1. The assessee has filed these three appeals for the assessment years 1974-75 to 1976-77 from the common order of the Commissioner (Appeals) dated 29-9-1979.
2. The assessee claimed the following payments on account of remuneration and bonus to the managing director, M.L.G. : Assessment year Salary Rs. 1974-75 27,340 1975-76 62,550 1976-77 62,785 3. M.L.G. became the managing director of the assessee-company after his father passed away on 7-9-1972. The accounting period for the assessment years 1975-76 and 1976-77 ended on 31-3-1975 and 31-3-1976, respectively. The remuneration of the managing director in the assessment year 1973-74, i.e., in the year in which the father of M.L.G. died, was Rs. 1,000 per month. This continued even in the assessment year 1974-75 till 13-9-1973. From 14-9-1973 to 31-12-1973, it was raised to Rs. 1,500 per month and from 1-1-1974 it was raised to Rs. 4,000 per month.
The ITO disallowed the following sums out of the remuneration paid by the assessee to the managing director : Assessment year Remuneration disallowed Rs. 1974-75 7,500 1975-76 40,960 1976-77 41,285 4. Pursuance to the directions given by the Commissioner the ITO recorded the statement of M.L.G. on 7-7-1979. M.L G. then was 25 years old. He studied at St. Xavier's School with English medium and thereafter joined H.L. College of Commerce, Ahmedabad. M.L.G. left the studies when he was an under-graduate, because of the death of his father, who was the managing director till his death. M.L.G. used to attend the factory of the assessee since he was 12 years old along with his father. M.L.G. joined as director of the assessee-company in the year 1971 and used to attend his work during morning and evening hours and during vacations. M.L.G. has stated to the ITO that since there was no other responsible member in his family, he joined as a managing director of the assessee-company from 14-9-1972, i.e., 1 days after the death of his father. As a managing director, M.L.G. attended to purchases and sales and also secured finances for the assessee-company by standing as personal guarantor. M.L.G. stated to the ITO that the assessee-company got an overdraft of Rs. 32 lakhs from the Bank of Baroda in the year 1973-74 for which he was required to give his personal guarantee in addition to the hypothecation of the assets of the assessee-company. M.L.G. further stated that he looked after accounts, labour problems, production, etc., and further stated that his father had studied up to 7th vernacular only and that he was not knowing English at all. M.L.G. stated that his father was getting remuneration as a managing director as under :Financial year Amount Rs.1968-69 2,31,0001969-70 1,38,0001970-71 64,8001971-72 72,000 Shri M.L.G. further stated that the total turnover of the assessee-company as per statement of accounts was as under :Financial year Amount Rs. in lakhs1971-72 2091972-73 3141973-74 3501974-75 355 5. The Commissioner (Appeals) found it difficult to accept that the asses-see had developed his capability to such an extent that he was in a position to get a salary of Rs. 4,000 per month at the age of 25 years. It is stated in the order of the Commissioner (Appeals) that no material was placed before him to compare the managing director's remuneration paid to M.L.G. with the persons of similar qualification.
In the view of the Commissioner (Appeals), the reason for enhancing of the remuneration paid to M.L.G. from Rs. 1,000 to Rs. 4,000 within a period of few months was not clearly due to his experience or his capabilities. In the view of the Commissioner (Appeals), the fact that on the death of his father, M.L.G. was the eldest of the family who controlled the company had definitely weighed in the matter of determining his remuneration. In the view of the Commissioner (Appeals), part of the consideration for payment of Rs. 4,000 per month was not a business consideration. In view of the Commissioner (Appeals), the remuneration paid to M.L.G. was excessive and unreasonable having regard to the legitimate business needs of the company and experience and qualification of M.L.G.6. The Commissioner (Appeals) held that the disallowance made by the ITO for the assessment year 1974-75 was reasonable. The Commissioner (Appeals) observed that after M.L.G. became the managing director, he was rapidly gathering experience in the running of the company and was compelled to take more responsibilities on his shoulders. The disallowance made by the ITO for the assessment years 1975-76 and 1976-77 were directed to be reduced by Rs. 5,000 and Rs. 10,000, respectively. These deductions were allowed for the additional experience and skill developed by Shri M.L.G. during the relevant period.
7. It is seen from the assessment order for the assessment year 1974-75 that the assessee declared a total income of Rs. 15,85,579. The turnover was to the tune of Rs. 3,50,90,123 as against the turnover of Rs. 3,14,99,722 in the preceding year. Gross profit rate of 40.5 per cent was shown against the rate of 41 per cent in the preceding year.
The assessment order for the assessment year 1975-76 shows that the assessee declared the total income of Rs. 6,36,989, the turnover was to the tune of Rs. 3,55,825 (sic.), and the gross profit rate of Rs. 37.5 per cent was shown. For the assessment year 1976-77, the assessee filed the return of income declaring loss of Rs. 5,07,020 ; the turnover was to the tune of Rs. 9,83,58,112 ; and gross profit rate of 34.4 per cent was shown.
8. Shri J.P. Shah, the learned advocate for the assessee, strongly relied on the progress made and the achievements of M.L.G. in the first 2 years. Shri Kathuria, the learned authorised representative for the revenue, strongly relied on the fact that the managing director was just a boy who could not put all efforts and on the fact that there was loss in the third year.
9. No material was placed before us which would show that being a boy M.L.G. did not handle the business as effectively as was done by his father. Even if some deduction is to be made because M.L.G. did not have as much experience in business as his father had, it has to be remembered that the father of M.L.G. got the remuneration of Rs. 64,800 in the assessment year 1971-72 and Rs. 72,000 in the assessment year 1972-73 and received even much higher remuneration in the assessment years 1968-69 and 1969-70. Shri Kathuria relied on the fact that there was a big jump in the remuneration of M.L.G. in a very small spell. The remuneration of Rs. 1,000 up to 13-9-1973 was increased by Rs. 500 from 14-9-1973 and was further increased by Rs. 2,500 from 1-1-1974. In our view, this could not be the ground for holding that the remuneration given to M.L.G. was excessive. When M.L.G. was examined by the ITO on 7-7-1979, the ITO does not seem to have enquired from M.L.G. as to why his remuneration was raised from Rs. 1,000 to Rs. 1,500 and from Rs. 1,500 to Rs. 4,000. It may be that M.L.G. did not ask for higher remuneration till 14-9-1973 and still higher remuneration till 1-1-1974.
10. The reasons for loss in the third year are given in the letter dated 15-10-1977 from the assessee to the ITO. It is stated in this letter that there was less demand in the assessment year 1976-77 ; that there was general trend in rise in prices of raw materials; that rates for power and fuel had gone up ; that there was increase in wages because the workers were adopting go slow policy and more workers had, therefore, to be taken up ;and that the assessee had to give some compensation because the workers raised the disputes and that more workers had gone on earned leave wages. It is also stated in this letter that export sales had gone up from Rs. 5,99,771 to Rs. 22,41,881. As the assessee used to supply the goods at destination the freight was more in the year In the assessment year 1976-77, the freight was Rs. 3,59,398 as against Rs. 1,46,739. It is stated by the assessee in this letter that the managing director was working himself to cope up the sales and management of the company.
11. On the facts of this case, we are satisfied that M.L.G. was working as efficiently as his father. In view of his past experience and having regard to his better educational qualifications as compared to the educational qualifications of his father we hold that the remuneration paid to M.L.G. in all the three years was neither excessive nor unreasonable, having regard to the legitimate business needs of the company.
12. In the result, the appeals are allowed. The ITO is directed to delete the addition of Rs. 7,500 from the total income of the assessee for the assessment year 1974-75, the addition of Rs. 35,950 from the total income of the assessee for the assessment year 1975-76 in addition to the deletion of Rs. 5,000 in view of the order of the Commissioner (Appeals) and to delete Rs. 31,285 from the total income of the assessee for the assessment year 1976-77 in addition to the deletion of Rs. 10,000 in view of the order of the Commissioner (Appeals).