Income-tax---

----Business expenditure---Disallowance---Company---Salary paid to managing director---Increase in salary---Finding by Income-tax Authorities that remuneration paid was excessive---Failure to refer to the "legitimate business needs of company" in their order---Not significant---Disallowance of part of increase---Justified---Indian Income Tax Act, 1961, S.40(c).

The assessee, a private limited company, had paid a salary of Rs.1,000 per month to its managing director, D, in the accounting year relevant to the assessment year 1973-74. D was a practising advocate and .the Assessing Officer noted that, in the immediately preceding year, he was paid a salary of only Rs.6,000; under the Bar Council Rules, he was not entitled to hold any other office of profit; and, lastly, no evidence regarding his services was produced before the Assessing Officer. He, therefore, disallowed the entire claim of the assessee amounting to Rs.12,000. On appeal, the Appellate Assistant Commissioner observed that, in the immediately preceding year, a salary of Rs.6,000 was allowed and keeping in view the increase in the cost of living, he directed the allowance of the managing director's salary at Rs.600 per month. He recorded a positive finding that the salary claimed at Rs.1,000 per month was highly excessive and disallowance was made under section 40(c) of the Income Tax Act, 1961. The Tribunal upheld this decision and observed that there was nothing to suggest that the managing director deserved a raise in his salary and that there was no evidence that the increase was justified by the services rendered by him. On a reference:

Held, that the words "legitimate business needs of the company" had not been used in any of the orders, but the mere omission to use the language of the statute was not of any consequence. The Assessing officer had recorded a finding that it was not established that the remuneration paid was wholly necessary for the purpose of business. The Appellate Assistant Commissioner had specifically referred to section 40(c) and had also held that the claim at Rs.1,000 per month was highly excessive. The Tribunal, in its finding, had held that there was no evidence to show that the increase was justified by the services rendered by him. These were all findings of fact. The Tribunal was right in upholding the disallowance of part of the remuneration paid to the managing director.

Calcutta Art Studio (Pvt.) Ltd. v. C.I.T. (1979) 118 ITR 752 (Cal); Kashiprasad Carpets (P.) Ltd. v. C.I.T. (1984) 148 ITR 710 (All) and Pheros and Co. P: Ltd. v. C.I.T. (1989) 175 ITR 44 (Gauhati) ref.

Vikram Gulati for the Assessee.

Standing Counsel for the Commissioner,

JUDGMENT

M.C. AGARWAL, J.---In pursuance of the directions made by this Court under section 256(2) of the Income Tax Act, 1961, the. Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, has referred the following question for the opinion of this Court:

"Whether, on the facts and in the circumstances of the case, any part of the sum of Rs.12,000 paid as remuneration to Shri Ram Awadh Dubey, managing director of the Company, was liable to be disallowed in law?"

We have heard learned counsel for the assessee, Sri Vikram Gulati, and learned standing counsel.

The proceedings relate to the assessment year 1973-74, for which the assessee's accounting year had ended on December 31, 1972. The assessee is a private limited company and, for the year under consideration, it .had paid a, salary of Rs.1,000 per month to its Managing Director, Sri RA. Dubey.-He was a practising advocate and the learned .Assessing Officer noted that, in the immediately preceding year, he was paid a salary of only Rs.6,000;, under the Bar Council Rules, he was not entitled to hold any other office of profit; and, lastly, no evidence regarding his services was produced before him. He, therefore, disallowed the entire claim of the assessee amounting to Rs.12,000; on appeal, the learned Appellate Assistant Commissioner observed that, in the immediately preceding year, a salary of Rs.6,000 was allowed and keeping in view the increase is the cost of living, he directed the allowance of the managing director's salary at Rs.600 per month. He recorded a positive finding that the salary claimed at Rs.1,000 per month was highly excessive and disallowance was made under section 40(c) of the Act. The assessee then went to the Appellate Tribunal in appeal and it was contended that the remuneration was raised to Rs.1,000 per month with effect from November 1, 1972, and thus for a period of two months in the preceding year the salary at Rs.1,000 per month had already been allowed in the assessment year 1972-73, and, therefore, there was no justification for disallowance of any portion of the salary in the year under consideration. The Tribunal observed that, in making the assessment for the preceding year, the raise in the salary was not noticed by the Assessing Officer and in affirming the order as passed by the Appellate Assistant Commissioner, the Tribunal recorded its finding as below:

"There is also nothing to suggest that the managing director deserved raising of his salary from Rs.500 per month to 1,000 per month. There is no evidence to show that this increase was justified by the services rendered by him.

Keeping all the facts of the case in view, we feel that the decision of the Appellate Assistant Commissioner holding that the remuneration of Rs.600 per month would be fair, appears to be very reasonable and we confirm the same."

Learned counsel for the assessee contended that the reasonableness of the expenditure has to be decided from the point of view of a prudent businessman and for this proposition he relied on Calcutta Art Studio (Pvt.) Ltd. v. C.I.T. (1979) 118 ITR 752 (Cal.), Pheros and Co. P. Ltd. v. C.I.T. (1989) 175 ITR 44 (Gauhati) and Kashiprasad Carpets (P.) Ltd. v. C.I.T. (1984) 148 ITR 710 (All.). There can be no doubt about the principle of law laid down in these rulings that the opinion as to reasonableness or otherwise of the amount must be formed having regard to the legitimate business needs of the company. Learned counsel took us through the orders of all the authorities below and contended that, in this case, none of the authorities has recorded a finding that the salary paid to the managing director was excessive or unreasonable having regard to the legitimate business needs of the company as is the requirement. of section 40(c). It is true that the words "legitimate business needs of the company" have not been used in any of the orders, but the mere omission to use the language of the statute will not be of any, consequence. The Assessing Officer has recorded a finding that it was not established that the remuneration paid is wholly necessary for the purpose of business. The Appellate Assistant Commissioner has specifically referred to section 40(c) and has also held that the claim at Rs.1,000 per month was highly excessive. The learned Tribunal, in its finding, has held that there was no evidence to show that the increase was justified by the services rendered by him. It has also held that the decision of the Appellate Assistant Commissioner holding that the remuneration of Rs.600 per month would be fair was reasonable. These are all findings of fact which this Court is not authorised to review and the legal effect is that to the extent the salary has been disallowed, it was excessive and unreasonable having regard to the legitimate business needs of the company in spite of the fact that the words "legitimate business needs of the company" have not been used by the Tribunal.

For the above reasons, we hold that the Tribunal was right in upholding the disallowance of a part of the remuneration paid to the Managing Director, Ram Awadh Dubey, and we answer the aforesaid question in the affirmative and in favour of the Revenue. The Commissioner shall get his costs of his reference from the assessee.

M.BA./140/T.F??????????????????????????????????????????????????????????????????????? Order accordingly.