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Commissioner of Income-tax Vs. Westcoast Shipping Agencies (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference Nos. 89 and 90 of 1978
Judge
Reported in[1981]127ITR442(Ker)
ActsIncome-tax Act, 1961 - Sections 40
AppellantCommissioner of Income-tax
RespondentWestcoast Shipping Agencies (P.) Ltd.
Appellant Advocate P.K. Ravindranatha Menon, Adv.
Respondent AdvocateParty in person
Excerpt:
.....- remuneration - section 40 of income-tax act, 1961 - whether tribunal justified in holding that assessee-company by giving qualifications of managing director discharged burden of proof in establishing that under section 40c monthly salary paid reasonable having regard to legitimate business needs of company and benefit derived to it - no material placed by assessee to show that remuneration paid reasonable having regard to market value of similar services in shipping trade of any person possessing aforementioned qualifications - having regard to legitimate business needs of company and benefits derived by it remuneration paid excessive - assessee failed to discharge onus of proving that remuneration paid was reasonable - question answered in negative. - - the value that can be..........circumstances of the case, the income-tax appellate tribunal is right in law in holding that the assessee-company has, by giving the qualifications of its managing director, sri p. k. korah, discharged its burden of proof in establishing that under section 40(c) of the income-tax act, 1961, the monthly salary of rs. 5,000 paid to sri p. k. korah is just and reasonable having regard to the legitimate business needs of the company and the benefit derived or accrued to it therefrom 3. whether, on the facts and in the circumstances of the case, the findings of the income-tax appellate tribunal that in the absence of any comparative case being given by the income-tax officer it is impossible for the tribunal to judge whether the payment of the salary to the managing director of the company.....
Judgment:

Balakrishna Eradi, C.J.

1. These are two connected references made to this court by the Income-tax Appellate Tribunal, Cochin Bench, pursuant to orders passed by this court under Section 256(2) of the I.T. Act, 1961 (hereinafter called ' the Act '), in O.P. Nos. 3225 of 1976 and 3233 of 1976. The assessee is the same company and the relevant assessment years are 1973-74 and 1974-75. The questions referred in I.T.R. No. 89 of 1978, which relates to the assessment year 1973-74, and the questions referred in I.T.R. No. 90 of 1978, which relates to the assessment year 1974-75, are :

2. Assessment year 1973-74 :

' 1 Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in deleting the addition of Rs. 18,000 made by the Income-tax Officer for the assessment year 1973-74 under Section 40(c) of the Income-tax Act, 1961

2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the assessee-company has, by giving the qualifications of its managing director, Sri P. K. Korah, discharged its burden of proof in establishing that under Section 40(c) of the Income-tax Act, 1961, the monthly salary of Rs. 5,000 paid to Sri P. K. Korah is just and reasonable having regard to the legitimate business needs of the company and the benefit derived or accrued to it therefrom

3. Whether, on the facts and in the circumstances of the case, the findings of the Income-tax Appellate Tribunal that in the absence of any comparative case being given by the Income-tax Officer it is impossible for the Tribunal to judge whether the payment of the salary to the managing director of the company is excessive and that the Income-tax Officer has not been able to substantiate the disallowance, are in disregard of the evidence on record and are perverse, unreasonable and wrong '

3. Assessment year 1974-75 :

' 1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in deleting the addition of Rs. 15,000 made by the Income-tax Officer for the assessment year 1974-75 under Section 40(c) of the Income-tax Act, 1961

2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the assessee-company has by giving the qualifications of its managing director, Sri P. K. Korah, discharged its burden of proof in establishing that under Section 40(c) of the Income-tax Act, 1961, the monthly salary of Rs. 5,000 paid to Sri P. K. Korah is just and reasonable having regard to the legitimate business needs of the company and the benefit derived or accrued to it therefrom?

3. Whether, on the facts and in the circumstances of the case, the findings of the Income-tax Appellate Tribunal that, in the absence of any comparative case being given by the Income-tax Officer, it is impossible for the Tribunal to judge whether the payment of the salary to the managing director of the company is excessive and that the Income-tax Officer has not been able to substantiate the disallowance, are in disregard of the evidence on record and are perverse, unreasonable and wrong '

4. The assessee is a private limited company incorporated on August 31, 1970. One Sri Korah was the managing director of the company duringthe relevant years. He along with his wife is holding 74 shares out of the total 150 shares. Clause 33 of the articles of association of the assessee-company states, inter alia, that the managing director shall be paid a salary of Rs. 5,000 per mensem. For the accounting year ended on March 31, 1973, the assessee-company filed a return disclosing an income of Rs. 45,826. On scrutiny of the accounts the ITO found that during the said year the company had paid to Shri Korah, the managing director, Rs. 60,000 by way of remuneration. The ITO went into the reasonableness of the said expenditure under Section 40(c) of the I.T. Act. After considering the submissions made before him on behalf of the assessee he came to the conclusion that the salary paid to the managing director was excessive and unreasonable having regard to the legitimate business needs of the company and the benefits derived or accrued to it therefrom. In the opinion of the ITO, a payment of Rs. 3,500 per mensem to the managing director would be adequate and reasonable on the facts and in the circumstances of the case. In this view the ITO disallowed a sum of Rs. 18,000.

5. For the assessment year 1974-75, the ITO followed his reasoning for the earlier year, but disallowed only Rs. 15,000.

6. Though appeals were filed by the assessee against the assessment so made, they were dismissed by the AAC who upheld the findings entered by the ITO and justified the disallowance of Rs. 18,000 and Rs. 15,000, respectively, for the two years. The assessee then carried the matter in appeal before the Tribunal. The Tribunal took note of the fact that the managing director and his wife together owned 74 shares out of the total of 150 shares of the company, and that there was every possibility that the remuneration fixed ' may not be the market value '. Though the Tribunal commenced the discussion of the question in para. 3 of its order by rightly stating that the onus to prove that the remuneration paid to the managing director was commensurate with the market value of his services was on the assessee, it was of opinion that the assessee had discharged the said onus by merely giving the qualifications of Mr. Korah. We may extract the relevant portion of the reasoning of the Tribunal contained in para. 3 of it order :

' The qualifications of Mr. Korah and his influence over one shipping line if they were found to be a fact will have to be considered while fixing the market value of his service. In order to state that these are not sufficient, it is for the ITO to bring in certain materials. The value that can be placed on the services of such a highly specialized profession like ship-brokering is not an easy job for a layman. In such cases the only safe guide we can think of is the position in some comparative cases. There are a number of ship-brokers and the services rendered by the chief executives of such ship-brokers would undoubtedly be a guideline. The ITO ought to have furnished some such guidelines and then only he could have come to theconclusion that the remuneration paid is excessive. In the absence of any comparative case being given, it is impossible for us to judge whether the payment is excessive. Since the assessee has discharged his onus by giving the qualifications of Mr. Korah it would be difficult for us now to sustain any disallowance for these two years. The additions will be deleted.'

7. In our opinion, counsel appearing for the revenue is well founded in his submission that the aforesaid approach made by the Tribunal to arrive at its decision is erroneous and unjustified. All that the assessee had said before the ITO was that Mr. Korah is an associate member of Chartered Shipbrokers, London, that he had worked in England for one year and that prior to joining the company he was employed in M/s. William Goodacre and Sons (India) Ltd., Alleppey, on a salary of Rs. 1,500 per mensem. No material whatever was placed by the assessee before the ITO to show that the remuneration paid by the assessee-company to the managing director was reasonable having regard to the market value of similar services in the shipping trade of any person possessing the aforementioned qualifications and that having regard to the legitimate business needs of the company and the benefits derived by it or accruing to it from the services of the managing director, the remuneration paid to him was not excessive. In such state of evidence the Tribunal was, in our opinion, fairly wrong in its view that the assessee had discharged the onus of proof and that the burden was shifted to the ITO to collect materials and establish that the remuneration paid by the company to its managing director was excessive or unreasonable. The following observations made by the Supreme Court while dealing with a similar case of disallowance under Section 10(4A) of the Indian I.T. Act, 1922, which corresponds to Section 40(c) of the present Act in Nund & Samont Co. P. Ltd. v. CIT : [1970]78ITR268(SC) are particularly relevant in this context :

' Counsel contended that under Section 10(4A) of the Act, the Income-tax Officer must reach a conclusion that the allowance was excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. It is, however, for the taxpayer to establish by evidence that a particular allowance is justifiable. Apparently, no evidence was tendered by the assessee relating to the duties of the managing director and the deputy managing director, the services rendered by them, the manner in which the profits earned by the assessee were enhanced by reason of their special aptitude or qualifications, the legitimate business needs of the assessee and the benefit derived by or accruing to the assessee in consequence of the services rendered by the managing director and the deputy managing director. In the absence of any such evidence, the finding recorded by the Income-tax Officer and confirmed by the Appellate Assistant Commissioner and theTribunal must be accepted. We are unable to agree with counsel for the assessee that even if the taxpayer does not produce any evidence in support of the claim for allowance, the Income-tax Officer must independently collect evidence and decide that the allowance claimed is excessive or unreasonable having regard to the legitimate business needs of the assessee before the power under Section 10(4A) may be exercised.'

8. Applying the aforesaid dictum to the present case, we have no hesitation to hold that the Tribunal was not justified in interfering with the conclusion of facts by the ITO and confirmed by the AAC that the remuneration paid to the managing director of the assessee-company was excessive and that a sum of Rs. 18,000 had to be disallowed under Section 40(c) of the Act for the assessment year 1973-74 and a sum of Rs. 15,000 for the assessment year 1974-75. Accordingly, we answer questions Nos. 1 and 2 in each of these references in the negative and question No. 3 in each case in the affirmative, all the questions being answered against the assessee and in favour of the revenue. There will be no direction regarding costs.

9. A copy of this judgment, under the seal of the court and the signature of the Registrar, will be forwarded to the Tribunal, as required by law.


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