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Commissioner of Income-tax Vs. Raman and Raman (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 300 of 1970 (Reference No. 88 of 1970)
Judge
Reported in[1977]110ITR747(Mad)
ActsIncome Tax Act, 1922 - Sections 10(2) and 10(4A)
AppellantCommissioner of Income-tax
RespondentRaman and Raman (P.) Ltd.
Appellant AdvocateJ. Jayaraman and ;Nalini Chidambaram, Advs.
Respondent AdvocateS. Narayanaswami and ;T.V. Ramanathan, Advs.
Cases ReferredSri Krishna Tiles & Potteries (Madras) P. Ltd. v. Commissioner of Income
Excerpt:
.....to undertaking coach building as well. in respect of assessment years 1956-57 to 1960-61, the income-tax officer added a portion of the remuneration and bonus paid to three of the directors purporting to act under section 10(4a) of the indian income-tax act, 1922 (hereinafter called 'the act'). though the income-tax officer held that the payment of the remuneration could be supported as having been wholly and exclusively for the purpose of the business under section 10(2)(xv) and the payment of bonus satisfied the conditions prescribed under section 10(2)(x) of the act, he was of the view that the payment was excessive and unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to the company. this argument was rejected by..........to undertaking coach building as well. in respect of assessment years 1956-57 to 1960-61, the income-tax officer added a portion of the remuneration and bonus paid to three of the directors purporting to act under section 10(4a) of the indian income-tax act, 1922 (hereinafter called 'the act'). though the income-tax officer held that the payment of the remuneration could be supported as having been wholly and exclusively for the purpose of the business under section 10(2)(xv) and the payment of bonus satisfied the conditions prescribed under section 10(2)(x) of the act, he was of the view that the payment was excessive and unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to the company. but, on a further appeal, the.....
Judgment:

V. Ramaswami, J.

1. The assessee is a private limited company carrying on transport business and having also income from servicing of vehicles and execution of jobs for others. In the assessment year 1960-61, the company also extended its activity to undertaking coach building as well. In respect of assessment years 1956-57 to 1960-61, the Income-tax Officer added a portion of the remuneration and bonus paid to three of the directors purporting to act under Section 10(4A) of the Indian Income-tax Act, 1922 (hereinafter called 'the Act'). Though the Income-tax Officer held that the payment of the remuneration could be supported as having been wholly and exclusively for the purpose of the business under Section 10(2)(xv) and the payment of bonus satisfied the conditions prescribed under Section 10(2)(x) of the Act, he was of the view that the payment was excessive and unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to the company. But, on a further appeal, the Appellate Assistant Commissioner held that, having regard to the services rendered by these directors, the benefits derived by the company and the increase in the volume of its business, the remuneration and the bonus paid were reasonable and not excessive and that, therefore, there was no case for disallowance of any part of the remuneration or bonus paid in any of these years under Section 10(4A) of the Act.

2. Revenue preferred an appeal to the Tribunal. Before the Tribunal, in regard to the bonus, the revenue contended that the payment was not in accordance with Section 10(2)(x) and that, therefore, that money had to be added back to the income returned. This argument was rejected by the Tribunal holding that all the conditions prescribed under Section 10(2)(x) were satisfied and that if it is not to be disallowed under Section 10(4A) it had to be allowed under Section 10(2)(x). The Tribunal considered the applicability of Section 10(4A). In its view, the history of the company, the services rendered by each one of these directors of the company in the matter of carrying on the business, their qualification in the business and other surrounding circumstances, did not warrant the Income-tax Officer's finding that the payment was either excessive or unreasonable. Accordingly, it confirmed the order of the Appellate Assistant Commissioner. At the instance of the revenue the following question has been referred:

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that no part of remuneration and bonus to directors should be added back looking to the provisions of Section 10{4A) of the Indian Income-tax Act, 1922, and that the payment of bonus was also not unreasonable under Section 10(2)(x) of the same Act ?'

3. There is no dispute that the remuneration paid to the directors was wholly and exclusively for the purpose of the business and, therefore, is an allowable deduction under Section 10(2)(xv). Similarly, the bonus paid to these directors is also an allowable deduction under Section 10(2)(x). But what is contended by the learned counsel for the revenue in this reference is that the fact that the payments are allowable deductions under Section 10(2)(x) or 10(2)(xv) does not in any way affect the applicability of Section 10(4A) and that provision will have to be considered with reference to the amalgam of all the payments made under Section 10(2) having regard to the business needs of the company or the benefit derived by such payment. The learned counsel is well-founded in his contention that it is only the reasonableness of the amounts claimed under the various heads under Sub-clauses (i) to (xv) of Section 10(2) that has to be decided with reference to the provisions in Section 10(4A) and in doing so the claim for allowance made under each clause cannot be considered separately or exclusively and the fact that the allowance was made exclusively for the purpose of the business would be an answer while considering the case under Section 10(4A).

4. The learned counsel for the revenue then contended that the view of the Income-tax Officer, that the payment was excessive or unreasonable having regard to the business needs of the company and the benefit derived by or accruing to it therefrom, had to be approached and decided only on the basis of a discretion vested in the matter on the Income-tax Officer and if it could not be held that the discretion was not exercised by him on proper materials, even the Tribunal could not interfere with the discretion of the Income-tax Officer.

5. Though we are also of the view that it is the opinion of the Income-tax Officer on the reasonableness or the unreasonableness that is material, that opinion will have to be considered in an objective mariner. If the opinion is to be reached on objective considerations then the Appellate Assistant Commissioner and the Tribunal could go into the reasons on which that opinion was formed and if the Tribunal or the Appellate Assistant Commissioner was of the view that the opinion was reached on extraneous considerations or irrelevant material or the reasons given are not germane it could interfere with the order. If that is so, against the order of the Tribunal the aggrieved party could ask for a reference on the question of legality of the view taken by the Income-tax Officer. Section 10(4A) itself states that the excessiveness or the unreasonableness ofthe allowance has to be considered 'having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom'. The use of the words 'having regard to' also suggests not merely the legitimate business needs of the company and the benefit derived by or accruing to it therefrom are the sole criterion but any other relevant consideration also could be taken into account. In other words, the two conditions--legitimate business needs of the company and the benefit derived by or accruing to it therefrom--are not exhaustive. This was also the view expressed by this court in Sri Krishna Tiles & Potteries (Madras) P. Ltd. v. Commissioner of Income-tax : [1973]90ITR439(Mad) , after consideration of earlier decisions rendered under Section 10(4A) of the Act. This court held that in cases where the order of the Income-tax Officer had been affirmed by the Appellate Tribunal the High Court will not normally interfere with that view of the Tribunal unless the decision of the Income-tax Officer or the Tribunal was unreasonable or capricious. We are not satisfied that in this case the view of the Tribunal that the payment was not excessive or unreasonable is so unreasonable or perverse as to call for interference by this court. As already stated, the Tribunal took into consideration the services rendered by these directors, their experience in the business, their capacity to diversify the company's activities, and the resultant increase in the volume of business clearly showed that by reason of the increased remuneration and bonus paid, the company was greatly benefited and it was also warranted by the legitimate business needs of the company. In this connection, we may refer to the decision in Commissioner of Income-tax v. Edward Keventer (P.) Ltd. : [1972]86ITR370(Cal) , wherein it was held that the term 'benefit to a company in relation to its business' has a very wide connotation and may not necessarily be capable of being accurately measured in terms of rupees, annas and pies. We are, therefore, satisfied that the view of the Tribunal is not liable to be interfered with. We, accordingly, answer the reference in the affirmative and against the revenue. The assessee will be entitled to its costs. Counsel's fee Rs. 250.


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