1. At the instance of the Commissioner of Income-tax, West Bengal IV, Calcutta, this court has directed the Tribunal under Section 66(2) of the Indian I.T. Act, 1922, to draw up a statement of case and refer the following question :
'Whether, on the facts and in the circumstances of the case and on aproper construction of Section 10(4A) of the Indian I.T. Act, 1922, the paymentof 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 aportion thereof ?'
2. The facts found and/or admitted in these proceedings are shortly asfollows: Messrs. Karam Chand Thapar & Bros. (P.) Ltd., Calcutta, theassessee, is a private limited company. In the assessment year 1961-62,the relevant previous year being the one ended on the 31st March, 1961,Rs. 1,00,777 paid to M. M. Thapar, son of late Karamchand Thapar, byway of remuneration consisting of salary, allowance and share of profits,came up for consideration during the assessment. M. M. Thapar had workedas a director of the assessee in the said assessment year. The ITO held thatM. M. Thapar who had joined the assessee for a short period would nothave been paid the same high remuneration as other experienced directors on business considerations and such remuneration was paid only because he was the son of the late Karam Chand Thapar, the managing director of the assessee at the relevant time. In the circumstances, the ITO allowed a part of the remuneration being Rs. 36,000 and disallowed the balance.
3. Being aggrieved, the assessee preferred an appeal. The AAC noted that in the earlier assessment years 1959-60 and 1960-61, a portion of the remuneration paid to M. M. Thapar had been disallowed. He also took into account that the main income of the assessee was agency commission mostly received from Sri Gopal Paper Mills and Ballarpur Paper and Straw Board Mills Ltd. He found that M. M. Thapar had a diploma in textile engineering from the California University and was previously employed in Jagatjit Cotton Textile Mills Ltd., a company managed by the assessee, at a salary of Rs. 1,000 per month and as such had no special qualifications for looking after the paper mills. He found further that profit commission was being paid only to the directors who were the members of the Thapar family and not to the other directors.
4. On the basis of the aforesaid he held that there was no material to show that the remuneration paid to M. M. Thapar was justified in view of the legitimate business needs of the assessee and the benefits derived by it. Accordingly, he upheld the disallowance made by the ITO.
5. Being aggrieved, the assessee preferred a further appeal to the ITA Tribunal. It was contended on behalf of the assessee in the appeal that the qualifications of M. M. Thapar were sufficiently high to justify the remuneration paid to him. It was also contended that no special post had been created for M. M. Thapar but he was appointed as a director in the usual course. It was contended further that remuneration and profits were being paid to all directors in the same proportion.
6. It was brought to the notice of the Tribunal that at the time of appointment of M. M. Thapar, the two mills, namely, Jagatjit Cotton Mills and Sri Gopal Paper Mills, were in a stage of expansion and after his appointment substantial expansion was effected in the said concerns, M. M. Thapar was responsible for the actual supervision and control of these two mills. The correspondence which passed between the assessee and the ITO in this connection consisting of five letters written between February and November, 1964, were produced before the Tribunal and the Tribunal noted that the aforesaid submissions were contained in the said letters.
7. The attention of the Tribunal was also drawn to the fact that the appointment of M. M. Thapar as a director of the assessee had been approved by the Company Law Board. Lastly, it was contended that the capability of M. M. Thapar to be appointed as a director had not been chal-lenged and in that view it was not open to the revenue to contend that there should be difference in the remuneration to be paid to its directors.
8. On behalf of the revenue it was contended that the 1TO had jurisdiction to enquire into the reasonableness of the appointment of M. M. Thapar and that M. M. Thapar was not qualified to look after the affairs of the paper mills.
9. On the basis of the aforesaid the Tribunal found the following as undisputed and/or proved facts :
(a) In appointing M. M. Thapar as a director no special post was created.
(b) M. M. Thapar was a technical person and had experience in business management.
(c) H. D. Verma, a director and not a member of the Thapar family, was not paid a profit commission inasmuch as he had retired from his post with effect from the 1st April, 1960, and had been re-employed in the rele-vant year for a period of one year.
10. The Tribunal held that the contentions of the revenue as to the lack of qualification of M. M. Thapar were without any substance. Following a decision of this court in CIT v. Edward Keventer (Private) Ltd. : 86ITR370(Cal) and applying the principles laid down therein the Tribunal held that from the point of view of a prudent businessman the remuneration and commission paid to M. M. Thapar were reasonable and justified and no disallowance therefrom was called for. The appeal of the assessee was allowed.
11. At the hearing, Mr. B. L. Pal, learned counsel for the revenue, reiterated the submissions of the revenue that the qualifications of M. M. Thapar were not sufficient so as to entitle him to such a high remuneration. He contended further that the Tribunal has not considered the relevant aspects of the question as had been laid down by the Supreme Court in Nund & Samont Co. P. Ltd. v. CIT : 78ITR268(SC) . The facts in that case were that the assessee, a private limited company, paid to its managing director and deputy managing director remuneration in terms of its articles of association being 30% of its annual net profits subject to a minimum of Rs. 5,000. The ITO disallowed a part of such remuneration on the ground that the allowances paid were excessive and unreasonable having regard to the legitimate business needs of the company. The AAC as also the Tribunal confirmed the disallowance. On a reference, the High Court at Patna upheld the order of the ITO, On final appeal before the Supreme Court, it was contended that the decision of the authorities upholding the disallowance on the ground that the remuneration was excessive or unreasonable was erroneous. The Supreme Court did not accept the contentions of the assessee and observed as follows (page 271) :
'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 of the services rendered by the managing director and the deputy managing director. In the absence of any such evidence, the finding recorded by the ITO and confirmed by the AAC and the Tribunal must be accepted.'
12. Inspired by the above observations Mr. Pal contended that in every case, it was necessary for the assessee to give evidence on each of the items enumerated, namely :
(a) Duties of the directors concerned.
(b) Services rendered by them.
(c) The manner of enhancement of profits by reason of the special aptitude or qualifications of the directors.
(d) Legitimate business needs of the assessee.
(e) Benefit derived by or accruing to the assessee by reason of the services rendered.
13. Dr. Debi Pal, learned counsel for the assessee, has contended on the other hand that on the facts found and considered by the Tribunal it could not be said that its decision was erroneous. There was sufficient material before the Tribunal to hold that the remuneration paid to the director concerned was reasonable and not excessive. He contended that the Tribunal had duly considered the needs of the assessee and the benefits derived by it.
14. The relevant facts and circumstances which were before the Tribunal may be reiterated at this stage.
(a) The director concerned, namely, M. M. Thapar, had certain amount of technical qualification, viz., a diploma in textile engineering.
(b) He also gained experience in the U.S.A. where he stayed for four years and also in India when he had worked in the textile mill of the assessee.
(c) At the material time he was supervising and in control of Jagat-jit Cotton Textiles Mills Ltd. and Sri Gopal Paper Mills which were in a stage of expansion.
(d) He was paid the same remuneration as that paid to the other directors.
(e) His appointment as a director of the assessee had been approvedby the Company Law Board.
None of the findings as aforesaid have been challenged by the revenue.
15. We note that under Section 169 of the Companies Act, 1956, appointment of a whole-time director of a private company, which is a subsidiary of a public company, requires approval of the Government. The section lays down that the Government shall not accord its approval for any such appointment unless it is satisfied that the terms and conditions thereof are fair and reasonable. There is no reason to assume that in the instant case the authorities concerned did not carry out their statutory duties and before according approval to the appointment of M. M. Thapar as a director of the assessee did not consider the terms and conditions of his appointment to ascertain whether they were fair and reasonable.
16. Both the ITO and the AAC proceeded on the basis that M. M. Thapar had meagre qualification and little experience. Whether a particular director is qualified or not or whether his experience is sufficient or not to justify the remuneration paid to him are conclusions based on facts and the decision of the Tribunal on this aspect has not been challenged as being based on no evidence or as perverse.
17. In any event, the factors which were taken into account by the Tribunal in the instant case were neither irrelevant nor insignificant. These were factors which any prudent businessman would take into account in determining the remuneration to be paid to a director or an employee. We are not called upon in a reference to reappreciate the evidence and substitute our conclusion for that of the Tribunal.
18. We are unable to accept the contention of Mr. B. L. Pal that in every case where the question of unreasonableness or excessiveness of the remuneration paid to a director arises it is necessary for the assessee to adduce evidence on all the items as enumerated by the Supreme Court in Nund & Samont Co. P. Ltd. : 78ITR268(SC) . All that the Supreme Court laid down was that in the facts and circumstances of that case, no evidence had been furnished by the assessee on any of the points indicated which according to the Supreme Court were relevant in deciding the issue.
19. A number of other decisions have been cited at the Bar as follows: (a) Reform Flour Mills (Pvt.) Ltd, v. CIT : 115ITR598(Cal) , (b) Sri Krishna Tiles & Potteries (Madras) P. Ltd. v. CIT : 90ITR439(Mad) , (c) CIT v. Raman & Raman (P.) Ltd. : 110ITR747(Mad) and (d) CIT v. India Carbon (P.) Ltd, .
20. It is not necessary for us to go into detailed consideration of these decisions. The relevant principles of law are well settled and have to be applied in the facts and circumstances of each case.
21. For the above reasons, we accept the contentions of the assessee and answer the question in the negative and in favour of the assessee.
22. There will be no order as to costs.
C.K. Banerji, J.
23. I agree.