Sabyasachi Mukharji, J.
1. In this reference under Section 256(1) of the I.T. Act, the following question has been referred to this court:
' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the disallowance made out of salary paid to Mr. J. D. Somerville could be sustained under Section 40(c) of the Income-tax Act, 1961 ?'
2. The assessee is M/s. Eastern Scales Pvt. Ltd. and the present statement relates to the assessment years 1973-74 and 1974-75 for which the corresponding previous years are the financial years ending on 31st March, 1973, and 31st March, 1974, respectively. In the appeals which were filed by the assessee for these two years the Tribunal was called upon to decide two issues: one relating to the curtailment of the deduction in respect of the managing director's salary from Rs. 42,350 per annum as claimed, to Rs. 36,000 per annum under the provisions of Section 40(c) and the other regarding the disallowance of Rs. 14,572 (for the assessment year 1973-74) and Rs. 15,295 (for the assessment year 1974-75) being the deduction claimed by way of gratuity liability under the Compulsory Gratuity Act, 1971.
3. In so far as the first of these two issues was concerned, it was observed by the Tribunal that, in restricting the deduction in respect of the managing director's remuneration, the authorities below had merely followed the decision of the Tribunal on this very issue for the earlier years. An attempt was, however, made by the learned counsel for the assessee to urge that a vital aspect of the matter had not been considered by the Tribunal in the earlier years and hence the decision of the Tribunal required reconsideration. It was submitted that prior to his becoming the managing director, Sri J. D. Somerville was a director of the assessee-com-pany. On the retirement of the then managing director, Sri J. D. Somerville was appointed to that post but the post of director which he had tillthen occupied was not filled, with the result that he was obliged to perform the functions which were till then being performed by two persons. This fact, according to the learned counsel, had not been taken into account by the Tribunal when it rendered its decision for the earlier years and it was for this reason that the said decision, in his opinion, required reconsideration. This contention was disposed of by the Tribunal in the following terms:
' The contention now sought to be raised before us by the learned counsel for the assessee was never urged in earlier years. There is also no material on record to show that there was any necessity for the appointment of any director other than the managing director from the assessment year 1970-71. He has also not been able to show any improvement in the business of the assessee-company in the assessment years under consideration. We, therefore, do not find any reason to take a view different from what the Tribunal has taken from the assessment years 1970-71 to 1972-73. We, therefore, affirm the orders of the Appellate Assistant Commissioner. '
4. It appears that the previous years' assessments were concerned really with the assessment years 1967-68, 1968-69 and 1969-70. The decision of the Tribunal for these assessment years came up for consideration before this court in Eastern Scales (P.) Ltd. v. CIT : 117ITR477(Cal) . There is, however, one significant factor different from those years, in the present year, that is to say, on the 1st of May, 1968, Mr. J. H. Somerville retired and in those years there were two directors. In the year under question there was only one director. The question of the allowability of the sum of Rs. 3,530 per month must be judged in this changed perspective that one director was doing the job of two directors. This question was really considered by the Division Bench of this court in the case of CIT v. Edward Keventer (P.) Ltd. : 86ITR370(Cal) . There, the Division Bench of this court held that the ITO did not apply the correct principles in forming his opinion as to the reasonableness of the sum paid to the directors. It was, further, held, he had not given any proper consideration to the legitimate business needs of the company and, on the aspect of benefit, his view was mainly influenced by applying his mind only to the kind of physical or hard labour done by the directors. The ITO considered the sums paid to the directors to be unreasonable on the basis of the percentage in relation to the profits of the company. The ITO did not appreciate that for a company of the kind with which the court was concerned, on the relevant facts, the court found, there was no justification for his finding that the payment of a commission was by way of allocation of profit. In these circumstances, so far as the Rani was concerned, in that case she happened to be the chairman of the board of directors. It appeared that any and every matter of import-ance was referred to the Rani and her advice and decision in all such matters were of vital importance in guiding the affairs of the company and its smooth and efficient administration. Among the directors there might be a division of labour for the efficient administration of the affairs of the company and there might be a managing director with larger powers and greater responsibility in the matter of management 'of the affairs of the company. Therefore, in these circumstances, the court upheld the decision of the Tribunal that the disallowance of the amounts paid to the directors under Section 10(4A) was unjustified. But this court in the case of Eastern Scales (P.) Ltd. : 117ITR477(Cal) , after referring to the aforesaid decision in the case of Edward Keventer (P.) Ltd. : 86ITR370(Cal) noted that the Division Bench had reiterated that the two tests were: the legitimate business needs of the company and, secondly, the benefit derived by or accruing to the company. Whether in a particular case, however, such tests had been correctly applied or not and whether in a particular case the legitimate business needs of the company or the benefit derived by the company had been correctly appreciated or not would depend upon the facts and circumstances of each case. It appears that the decision of this court in Edward Keventer's case : 86ITR370(Cal) , referred to hereinbefore, went up in appeal before the Supreme Court in the case of CIT v. Edward Keventer (P.) Ltd. : 115ITR149(SC) of the said report, the Supreme Court approved of the said reasoning of the Calcutta High Court.
5. In that view of the matter, in our opinion, in view of the significant factor that one director was performing the job of two directors, the Tribunal was in error (in its conclusion) that the facts and circumstances in the years in question were not different from the facts of the earlier years. There was no division of labour for efficient administration and one director was doing the entire work. In the instant case, one director was shouldering the entire responsibility. It is a factor which is material for the business needs of the company. In that view of the matter, we are of the view that the Tribunal arrived at an incorrect decision and the question must, therefore, be answered in the negative and in favour of the assessee. Before we part with, however, we must observe that in our decision in the case of Eastern Scales (P.) Ltd. v. CIT : 117ITR477(Cal) , we had inadvertently observed that in the case before this court, in CIT v. Edward Keventer P. Ltd. : 86ITR370(Cal) , the attention of the Division Bench was not drawn to the decision of the Supreme Court in the case of Nund & Samont Co. (P.) Ltd. v. CIT : 78ITR268(SC) , though the judgment of the Supreme Court was delivered on the 6th May, 1970. This seems to be an inadvertent error because we find that in the decision of the Division Bench of this court in the case of CIT v. Edward Keventer (P.)Ltd. : 86ITR370(Cal) , learned advocate for the revenue had drawn attention to the Supreme Court decision in the case of Nund & Samont Co. P. Ltd. v. CIT : 78ITR268(SC) . Indeed, at p. 283 of the report, the Division Bench in the case of CIT v. Edward Keventer (P.) Ltd. : 86ITR370(Cal) relied on the Supreme Court's observation in arriving at its decision. Therefore, that statement in the decision in the case of Eastern Scales (P.) Ltd. v. CIT : 117ITR477(Cal) , must have been an inadvertent error. The true test, it appears, as appearing from the decision in the case of CIT v. Edward Keventer (P.) Ltd. : 86ITR370(Cal) , on this aspect, is as follows :
'The legitimate business needs of the company must be judged from the view-point of the company itself and must be viewed from the point of view of a prudent businessman. It is not for the Income-tax Officer to dictate what the business needs of the company should be and he is only to judge the legitimacy of the business needs of the company from the point of view of a prudent businessman. The benefit derived or accruing to the company must also be considered from the angle of a prudent businessman. The term ' benefit' to a company in relation to its business, it must be remembered, has a very wide connotation and may not necessarily be capable of being accurately measured in terms of pound, shillings and pence in all cases. Both these aspects have to be considered judiciously, dispassionately without any bias of any kind from the view-point of a reasonable and honest person in business. '
6. This reasoning has been approved of by the Supreme Court in the decision referred to hereinbefore. In the premises, the question is answered, as we have indicated before, in the negative and in favour of the assessee.
7. In the facts and circumstances of this case, the parties will pay and bear their own costs.
C.K. Banerji, J.
8. I agree.