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Commissioner of Income-tax Vs. Karam Chand Thapar and Brothers (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 146 of 1975
Judge
Reported in[1986]157ITR212(Cal)
ActsIncome Tax Act, 1961 - Section 37, 37(1) and 40
AppellantCommissioner of Income-tax
RespondentKaram Chand Thapar and Brothers (P.) Ltd.
Excerpt:
- .....sri thapar had he not been the son of late sri k. c. thapar who was the managing direetor of the assessee-company. according to the income-tax officer, in any case, within the short period of his assuming service with the company, such high remuneration could not be regarded to have been made out of business consideration only. in the circumstances, remuneration of rs. 36,000 was allowed but the balance of rs. 37,308 was disallowed.3. against the order of the income-tax officer, the assessee appealed to the appellate assistant commissioner who found that sri thapar was first appointed a director of the assessee-cempany during the accounting year relevant to the assessment year 1961-62 and upheld the disallowance in accordance with the provisions of section 40(c) of the act.4. against.....
Judgment:

R.N. Pyne, J.

1. This reference under Section 256(1) of the Income-tax Act, 1961, relates to the assessment year 1962-63, for which the relevantprevious year ended on March 31, 1962. The relevant facts of this case as will appear from the statement of the case submitted by the Tribunal are stated here under.

2. In the course of the assessment proceedings of the assessee which is a private limited company, the Income-tax Officer found that a total amount of Rs. 73,308 was paid to one Sri M. M. Thapar, son of late Sri K. C. Thapar, which consisted of salary of Rs. 36,000 and share of profit of Rs. 37,308. When called upon to explain the reason for giving such high remuneration, the assessee in its letter dated March 8, 1967, stated that Sri M. M. Thapar had worked in the year under consideration as before as director and had also attended 15 out of 26 directors' meetings. The assessee further submitted before the Income-tax Officer that the share of profit allowed during the accounting year amounted to Rs. 37,308 as against Rs. 64,777 paid in the last year. The Income-tax Officer was of the opinion that taking all factors into consideration, it was clear that such high remuneration like other directors could not have been paid to Sri Thapar had he not been the son of late Sri K. C. Thapar who was the managing direetor of the assessee-company. According to the Income-tax Officer, in any case, within the short period of his assuming service with the company, such high remuneration could not be regarded to have been made out of business consideration only. In the circumstances, remuneration of Rs. 36,000 was allowed but the balance of Rs. 37,308 was disallowed.

3. Against the order of the Income-tax Officer, the assessee appealed to the Appellate Assistant Commissioner who found that Sri Thapar was first appointed a director of the assessee-cempany during the accounting year relevant to the assessment year 1961-62 and upheld the disallowance in accordance with the provisions of Section 40(c) of the Act.

4. Against the order of the Appellate Assistant Commissioner, the assessee appealed to the Tribunal. Before the Tribunal, learned counsel for the assessee relied upon the order of the Tribunal in I.T.A. No. 334 (Cal) of 1968-69 for the assessment year 1959-60, in which full claim of remuneration had been allowed following another order of the Tribunal in I.T.A. No. 1767 for the assessment year 1961-62. According to the Tribunal, the matter was thoroughly discussed in the order for the assessment year 1961-62 and it was not necessary to repeat those facts again. As, according to the Tribunal, the facts of the year under consideration and the facts of the assessment year 1961-62 were the same, it, following the earlier orders, allowed the entire claim of remuneration in the year under appeal also and deleted the addition of Rs. 37,308.

5. As the Tribunal folio wed its order for the assessment year 1961-62, a brief reference to the proceedings before the Tribunal for the assessment year 1961-62 and its order for the said year can be made.

6. In the assessment year 1961-62, Sri M. M. Thapar was paid a total amount of Rs. 1,00,777 consisting of salary of Rs. 36,000 and share of profit of Rs. 64,777. The Income-tax Officer held that it was not clear what services Sri Thapar who worked as a director in that year had rendered. According to him, taking all the facts into consideration, the payment of such high remuneration to Sri Thapar could not have been made had he not been the son of late Sri K.C. Thapar, the managing director of the assessee-company. He, therefore, allowed the remuneration of Rs. 36,000 and disallowed the balance of Rs. 64,777 under Section 10(4A) of the Indian Income-tax Act, 1922. The disallowance was also confirmed by the Appellate Assistant Commissioner in the appeal preferred by the assessee against the order of the Income-tax Officer. According to the Appellate Assistant Commissioner, Sri Thapar had no special qualifications to look after the affairs of the two companies, Sreegopal Paper Mills Ltd. and Ballarpur Paper & Straw Boards Mills Ltd., as he had only obtained a diploma in Textile Engineering from the California University and prior to his appointment as the director in the assessee-company, he was employed on a salary of Rs. 1,000 per month in Jagatjit Cotton Textile Mills Ltd., a managed company of the assessee-company.

7. The above disallowance was challenged by the assessee in an appeal before the Appellate Tribunal. Before the Tribunal on behalf of the assessee, reference was made to the educational qualifications and experience of Sri Thapar, viz., he had obtained his B.Sc. degree in Textile from Philadelphia. Textile Institute, U.S.A. and had also been there for about four years and after his return he joined Jagatjit Cotton Textile Mills and gained experience of the actual working. It was submitted that there were five directors of the assessee-company besides the managing director. One of them was Lala Shamlal who retired in 1954 and in his place Sri L. M. Thapar was appointed. Another director, Sri V. Mehta, retired in 1958 and Sri M. M. Thapar was appointed and the vacancy of Sri L. M. Khemka was not filled in. Sri Shamlal and Sri Mehta had no technical experience but remuneration and profits were being paid to them in the same proportion as to all other directors which were not challenged by the Revenue. It was also submitted that for the appointment of Sri Thapar, no new post was created and at that time two mills were in a stage of expansion and after the appointment of Sri Thapar, vast expansion took place in them. The counsel for the assessee further submitted that it was the post which carried salary and not the age of the person appointed and once a person was appointed to a certain post, no further classification in the matter of salary could be made. The facts that the appointment of Sri Thapar was approved by the Company Law Board and subsequently when he was appointed the managing director of Jagatjit Cotton TextileMills Ltd., the board approved the payment of Rs. 1,65,000 per year to him by way of remuneration, allowance and commission were brought to the notice of the Tribunal. It was pointed out to the Tribunal that the Department had not challenged the fact of the appointment of Sri Thapar and of his capability for this post. Further, the fact that he was a close relation of the managing director did not make any difference. It was further submitted that the taxing authorities could enquire into the reasonableness of the payment of remuneration and the benefit derived by the employer but that enquiry should be made from the standpoint of a businessman and not from that of the Revenue. Reliance was placed on several cases including the decision , of the Calcutta High Court in CIT v. Edward Keventer (P) Ltd. : [1972]86ITR370(Cal) .

8. The Revenue relied upon the orders of the Income-tax Officer and the Appellate Assistant Commissioner and the reasons given by them. It was contended that Sri Thapar was not qualified to look after the affairs of the paper mills. The learned departmental representative appearing for the Revenue placed reliance on the cases of Nund & Samonta Co. (P) Ltd. v. CIT : [1966]62ITR538(Patna) , Harbour Engineering (P) Ltd. v. CIT : [1964]52ITR249(Mad) and Swadeshi Cotton Mills Co. Ltd. v. CIT : [1967]63ITR57(SC) .

9. After considering the respective submissions, the Tribunal was of the view that Sri Thapar had been appointed on the retirement of one of the directors and no special post had been created for him. The fact of his appointment was not disputed by the Department. According to the Tribunal, he was a highly qualified person and had experience in business and management. The fact that his father was the managing director of the company did not, in the opinion of the Tribunal, affect the assessee's case in any way. It was also found by the Tribunal that profit commission had not been paid to the fourth director because he had retired with effect from April 1, 1960, and was re-employed for a period of one year. Relying on the decision in the case of CIT v. Edward Keventer (P) Ltd. : [1972]86ITR370(Cal) , the Tribunal held that the legitimate business needs of the company and the question of benefit derived or accrued to it had to be judged from the point of view of a prudent businessman. The Income-tax Officer had to apply his mind to the nature of the business of the company, the actual work done by the directors, the quantum of income earned by the company, the necessity to pay remuneration to the director and other allied considerations to form an opinion whether or not the payment was reasonable or excessive. According to the Tribunal, the Income-tax Officer and the Appellate Assistant Commissioner did not examine the case on the above lines. The Tribunal came to the conclusion that the payments made toSri Thapar by way of remuneration and commission were reasonable and justified and no disallowance was called for.

10. On the aforesaid facts, the following question of law has been referred to the High Court for its opinion :

'Whether, on the facts and in the circumstances of the case and on a proper construction of Section 40(c) of the Income-tax Act, 1961, the payment of Rs. 73,308 to Sri M.M. Thapar by way of salary and profit commission was excessive or unreasonable so as to justify the disallowance of a portion thereof ?'

11. Late Lala K. C. Thapar, the then chairman of the board of directors of the assessee-company, was on a business tour to Delhi. He died there on March 29, 1962. His dead body was flown from Delhi to Calcutta and an expenditure of Rs. 16,731 was incurred by the company for that purpose. This amount was claimed as an allowable expenditure in the computation of the assessee's total income. The assessee contended in its letter dated April 8, 1967, that a resolution dated June 11, 1962, was passed by the board of directors of the assessee-company in this connection and that it was the direct responsibility and obligation of the company to bring back his dead body to Calcutta where his family resided. Assessee's above contention was not accepted by the Income-tax Officer and he disallowed the claim. According to him, the expenses were in no way connected with the business. The disallowance was also confirmed by the Appellate Assistant Commissioner on the ground that the expenditure incurred was not wholly and exclusively laid out for the purpose of carrying on the assessee's business.

12. Against the order of the Appellate Assistant Commissioner, the assessee appealed to the Tribunal. Before the Tribunal, counsel for the assessee placed reliance on the decision of the Delhi High Court in the case of CIT v. Supreme Motors (P) Ltd. : [1972]84ITR1(Delhi) . In that case, in similar circumstances, when the chairman of the company had come from Jodhpur to Delhi on a tour and had died there and his dead body was sent back to Jodhpur, the High Court held that the expenses for carrying the dead body to Jodhpur were allowable expenditure, being incidental to the business carried on by the assessee-company. According to the Tribunal, in the instant case, the fact that Lala K.C. Thapar was on a business tour to Delhi where he died had not been disputed at any stage and, therefore, relying on the above decision, the Tribunal allowed the assessee's claim and deleted the addition of Rs. 16,737.

13. On the aforesaid facts, according to the Tribunal, the following question of law arises and it has referred the same to the Hon'ble High Court for its opinion :

'Whether, on the facts and . in the circumstances of the case, the Tribunal was right in holding that a sum of Rs. 16,737 was an allowable business expenditure ?'

14. Regarding the question of disallowance of remuneration paid to Sri M. M. Thapar for the year under consideration, i.e., assessment year 1962-63, the Tribunal, following its order in I. T. A. No. 1767 of 1968-69 for the assessment year 1961-62, allowed the entire claim of remuneration and deleted the addition of Rs. 37,308. From the said order of the Tribunal for the assessment year 1961-62, at the instance of the Commissioner of Income-tax, West Bengal-IV, the following question of law was referred to the High Court for its opinion :

'Whether, on the facts and in the circumstances of the case and on a proper construction of Section 10(4A) of the Indian Income-tax Act, 1922, the payment of Rs. 1,00,777 to Shri M. M. Thapar by way of salary and profit commission was excessive or unreasonable so as to justify the disallowance of a portion thereof ?'

15. The High Court accepting the contentions of the assessee answered the said question in the negative and in favour of the assessee.

16. As a similar question is under consideration in respect of the same assessee for the assessment year 1962-63, following the decision in the case of CIT v. Karam Chand Thapar & Bros. (P.) Ltd. : [1978]115ITR688(Cal) , we answer the first question referred to us in the negative and in favour of the assessee.

17. The second question is whether the expenditure of Rs. 16, 737 incurred by the assessee for bringing by air the dead body of the chairman of the board of directors of the assessee, late Karam Chand Thapar, from Delhi to Calcutta is a business expenditure. He was on a business tour to Delhi where he died on March 29, 1962. His dead body was flown from Delhi to Calcutta and for that purpose an expenditure of Rs. 16,737 was incurred. The assessee claimed the said sum as business expenditure. According to the Income-tax Officer, the said expense is in no way connected with the business of the assessee and he disallowed the same. The Appellate Assistant Commissioner confirmed the disallowance on the ground that the expenditure incurred was not wholly and exclusively laid out for the purposes of carrying on the assessee's business. In appeal against the order of the Appellate Assistant Commissioner to the Tribunal, the latter relied on a decision of the Delhi High Court in the case of CIT v. Supreme Motors (P.) Ltd. : [1972]84ITR1(Delhi) and held that the said expenditure was for the purpose of business and deleted the addition of Rs. 16,737.

18. Counsel for the Revenue contended that the expenditure incurred by the assessee for bringing the dead body of late Karam Chand Thapar byair from Delhi to Calcutta was not in any way connected with the business of the assessee-company. It was no part of the assessee's business to bring the dead body of its chairman of the board of directors from Delhi to Calcutta. It was done for the benefit of the members of the family of the chairman and as such cannot be said to form part of the business of the assessee. Reliance was placed on the case of Atlas Cycle Industries Ltd. v. CIT .

19. On behalf of the assessee, it was contended that Mr. K. C. Thapar went to Delhi in connection with the business of the assessee-company. It was the duty of the assessee-company to see that he came back to Calcutta. Had he been alive, the expenses incurred for his return to Calcutta would admittedly have been expenditure incurred for the business of the company. His death at Delhi did not make any difference. It was the duty of the assessee-company to see that he returned to Calcutta from Delhi. As Mr. Thapar went to Delhi in connection with the business of the assessee-company, it was the duty of the assessee to arrange for his return to Calcutta and the expenditure incurred for the same cannot but be said to have been incurred for the purpose of the business of the assessee-company. The death of Mr. Thapar at Delhi did not make any difference. As it was the duty of the assessee-company to make arrangement for his return to Calcutta from Delhi and to incur expenses for the same, such expenses would be said to have been incurred for the purpose of the business of the company. Hence, the amount incurred by the assessee-company for bringing the dead body of Mr. Thapar would be an expenditure incurred for the business of the assessee-company. Reliance was placed on the case of CIT v. Supreme Molars (P.) Ltd. : [1972]84ITR1(Delhi) .

20. In the case of Atlas Cycle Industries Ltd. v. CIT , the facts were that the assessee-company organised an eye-camp for its workers free of charge on which it incurred an expenditure of Rs. 3,205 and claimed the amount as deduction. The Income-tax Officer allowed only one-half of the expenses. The Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. The Tribunal held that the eye-camp was open to outsiders and that no data was available about the number of outsiders who took advantage of the camp and affirmed the orders of the Income-tax Officer and the Appellate Assistant Commissioner. It was held that the expenditure was not incurred for the benefit of the workers only nor was there any evidence to show that the eye-camp was primarily meant for the workers working in the industrial unit of the assessee. Therefore, 50 per cent. of the expenditure incurred on the eye-camp for the benefit of the employees was not for purposes of business and could not be allowed as a deduction.

21. The above case is distinguishable. In the above case, as outsiders also got the benefit of the eye-camp, it was held that expenditure was not for the benefit of the workers of the assessee-company only. As the entire expenditure incurred on eye-camp was not for the benefit of the workers of the assessee-company only, it was held that the entire expenditure was not incurred for the purposes of business of the assessee-company and could not be allowed as deduction.

22. In the case of CIT v. Supreme Motors Private Ltd. : [1972]84ITR1(Delhi) , the facts were that the Chairman of the assessee-company had come from Jodhpur to Delhi on a tour of inspection, and while on such tour he died of heart failure. The company chartered a plane to have his body sent back to Jodhpur and incurred a sum of Rs. 6,900 for that purpose. The question was whether the expenditure was incidental to the business carried on by the assessee and allowable as business expenditure. It was held that the expenditure incurred by the assessee was incidental to the business carried on by it and was allowable.

23. The above decision fairly and squarely applies to the facts of the instant case. We respectfully agree with the above decision of the Delhi High Court and the reasons given therein. What is money wholly and exclusively laid out for the purposes of trade as required by Section 37 of the Income-tax Act, 1961, is a question which must be determined upon the principles of ordinary commercial trading. See CIT v. Chandulal Keshavlal : [1960]38ITR601(SC) . One must look to the direct concern and direct purpose for which the money is laid out. Expenditure incurred by the assessee in the instant case was incidental to the business carried on by the assessee. The test of commercial expediency for determining whether an expenditure was wholly or exclusively laid out for the purpose of business and reasonableness of the expenditure should be judged from the point of view of the businessman and not of the Revenue.

24. Late K.C. Thapar, the then chairman of the assessee-company, went to Delhi in connection with and for the purpose of business of the assessee-company. If he was alive, it was the duty of the assessee-company to bear all expenses for his return and such expenditure would have been for the purpose of business of the company. The death of K. C. Thapar at Delhi did not make any difference. It was the duty of the assessee-company to make arrangements for bringing his dead body to Calcutta and to bear the expenses incurred for that purpose. Expenses incurred by the assessee-company for carrying the dead body of late K. C. Thapar was the liability of the assessee-company and as such was incidental to the businesscarried on by the assessee-company and should be borne by the assessee-company.

25. For the reasons stated hereinabove and following the decision of the Delhi High Court in the case of CIT v. Supreme Motors Private Ltd. : [1972]84ITR1(Delhi) . We answer the second question in the affirmative and in favour of the assessee.

26. In the facts and circumstances of this case, there will be no order as to costs.

Ajit Kumar Sengupta, J.

27. I agree.


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