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J.B. Bottling Co. (P.) Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtDelhi High Court
Decided On
Case NumberIncome-tax Case No. 10 of 1972
Judge
Reported in[1975]98ITR512(Delhi)
ActsIncome Tax Act, 1961 - Sections 40 and 256
AppellantJ.B. Bottling Co. (P.) Ltd.
RespondentCommissioner of Income-tax
Appellant Advocate G.C. Sharma,; R. Chawla and; L.C. Goyal, Advs
Respondent Advocate B.N. Kirpal, Adv.
Cases ReferredNund & Samoni Co. P. Ltd. v. Commissioner of Income
Excerpt:
.....deductions. - - 49,316 under section 40(c) of the income-tax act, 1961, being remuneration paid to the directors of the assessed-company, in accordance with the terms of its articles of association ? (2) whether, on the facts and in the circumstances of the case, and having regard to the legitimate business needs of the company and the benefit derived by or accruing to it there from, there was any evidence before the tribunal to hold that the remuneration paid to the directors was excessive or unreasonable, within the meaning of section 40(c) of the income-tax act, 1961 ? (3) whether the tribunal was right in law in placing the onus of proof as regards the excessive or unreasonable character of the remuneration paid to the directors and in coming to a finding that the assessed..........j. b. bottling co. p. ltd. (herein called 'the petitioner') against the order of the income-tax appellate tribunal, refusing to state the case and refer the following questions, said to be questions of law arising out of its order in respect of two appeals of the petitioner relating to assessment years 1963-64 and 1964-65.2. for the assessment year 1963-64, the following questions were suggested :'(1) whether, on the facts and in the circumstances of the case, the tribunal was justified in law in upholding the disallowance of the sum of rs. 49,316 under section 40(c) of the income-tax act, 1961, being remuneration paid to the directors of the assessed-company, in accordance with the terms of its articles of association ?(2) whether, on the facts and in the circumstances of the case,.....
Judgment:

Khanna, J.

1. This petition under Section 256(2) of the Income-tax Act, 1961, has been filed by Messrs. J. B. Bottling Co. P. Ltd. (herein called 'the petitioner') against the order of the Income-tax Appellate Tribunal, refusing to state the case and refer the following questions, said to be questions of law arising out of its order in respect of two appeals of the petitioner relating to assessment years 1963-64 and 1964-65.

2. For the assessment year 1963-64, the following questions were suggested :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding the disallowance of the sum of Rs. 49,316 under Section 40(c) of the Income-tax Act, 1961, being remuneration paid to the directors of the assessed-company, in accordance with the terms of its articles of association ?

(2) Whether, on the facts and in the circumstances of the case, and having regard to the legitimate business needs of the company and the benefit derived by or accruing to it there from, there was any evidence before the Tribunal to hold that the remuneration paid to the directors was excessive or unreasonable, within the meaning of Section 40(c) of the Income-tax Act, 1961 ?

(3) Whether the Tribunal was right in law in placing the onus of proof as regards the excessive or unreasonable character of the remuneration paid to the directors and in coming to a finding that the assessed had failed to prove its reasonableness ?'

3. The following questions were suggested for the assessment year 1964-651

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding the disallowance of the sum of Rs. 51,400 under Section 40(c) of the Income-tax Act, 1961, being remuneration paid to the directors of the assessed-company, in accordance with the terms of its articles of association ?

(2) Whether, on the facts and in the circumstances of the case, and having regard to the legitimate business needs of the company and the benefit derived by or accruing to it there from, there was any evidence before the Tribunal to hold that the remuneration paid to the directors was excessive or unreasonable within the meaning of Section 40(c) of the Income-tax Act, 1961 ?

(3) Whether the Tribunal was right in law in placing the onus of proof as regards the excessive or unreasonable character of the remuneration paid to the directors and in coming to a finding that the assessed had failed to prove its reasonableness ?'

4. The petitioner is a private company limited by shares and is engaged in the business of manufacturing aerated water in the trade name of POP COLA. During the relevant years it had the following four directors:

(a) Smt. L.J. Pamnani,

(b) Smt. K.L. Pamnani,

(c) Smt. K.P. Pamnani,

(d) Seth Bal Chand.

5. The remunerations paid during the assessment year 1963-64 to the first three were Rs 17,450, Rs. 17,450 and Rs. 23,260 respectively and for 1964-65 were Rs. 18,000, Rs. 18,000 and Rs. 24,000, respectively. Smt LJ. Pamnani, the first director, is the wife and the other two, the daughters-in-law of the chairman.

6. The petitioner-company claimed the said remunerations as deductions from its profits. The Income-tax Officer felt convinced that the rendering of service by the three ladies was proved but found no justification for the quantum of remuneration claimed. He reduced the same to Rs. 1,000 per month for each of the said three ladies. The Appellate Assistant Commissioner in appeal observed that the petitioner had a paid manager drawing Rs. 21,625 per annum, besides the experience of Shri Bal Chand. As he was not sure of the nature of services rendered by the ladies, he set aside the assessment and directed the Income-tax Officer to further investigate into the case and frame a fresh assessment.

7. On remand, the Income-tax Officer came to the same conclusion as before. The Appellate Assistant Commissioner, in appeal, again said that the allowances given to the ladies were unreasonable. He gave a number of opportunities to the petitioner to show the type of services rendered by them to justify the said remunerations. A list of duties of each directorwas filed without furnishing any proof to substantiate the same. The petitioner claimed that the said ladies attended the directors' meeting, operated the current account of the petitioner with the bank, developed a new drink, helped in procuring the import licenses, negotiated for the allotment of an industrial plot of land and one of the ladies (Smt. L.J. Pamnani) assisted in executing publicity programme. The only evidence produced was a certificate from the Allahabad Bank, Karol Bagh, showing the operation of the current account by the three ladies on behalf of the petitioner and a certificate from Gayways Publicity P. Ltd., showing that advertisement sketches were approved by Smt. L.J. Pamnani. The ladies did not appear before the Appellate Assistant Commissioner, although opportunity was given for the purpose. He concluded that none of the other functions were proved to have been performed by the ladies. For attending board meetings, they were paid separate sitting fees. The allowance of Rs. 1,000 per month as remuneration to each of them was considered unreasonable and excessive. He allowed Rs. 300 per month to Smt. L.J. Pamnani and Rs. 250 per month each to the other two. The income of the petitioner was accordingly directed to be enhanced.

8. The Appellate Tribunal in second appeal was of the view that an allowance under Section 40(c) of the Income-tax Act could be claimed if it could be shown to the satisfaction of the authorities that the payment was justified and incurred wholly and exclusively for the purpose of business and was not unreasonable having regard to the legitimate business needs of the assessed and the benefit derived by it from such payment. The assessed, according to it, had to show that substantial benefit accrued to the company from the payments ; and this could be done only by producing evidence. The Tribunal found that there was no evidence whatsoever in this connection, except the two certificates of the Allahabad Bank and Messrs. Gayways Publicity P. Ltd. The onus which lay heavily on the assessed was, thereforee, not discharged. The assertion of the petitioner that profits had substantially increased was also found to be not correct and the results were found to be the negative. Even increase in turnover in the subsequent years could not be linked with any services rendered by the lady directors. The Tribunal, thereforee, agreed with the Appellate Assistant Commissioner and dismissed the appeal.

9. The petitioner's application before the Tribunal under Section 256(1) of the Act was also dismissed, as in its opinion, no question of law arose out of its order. This has brought the petitioner to this court.

10. Mr. G.C. Sharma, the learned counsel for the petitioner, contended before us that the Tribunal was in error to say that its findings were findings of fact. It had reached its conclusion without applying correct legal principles to the facts before it. According to him, the question of reasonableness of remuneration has to be determined by placing oneself in the position of a director in-charge of the management. The Tribunal had found that the property of the ladies had been mortgaged and this was a service which had been rendered by them, but which had not been taken into consideration by the Appellate Assistant Commissioner or by the Tribunal. Mr. Sharma further contended that it was the opinion of the Income-tax Officer which was to prevail and not the assessment made by the Appellate Assistant Commissioner or the Tribunal.

11. Mr. B. N. Kirpal, the learned counsel for the revenue, on the other hand, submitted that the Tribunal having come to a definite finding of fact, no question arose for making any reference to this court. The finding of the Income-tax Officer remained unsupported by evidence and, thereforee, it was legitimate on the part of the Appellate Assistant Commissioner and the Tribunal to interfere with his findings. The findings of the Tribunal could not be said to have been arrived at by ignoring any relevant legal principles.

12. The three lady directors are said to have helped the company in developing a new soft drink and in negotiating an import license and the allotment of an industrial plot of land. No evidence supports these allegations. The Tribunal, thereforee, rightly confirmed the findings of the Appellate Assistant Commissioner that none of these services were proved to have been performed by the said directors. This is a finding of fact which would not give rise to any question of law. The only other findings requiring any consideration are that the three lady directors had been operating upon the current account of the petitioner with the bank and one of them (Smt. L.J. Pamnani) had assisted in the publicity programme of the petitioner. The Tribunal observed that some of the properties belonging to the lady directors were mortgaged, but was unable to find any justification to remunerate the ladies to the extent of Rs. 5,000 a month, even long before the loans were even in contemplation. It was also noticed that the aforesaid ladies had no qualifications or business experience or technical knowledge. It was in these circumstances that it came to the conclusion that there was no justification in allowing any remuneration more than that allowed by the Appellate Assistant Commissioner, This is a finding of fact and does not involve the applicability of any legal principles.

13. The Supreme Court in Nund & Samoni Co. P. Ltd. v. Commissioner of Income-tax, : [1970]78ITR268(SC) was of the view that it was for the taxpayer to establish by evidence that the particular allowance was justifiable. It was held that in the absence of evidence relating to the duties of the, directors, the services rendered by them the manner in which the profits were enhanced by reason of their special aptitude or qualifications, the legitimate businessneeds and the benefit derived by the appellant in consequence of such services rendered, the finding recorded by the Income-tax Officer as confirmed by the Tribunal had to be accepted.

14. The Tribunal, in the instant case, was of the view that the income-tax authorities had to be satisfied that the remunerations paid to the ladies were exclusively for the purpose of business and not unreasonable having regard to the legitimate business needs and that the benefit derived by them was in consequence of services rendered by them. The company should have been shown to have received substantial benefits by the payment of the remunerations in dispute. This could be justified only by producing evidence and if there was no evidence the mere reference to articles of association which authorised the payment could not be taken as substitute for evidence required under Section 40(c) of the Act. The petitioner in order to justify the deductions claimed failed to adduce any proof. Mr. Sharma contended that our order in this case may affect the petitioner in relation to its assessments for subsequent years; but his apprehensions have no justification. For, if in the subsequent years, evidence can be produced to establish justification of the petitioner's claim, the same shall have to be viewed in a different light. For the years under review, however, the petitioner failed to provide the required proof. The Tribunal thus has not ignored any relevant legal principles. The findings reached by it were conclusions of fact and we do not find that they gave rise to any question of law requiring reference to this court. The order of the Tribunal declining to prepare the statement of case and making the reference applied for, thereforee, is justified. In the circumstances of the case, this application is dismissed. But there shall be no order as to costs.


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