1. There is pretty little law directly involved in this income-tax reference. It, however, demands a wholesome approach to corporate taxation. The assessee is private company. The managing director of this company is a married woman called Aunsuyadevi. The company was described by its learned counsel, Mr Veeraraghavan, as a 'family company'. This is an expression used in serious legal discussion even in England. The phrase occurs in one of Justice Rowlatt's judgments. It you turn to company law, you know of no such company. We have heard of one-man companies, an impossibility under corporate law, but very much of a phenomenon if you look at corporate realities. Most one-man companies are, however, man-and-wife companies or family companies. Income-tax law has had to do with business houses and trading families which have incorporated themselves as companies. To many family men and women, innocent of company law, it is quite an artificial situation of find husband and wife, father and son, brother and sister, in laws and in-laws going through the motion of board-roof etiquette, passing resolutions, signing minutes books, entering into contracts of service, getting paid salaries, voting themselves benefits and the like. Company law is bereft of family feeling, if it is coldly approached, It insists on the members of the family doing the right thing as members of the company. Income-tax, however, sees through the facade. It has got to, most of the time there is no need to lift the veil of incorporation. In many compani held by families, the veil is made of pure gauze. It is the prerogative of the ITO to see through things to get at the fiscal relatives. Recently the income-tax code has made an express enabling provision. Not that the ITO has had any real need to be armed with a specific power. The express provision, however, in so many words, enables the ITO to disallow certain items of expenditure in what may be broadly described as 'closed' companies. The modus operandi in such cases is that the expenditure incurred by the company is debited to the company and in all in the company and who is a close relationship with the others, having a controlling interest. This provision in the Indian I.T. Act, 1922, was s. 10(4A) of the Act. Its replica is to be found in s. 40(c)(i) of the present I.T. Act, 1961. The provision reads as follows :
'Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income cargeable 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 provision 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 many 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 thereform, 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 -...'
(the rest of the section is unnecessary for the present discussion).
2. The sum and substance of this enabling provision is to arm the ITO with the power to disallow the remuneration paid to a director of a company if he is satisfied that the expenditure laid out in the payment of such remuneration is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by the company from such expenditure.
3. The assessee, in this case, is one M/s Mycol Distributors (P.) Limited, against whom this provision was invoked by the ITO. This company was incorporated as a private company in the year 1963 having four shareholders. Venugopal was the chairman of the said company, V.Anusuyadevi is his wife. V. Ravindranath and V. Mohan Rao are the sons of Venugopal, though his first wife. Ravindranath was appointed as the technical director of the company. Venugopal's wife is the managing director. The company's registered office as well as the residence of these individuals, directors, shareholders and all, is at one and the same place. The business of the company is to act, as the selling agents for the products of Velsicol Chemical Corporation, U.S.A. The main products manufactured and distributed by M/s. Velsicol Chemical Corporation is endrine, which is a substance used in the manufacture of pesticides and insecticides. The role of the assessee as agent of the American company is to import the goods and supply them to various constituent dealers and sub-dealers on the basis of the orders placed by them. The assessee-company obtains commission for its labours. It appears from the record that Venugopal, the chairman of the company, had made trips to the United States, apparently in connection with the company's business. It is said that he was accompanied by his wife, Anusuyadevi. The formal agreement of agency between the American company and the assessee-company was the result of this American trip. under the terms of the articles of the association of the assessee-company, there is to be a board of directors with a chairman and a director. One of the articles provides that the managing director may be paid such remuneration for managing the affairs of the company as may be fixed by the board of directors from time to time. By a resolution dated November 21, 1963, V. Ravindranath was appointed as a technical director. In June next year the board resolved to appoint V.Anusuyadevi as the managing director of the company for a period of five years. Her remuneration was fixed at Rs. 350 per month plus a commission equivalent to 10 per cent. of the net profits of the company. The resolution to appoint V.Anusuyadevi as the managing director also contemplated a full-fledged service agreement being entered into by the company with her as managing director. The agreement was executed on June 29, 1964. It provides that V. Anusuyadevi should perform the duties of managing the affairs of the company as managing director and she was to receive the payment of remuneration on the manner stated in the board resolutions. The company's accounting year ends with the completion of September every year. In the relevant account years corresponding to the assessment years 1965-66 to 1968-69, the assessee had debited a fixed remuneration of Rs. 350 per month as dwell as the commission at the rate of 10 per cent. of the net profit as proper debit times in the profit and loss account to the account of Anusuyadevi. This was naturally claimed as an admissible deduction on the computation of business profit for the purpose of the I.T. Act. The ITO disallowed the entire commission amount at the rate of 10 per cent. of the net profit. He disallowed a portion even of the fixed remuneration paid to Anusuyadevi. The disallowance was obviously made by the ITO in exercise of his poem under s. 40(c)(i) of the I.T. Act, to which we had made reference earlier.
4. The assessee-Company, however, did not accept the disallowance of the whole of the commission amount and of a portion of the monthly remuneration paid to Anusuyadevi. On appeal, the tribunal felt that the disallowance by the ITO was opposed to natural justice. While disallowing the remuneration in the manner aforesaid, the ITO had not heard Anusuyadevi herself. The Tribunal considered this to be a defective procedure, and they directed the AAC to examine Anususyadevi and send a report. The AAC examined the lady on oath and submitted the transcript of the evidence before the Tribunal. The Tribunal considered the evidence of Anusuyadevi as well as the other materials already on record.
5. The Tribunal observed that primarily it was for the assessee-company to produce evidence to show that the remuneration and commission paid to the managing director were not excessive or unreasonable in terms of s. 40(c)(i) of the Act. Turning to the material evidence in the case, the Tribunal observed that there was nothing to show that Anusuyadevi participated in the business affairs of certain earlier partnership firms and acquired any experience which as useful for the conduct of the assessee-company's business. The Tribunal found that even her trips abroad along with her husband could not have added to the sum total of her business knowledge or experience. The Tribunal also pointed out that Anusuyadevi had no special qualifications or background which would have equipped her for carrying on the business of the company, such as canvassing orders for the products of the American company form customers in India. The Tribunal referred, in particular, to Anusuyadevi's deposition before the AAC and observed that her answers to questions showed that she had hardly anything to do with the business of the company in the matter of indenting and receiving orders for the products of the American company. She had not, according to the Tribunal, in any real sense, contributed anything to the business of the company. All that she did was to look after the company's office, which the Tribunal pointed out, was housed in the residence of his lady. She did some correspondence and made formal call of the meetings of the board of director. These small chores, in the opinion of the Tribunal, did not justify the earning of any commission on sales.
6. Having regard to their evaluation of the materials on record relating to the nature of the business of the assessee and the benefit derived by the assessee by employing Anusuyadevi as the managing director and also having regard to the experience and personal qualifications of Anusuyadevi, the Tribunal held that the commission paid to her at the rate of 10 per cent. of the net profits was wholly unreasonable. On that basis, they upheld the disallowance of the commission made by the ITO, under s. 40(c)(i) of the Act. The Tribunal was, however, satisfied that the assessee was justified in paying a fixed remuneration to Anusuyadevi in terms of the resolutions of the company, namely, at the rate of Rs. 350 per month. To the extent that the ITO disallowed a portion of the fixed remuneration, the Tribunal held that there was no justification for doing so, having regard to the considerations governing s. 40(c)(i) of the Act.
7. The question in this reference is :
'Whether, on the facts and in the circumstances of the case, the commission paid to the managing director, Mrs Anusuya Devi, is admissible expenditure under the provisions of the I.T. Act, 1961 ?'
8. Mr. Veeraraghavan, learned counsel for the assessee, submitted that Anusuyadevi had been associated with the company from its inception. Right from the very start she was stated to be in the husband's business. Even before the incorporation of the company, while the business was Even before the incorporation of the company, while the business was being run as a : partnership, it was said that the wife was interested in the business. Learned counsel further submitted that the board of directors of the company, on a consideration of the relevant circumstances, resolved upon the payment of commission and fixed remuneration to Anusuyadevi, and having so resolved, abided by the resolution, and paid her monthly salary and commission on the net profits. This decision, according to the learned counsel, was purely a business decision based on a consideration of business expediency. Learned counsel submits that the fact that Anusuyadevi was related by marriage to the other member and directors of the company cannot by itself be a sufficient consideration for the ITO to reject any portion of the remuneration payable to her in consideration of the services render by her as a managing director. Learned counsel was particularly critical of the provision of s. 40(c)(i) were regarded as applicable to this case at all, the disallowance cannot be founded on the absence of any technical or special qualification in Anusuyadevi. Learned counsel pointed out that want of managerial or technical qualification is not one of the statutory grounds on which payment of commission or other remuneration can be rejected either in whole or in part.
9. Having listened to the arguments of learned counsel, it seems to us that the finding through which was were conducted were wholly in the region of facts. Before the Tribunal as well as before the ITO, the question was not about the factum of payment or the validity of a resolution or other instrumentality governing the terms of payment. It was not suggested by the ITO or other authorities, including the Tribunal, that Anusuyadevi did not deserve the remuneration or the commission. All that was decided one in this case was to deny the benefit of : allowance which would otherwise have been granted to the assessee in respect of the outgoing by way or remuneration and commission paid to Anusuyadevi-the basis of disallowance being that the expenditure could not be justified as being within bounds or within reasonable limits having regard to the legitimate business needs of the company and the benefit derived by the payment of such remuneration. The enquiry directed by s. 40(c)(i) of the Act is thus out and out an enquiry involving an appreciation and evaluation of facts from a particular point of view, namely, the legitimate business needs of the assessee-company and the benefits which might be said to be derived by the assessee by the outlay of the expenditure in question. While the Act has made the ITO initially the authority who has got to render a decision on the question of legitimate business needs and the benefits derived from the business, the appellate authorities, including the Appellate Tribunal, could certainly reassess the evidence and consider the factual conclusions not only on the basis of the facts already on record but even on the basis of such further materials as they might require and gather. It is from this point of views that the Tribunal looked at the entire materials on record, supplemented by the deposition of Anusuyadevi. We are satisfied that the exercise involved in the application of s. 40(c)(i) of the Act is an exercise in fact-finding, in arriving as at value judgments relating to the excessiveness or unreasonableness of business expenditure from the standpoint of the business needs of the company and the measure of benefit derived by the company the expenditure in question, Whether the expenditure is excessive or unreasonable from the point of view of the legitimate business need of the company must in every case be a question of degree depending on a variety of attendant facts and circumstances. When the Tribunal, as an ultimate fact-finding authority, have expressed their conclusions on such a question, this court sitting in reference ought not to interfere with the ultimate determination by the Tribunal, since every step towards the conclusion of the Tribunal only bristles with the factual finding and inferences. The decision of the Tribunal can only be found fault with on a point of law if it could be urged that the Tribunal had misdirected themselves in law while addressing themselves to the facts, or if it could be found that the conclusion arrived at by the Tribunal is perverse or is not based on a reasonable view of the facts. The assessee's learned counsel said that in one part of their reasoning the Tribunal had taken a wrong step. Learned counsel pointed out that the Tribunal expected to find in Anusuyadevi some special qualification which really was lacking in her. Learned counsel said that this was quite a wrong approach to s. 40(c). As to this particular arguments, we may agree that presence or absence of special qualification has not been made one of the grounds for disallowance in whole or in part of the remuneration to the director in a closed company under section 40(c)(i) of the Act. But we cannot entirely disregard this aspect of the equipment or what of it, in Mrs. Anusuyadevi, considering that the finding as to unreasonableness or exclusiveness of the remuneration to be rendered by the officer has got to be rendered with reference to the legitimate business needs of the company on a consideration of all relevant facts and circumstances. Surely, it would not be irrelevant to ask the question whether the same 10 per cent. commission would have been paid to a third person who was as innocent of any managerial skill or other qualifications as this lady was for the type of work and responsibility demanded by the office of the managing director in this company. We are, therefore, of the view that in taking note of the absence of any technical qualification on the part to Anusuyadevi, the Tribunal have not gone wrong or taken any wrong or taken any wrong step in their reasoning such as might be regarded as vitiating their ultimate conclusion.
10. Learned counsel for the assessee stressed that the remuneration and commission paid by the assessee-company to Anusuyadevi were backed up by the resolutions of the company. He further submitted that the remuneration was based on the net profits of the company, and not on the turnover of the business over a period of years, and in that context, it could not be said that 10 per cent. of the net profits was excessive or unreasonable. We find from the tribunal's order that regard was paid by them to the question of turnover of the company. But the whole conclusion of the Tribunal was based on the fact that given the huge turnover in the business, Anusuyadevi did not and could not be regarded as having contributed to the turnover. This finding of the Tribunal, the assessee's learned counsel was hard put to it to challenge. The evidence of Anusuyadevi before the AAC wholly bears out the Tribunal's finding that if there was progressive increase in the turnover of the company the reason therefor should be sought in factors other than the exertions of the managing director. The connection between the turnover in the company's business and the part played by Anusuyadevi was brought out in the course of the examination of that lady. In answering a question put to her, she frankly admitted that while her son, Ravindranath, had put in efforts to canvass orders, she had not put forth any individual efforts of her own. This answer does not superheat the contention of the learned counsel that the commission paid by the company to Anusuyadevi can be justified on the basis of her efforts in increasing the company's turnover.
11. As we earlier stated at the beginning, this case really turns on the findings of fact by the Tribunal. On those factorial findings, the question which has been brought for our consideration admits of but one answer, and that is, that commission paid to Anusuyadevi was correctly disallowed as inadmissible expenditure under s. 40(c) of the I.T. Act. The reference is answered accordingly. In the peculiar circumstances of the case, there will be no order as to costs.