)(i) of the Income-tax Act, 1961 ?'
2. We are concerned in this case with the assessment years 1962-63, 1963-64 and 1964-65, with the relevant accounting years ending on 31st December, 1961, 31st December, 1962, and 31st December, 1963, respectively. The dispute is as regards allowance of expenditure by way of commission payments to the directors of the assessee-company, being of Rs. 1,34,735, Rs. 1,83,691 and Rs. 2,04,244, respectively, for the concerned assessment years.
3. The assessee-company, a family concern, was incorporated on 29th September, 1958, for manufacture of heavy chemicals required for electroplating industry. During the relevant accounting years 1961, 1962 and 1963, it had six directors who were also the directors of the assessee-company even during the previous years. Under separate agreements, the directors were entitled to a salary and certain commission based on the percentage of profits.
4. For the concerned assessment years, salaries and commission based on profits paid to the six directors were as follows :
1962-63 1963-64 1964-65
Salary Com- Salary Com- Salary Com-
mission mission mission
Rs. Rs. Rs. Rs. Rs. Rs.
1. Shri A. N. 15,600@ 40,148@ 15,600 55,107 15,600 61,273
Kotibhaskar, 1,300 12% of
Managing p.m. profits
2. Shri M. G. 5,400@ 30,313@ 5,400 41,331 5,400 45,955
Kotibhaskar, 450 90% of
Chairman, p.m. profits
3. Shri R. Y. 10,800@ 26,945@ 10,800 36,738 10,800 40,849
Shahane, 900 8% of
Technical p.m. profits
4. Shri C. N. 6,000@ 16,841@ 6,000 22,961 6,000 25,531
Kotibhaskar, 500 5% of
Business p.m. profits
5. Shri H. N. 1,800@ 10,104@ 1,800 13,777 1,800 15,318
Kotibhaskar, 150 3% of
Director. p.m. profits
6. Shri R. G. 1,800@ 10,104@ 1,800 13,777 1,800 15,318
Kotibhaskar, 150 3% of
Director. p.m. profits
5. All the directors come from the same family of Kotibhaskar.
6. The ITO on the same reasoning as given by him in his assessment order for the assessment years 1960-61 and 1961-62, acting under s. 40(c)(i) of the I.T. Act, 1961, disallowed the said payments of commission to the directors. In the company's assessment for the years 1960-61 and 1961-62, the ITO had, acting under s. 10(4A) of the Indian I.T. Act, 1922, disallowed the said payments to the directors by way of commission on the ground that the said arrangement by the assessee-company with the directors was a cloak for the diversion of profits made by the company into the hands of the directors as commission. The factors that the ITO relied upon for that finding were that all the directors were from the same family, that the assessee-company was a family concern, that four of the directors were initially partners in the firm which was taken over by the company, and that the said directors were drawing lower salaries as partners of the firm.
7. It may be pointed out that against the said assessment orders for the years 1960-61 and 1961-62, the assessee-company had appealed to the AAC, who had confirmed the same. However, in appeal to the Tribunal against the said orders, the Tribunal had reversed the orders of the ITO and allowed the said amounts of commission.
8. In its said order in respect of the assessment years 1960-61 and 1961-62, the Tribunal, after going through all the facts and circumstances of the case, had observed :
'We are satisfied that the said six directors of the company were men of considerable experience and men of status and have the necessary qualifications. We are also satisfied that the duties assigned to them are of a responsible nature unlike in the case of ordinary employees. It is also to be noted that the directors have almost paid nearly the same tax as would have been paid by the company, if the said amount was disallowed. It is also an admitted fact that there is an increase in the business of the company.... But if the payment to each director is taken into account, in our opinion, it cannot be considered excessive, as in similar positions as employees, it would not be difficult for us to believe that such a person would not offer himself for a lower emolument than he gets now. Mere drawing of low salaries as partners in the earlier firm cannot lead us to conclude that large profits accruing to them in the partnership firm were not as a result of services rendered by them.'
9. In appeal to the AAC against the orders of the ITO in respect of the concerned assessment years 1962-63, 1963-64 and 1964-65, the AAC by his consolidated order, relying on the said earlier order of the Tribunal for the assessment years 1960-61 and 1961-62, set aside the orders of the ITO in respect of the commission to the directors and allowed the said amounts.
10. In an appeal by the Revenue against the AAC's consolidated order for the said assessment years the Tribunal, following the reasoning in its said earlier order for the assessment years 1960-61 and 1961-62, dismissed the appeal and confirmed the AAC's order on that point. In its said order the Tribunal again observed :
'On the facts and having regard to the experience, qualifications and duties of each of the six directors of the company and the low salaries paid to them, and taking into account the expansion in business turnover and profits from year to year and considering the legitimate business needs of the company, and considering the benefit derived by the company from the payment of commission on profits to each of the six directors, we were of the view that the commission paid to each of the directors for services rendered is not excessive or unreasonable so as to call for disallowance of the same in terms of the provisions of section 40(c)(i) of the Income-tax Act, 1961.'
11. It is this finding of the Tribunal that is challenged before us by the Revenue. Section 40(c)(i) of the I.T. Act, 1961, corresponding to the provisions of s. 10(4A) of the Indian I.T. Act, 1922, so far as is relevant, provides :
'40. Amounts not deductible. - Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession',...
(c) in the case of any company -
(i) any expenditure which results directly or indirectly in the provisions of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be,...
if in the opinion of the Income-tax Officer any such expenditure or allowance as is mentioned in sub-clauses (i) and (ii) is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom, so, however, that the deduction in respect of the aggregate of such expenditure and allowance in respect of any one person referred to in sub-clause (i) shall, in no case, exceed -'
12. In our view, the question whether any such payment made to the directors, in this case commission on profits, was excessive or unreasonable, having regard to the legitimate business needs of the company, and the benefit derived and accruing to it therefrom was purely a question of fact, primarily for the determination of the Tribunal. This court in the case of Caravan Containers P. Ltd. v. CIT : 120ITR636(Bom) , has held that the question arising under the said section would be a matter for the Tribunal which is the fact-finding authority to decide.
13. In that view of the matter, the questions referred to us for our opinion, not being questions of law, need not be answered by us.
14. However, even if they were to be answered, we find that the Tribunal in both its orders namely, for the assessment years 1960-61 and 1961-62, dated 21st September, 1967, and for the subsequent assessment years 1962-63 to 1964-65 dated 8th October, 1969 (annexs. 'E' and 'F' respectively), has given cogent reasons for arriving at its finding that the said commission from the profits paid by the assessee to its directors was not excessive or unreasonable. There was no allegation that the said finding was either mala fide or perverse. We would, therefore, accept the said finding of the Tribunal.
15. In that view of the matter, firstly, we do not think that the said questions framed, being purely questions of fact, were referable to this court. However, if the same were to be answered, we would answer the same as under :
16. Question No. 1 : In the negative and in favour of the assessee.
17. Question No. 2 : In the negative and in favour of the assessee.
18. Revenue to pay the costs of the reference.