1. This reference, under Section 256(2) of I.T. Act, 1961, arises out of the assessment proceedings for the assessment year 1969-70, and the question before us is as follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal's finding that the salaries paid to the managing director and other director were excessive, is perverse ?'
2. The assessee is a private limited company carrying on the business of lithographic printing which it took over in the assessment year 1967-68, from Calcutta Art Studio, a firm in which there were several partners.
3. Shri P.K. Biswas, Shri S.M. Biswas and Shri Biswajit Biswas were some of the partners of the aforesaid firm and they became the employees of the assessee-company. The AAC in the appeal filed by the assessee-company has allowed the salary paid to them but we are not directly concerned with it in this reference.
4. The senior partner of the aforesaid firm was Shri Surendra Nath Biswas. He is a qualified artist and an expert in litho-printing. He became the managing director of the assessee-company on a monthly salary of Rs. 1,500.
5. Shri Biswanath Biswas was also a partner of the aforesaid firm. He is an expert in off-set printing and has vast experience in it as appears from para. 9 of the order of the AAC which forms part of the statement of case. He became the other director of the assessee-company on a monthly salary of Rs. 1,000. It may now be noted here that there is a mistake inpara. 3 of the statement of case and the said mistake is that Shri Surendra Nath Biswas was an expert in off-set printing.
6. Before the assessee-company took over the business of the aforesaid firm the total sales of the firm were Rs. 3,76,077 in the assessment year 1965-66 and Rs. 2,89,136 in the assessment year 1966-67. Thereafter, the total sales of the assessee-company were Rs. 5,43,079 in the assessment year 1967-68, Rs. 5,42,828 in the assessment year 1968-69 and Rs. 5,53,872 in the assessment year 1969-70. The profit in the assessment year 1967-68 of the assessee was Rs. 3,897 and in the assessment year 1968-69 was Rs. 4,283, whereas there was a loss in the assessment year 1969-70 and the amount was Rs. 14,552.
7. The ITO has disallowed Rs. 8,000 out of the total salary of Rs. 18,000 paid to Shri Surendra Nath Biswas and Rs. 6,000 out of the total salary of Rs. 12,000 paid to Shri Biswanath Biswas under Section 40(c)(i) of the I.T. Act, 1961.
8. The AAC has, however, allowed Rs. 12,000 in the case of Shri Surendra Nath Biswas and has disallowed the balance amount. Similarly, he has allowed Rs. 7,000 in the case of Shri Biswanath Biswas and has disallowed the balance amount. As to the salary of Shri Surendra Nath Biswas the order of the AAC reads, inter alia, as follows:
'It is thus obvious that in the first two years, the appellant has shown negligible amounts of profit and in the third year, it has shown a huge amount of loss. This means that the appellant-company has not been benefited to any marked extent as a result of the services of the managing director. This thing is further obvious from the fact that the gross profit in the assessment year 1969-70 has gone down to 19.5% as against the profit of 22'7% shown in the first year. After considering the trading results and business needs of the appellant-company I feel that the remuneration of Rs. 18,000 paid by it to the managing director was certainly excessive and unreasonable. After taking into account the previous experience of these persons and other circumstances of the case, I feel that a remuneration of Rs. 12,000 will be reasonable for this person. Thus, there shall be a disallowance of Rs. 6,000 only in each of the years. This will mean a relief of Rs. 2,000 in each of the assessment years 1967-68 and 1968, 69 and Rs. 1,000 in the assessment year 1969-70.'
9. And, respecting the salary of Biswanath Biswas, the AAC says thus:
'On a discussion of the matter with the appellant's counsel, I noticed that in the partnership firm styled as M/s. Calcutta Art Studio the share of profit of this person was exactly the same as that of S/S. P.K. Biswas, Biswajit Biswas and S.M. Biswas who were taken over as employees by the appellant-company. It has already been mentioned above that Sri P.K. Biswas was paid a salary of Rs. 7,200 whereas the latter two personswere paid salaries of Rs. 6,000 and Rs. 6,600. All these persons were having more or less the same experience in the printing business as Sri Biswanath Biswas. The appellant's counsel was, therefore, requested to justify the higher remuneration paid by the appellant to the director. He, however, did not give any satisfactory explanation on this point. Besides, it has already been seen that the appellant-company has not been benefited to any great extent as a result of the service of the director. After considering these facts, I feel that the remuneration of Rs. 12,000 paid by the appellant to this person is also excessive. In my opinion, a remuneration of Rs. 7,200 will be reasonable for this person. After allowing remuneration of Rs. 7,200, there will be a disallowance of Rs. 4,800 in each of the years under appeal. This will mean a relief of Rs. 1,200 in each of the first two years and Rs. 200 in the third year.'
10. The assessee-company then filed a further appeal regarding the disallowed amounts, but the Appellate Tribunal dismissed it and sustained the order of the AAC in the following terms :
'In our opinion, however, the Appellate Assistant Commissioner has allowed the reasonable amount of remuneration to each of the directors after considering all the facts and circumstances. The assessee has not brought sufficient material on record to justify the payment of more remuneration than that allowed by the Appellate Assistant Commissioner. While fixing the remuneration we have to take into account the commercial expediency and legitimate needs of the business. We are not concerned with the experience of the directors. The turnover and the extent of the business of the company do not justify the payment of enhanced remuneration. We, accordingly, see no reason to interfere.'
11. As the case of CIT v. Edward Keventer (Private) Ltd. : 86ITR370(Cal) has been affirmed by the Supreme Court : 115ITR149(SC) , it is unnecessary for us to discuss the cases cited at the Bar or the principles laid down by the Division Bench of this court in the aforesaid case. We shall, however, quote a passage from the judgment of the Supreme Court in the case of Nund & Samont Co. P. Ltd. v. CIT : 78ITR268(SC) , on which reliance was placed by Mr. Ajit Sengupta, learned counsel for the revenue. The Supreme Court at pages 271 and 272 of the report says thus:
'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 ofthe 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 the Tribunal 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.'
12. Mr. Sengupta, therefore, argues that no evidence was adduced by the assessee-company in support of its claim and, therefore, it cannot be said that the finding of the Tribunal, namely, that the salary paid to the managing director and the other director was excessive, is perverse. He also argues that as the assessee-company has appointed those three experienced former partners of the said firm as its employees, the Tribunal has rightly disallowed the balance amount by saying, 'We are not concerned with the experience of the directors.'
13. We are, however, not impressed by his arguments. The assessee-company has adduced all relevant materials before the authorities below as appears from the appellate orders and, therefore, reliance on the case of Nund & Samont Co. P. Ltd. : 78ITR268(SC) was misplaced by Mr. Sengupta.
14. The authorities below have nowhere said that the assessee-company did not require an expert artist or an expert in offset printing. There is nothing on the record to show that the aforesaid three employees of the assessee-company were either artists or experts in offset printing. Nor there is any finding that the business of the assessee-company or its affairs was managed by those three employees or any other employee of the assessee-company.
15. Shri Biswanath Biswas is not an employee of the assessee-company. He is a director of the company. He has rendered services in his capacity of a director to the assessee-company and for this reason a part of his salary has been allowed by all the authorities below. The appellate authorities in disallowing the balance of his salary should not have compared his salary with the salary of the aforesaid three employees of the assessee-company for they are not comparable units at all and that Shri Biswanath Biswas was not an employee but a director of the company.
16. It was not even argued by the departmental representative before the appellate authorities that the service of Shri Surendra Nath Biswas as an artist and the service of Biswanath Biswas as an expert in offset printing were not the legitimate business needs of the assessee-company. We alsodo not find any such finding in the orders of the appellate authorities. On the other hand, while disallowing a part of the salary of Shri Surendra Nath Biswas, the AAC without specifying the legitimate business needs of the assessee-company has stated that he has considered the legitimate business needs of the assessee-company and the Appellate Tribunal has merely quoted Section 40(c)(i) of the Act in sustaining the disallowance of the salary of Shri Surendra Nath Biswas and Shri Biswanath Biswas.
17. Further, the finding of the AAC is that the sale has vastly increased and this finding was accepted by the Appellate Tribunal. It is not the finding of the appellate authorities below that this vast increase in sale was not due to the services rendered by Sri Surendra Nath Biswas or Sri Biswanath Biswas. It is an admitted fact that they have rendered service to the assessee-company and that is why a part of their salary was allowed by all the authorities below. Therefore, it is beyond dispute that their service was a legitimate business need of the assessee-company. Moreover, they managed the business of the assessee-company and, therefore, it must be held that the vast increase in sale was due to their endeavour because it is not the finding of the authorities below that the business of the assessee-company was carried on by any employee of the assessee-company.
18. The appellate authorities, in our opinion, fell into an error in disallowing a part of the salary of these two gentlemen on the basis of negligible profits of the earlier years and loss in the assessment year. Profit or loss is not at all relevant consideration under Section 40(c)(i) of the Act, for it uses the expression 'the benefit derived by or accruing to it therefrom'. The word 'benefit' here means benefit derived by the company or accruing to it from the service of the persons specified in the section. Further, profit or loss depends on various factors. There may be a huge profit in one year and similarly there may be a huge loss in another year. Merely because there is a huge profit, the entire remuneration or salary paid to the persons specified in the section cannot be allowed as a matter of course. Similarly, no part of the remuneration or salary can be disallowed merely on the ground that the company has suffered a huge loss in the accounting year.
19. It is not the profit or loss but the benefit derived by the company or accruing to the company from the service of the persons specified in the section and the legitimate business needs of the company that must be considered, not as a tax collector but as a prudent businessman before disallowing any part of their remuneration or salary. And it is not permissible to disallow any part of their remuneration or salary by simply quoting the language of the section and without stating the facts and reasons in support thereof.
20. In rejecting the claim, the Appellate Tribunal has, inter alia, said : 'We are not concerned with the experience of the directors' and it said so without giving any reason whatsoever. It is elementary that a businessman is benefited by the service of the experienced directors or employees. The employees, however, do not manage the affairs of the company. They merely do what they are asked to do, whereas the directors run the business of the company. If the directors are experienced in business, their experience cannot be ignored at all in considering the legitimate business needs of the company.
21. We, accordingly, answer the question in the affirmative and in favourof the assessee. We, however, do not propose to make any order as tocosts.
Sudhindra Mohan Guha, J.
22. I agree.