Income‑tax‑‑‑

‑‑‑‑Business expenditure‑‑‑Disallowance‑‑‑Salary and commission paid to relatives‑‑‑Finding that salary and commission were excessive having regard to legitimate needs of business‑‑‑Disallowance of part of salary and commission was justified‑‑‑Indian Income Tax Act, 1961, S.40‑A.

A perusal of section 40A(2)(a) of the Income Tax Act, 1961, would disclose that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this subsection, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.

The assessee was a manufacturer of three‑wheeler cycles and he declared an income of Rs.21,000 as assessable income. for the assessment year 1975‑76. The assessee had claimed to have paid a sum of Rs.23,024 towards remuneration of his brother, M, for the technical and supervisory services said to have been rendered by ‑him to the assessee during the abovesaid assessment year, as against a sum of Rs.13,908 shown as remuneration to M for the previous assessment year. Likewise the assessee had claimed a deduction to an extent of Rs.21,412 towards commission payable to another brother, V, for the services rendered by him to the assessee in the abovesaid business during the assessment year 1975‑76 as against a sum of Rs.12,000 paid as commission to him in the previous assessment year. The Income‑tax Officer held that a remuneration of Rs.15,000 paid to M and commission of Rs.13,000 paid to V, the brothers of the assessees, for the services rendered during the assessment year 1975‑76 were reasonable and disallowed the balance of Rs.8,024 and Rs.8,412 towards remuneration and commission to M and V, respectively, as unreasonable. This was confirmed by the Appellate Assistant Commissioner and the Tribunal. On a reference:

Held, that the records disclosed that M was a psychology graduate with no technical qualification or training. Though it was claimed that M had been employed in the Bendweld Industries and acquired some training no certificate had been produced to prove it. V had passed only S.S.L.C. and had been doing commission business for the past three years. The turnover of the assessee during 1975‑76 was Rs.4,28,170 as against Rs.3,90,530, the turnover of the previous assessment year. The Tribunal had considered the three conditions specified in section 40A(2)(a) of the Act while confirming the order of the Appellate Assistant Commissioner regarding the excess or unreasonableness of the remuneration and commission alleged to have been paid by the assessee to his brothers, M and V. Hence, the Tribunal was justified in disallowing partly the remuneration paid by the assessee to his two brothers.

CIT v. Kundan Sugar Mills (P.) Ltd. (1980) 121 ITR 848 (All.) and Upper India Publishing House (P.) Ltd. v. CIT (1979) 117 ITR 569 (SC) ref.

Miss Maya J. Nichani for Petitioner.

C.V. Rajan for Respondent.

JUDGMENT

P. THANGAVEL, J.‑‑‑As per the directions of this Court in T.P. No.227 of 1979, at the instance of the assessee under section 256(2) of the Income Tax Act, 1961, (hereinafter referred to as "the Act"), the‑ Income‑tax Appellate Tribunal, Madras Bench "C", has stated a case and referred the following question of law for the opinion of this Court:

"Whether on a proper interpretation of section 40A(2) of the Income Tax Act, 1961, the Tribunal was justified in disallowing partly the remuneration and commission paid by the assessee to his two brothers engaged as employees in his business?"

The assessee is an individual and he is carrying on the business of manufacturing three wheeler cycles. The assessee declared an income of Rs.21,000 as the assessable income for the assessment year 1975‑76. While arriving at the abovesaid taxable income, the assessee had shown to have paid a sum of Rs.23,024 to his brother, K.R. Madhukar, as remuneration for technical and supervisory services rendered by him and a sum of Rs.21,412 to his another brother, K.R. Vijayakumar, as commission for services rendered by him in the business carried on by the assessee for the assessment year 1975‑76. The assessee had shown to have paid a sum of Rs.13,908 and Rs.12,000 to his brothers, K.R. Madhukar and K.R. Vijayakumar, towards remuneration and commission, respectively, during the previous assessment year.

The Income‑tax Officer held that a sum of Rs.15,000 paid towards the remuneration of K.R. Madhukar and Rs.l‑3,000. paid towards the commission of K.R. Vijayakumar were reasonable and the balance amount of Rs.8,024 and Rs.8,412 shown to have been paid to K.R. Madhukar and K:R. Vijayakumar, respectively, were unreasonable.'The Income‑tax Officer had taken into consideration the increase in turnover registered in the business during the assessment year 1975‑76 than that of the previous assessment year and also the technical qualification of K.R. Madhukar to arrive at the reasonable remuneration payable to K.R. Madhukar, while the Income‑tax Officer had taken into consideration the non‑mentioning of exchanged of letters between the assessee and K.R. Vijayakumar and other fact like express contract, services rendered, facts shown for increase of commission in the statement Income‑tax Officer at of accounts and the letters lodged before thea subsequent stage to arrive at the reasonable amount payable to K.R. Vijayakumar, the Income‑tax Officer had also taken into consideration the fact that the abovesaid K.R. Madhukar and K.R. conclusion are brothers o f the assessee in arriving at the abovesaid conclusion.

Aggrieved against the order of the Income‑tax Officer, the assessee filed an appeal before the appellate Assistant Commissioner, questioning the correctness of the disallowance of the abovesaid remuneration and commission to K.R. Madhular and K.R. Vijayakumar, apart from other disallowances made by the Income‑tax Officer. The Appellate Assistant Commissioner, in the light of section 40A(2)(a)(b) of the Act, agreed with the conclusions of the Income‑tax Officer regarding the disallowance of remuneration and commission alleged to have been paid by the assessee to K.R. Madhukar and K.R. Vijayakumar on the ground that the Income‑tax Officer was justified in coming to such a conclusion, taking into consideration the totality of the circumstances specified by the assessee in his accounts. But the Appellate Assistant Commissioner allowed the deduction of Rs.3,200 and Rs.938 totalling repair of the building underto Rs.4,138 said to have been spent for the municipal tax for the said b he occupation of the assessee and payment of municipal tax. For the said building,which are not subject‑matter of this reference.

Aggrieved against the order of the Appellate Assistant Commissioner regarding the disallowance of remuneration to an extent of Rs.8,024 to K. R. Madhukar and Rs.8,412 towards commission to K.R. Vijayakumar, the assessee filed an appeal before the Income‑tax Appellate Tribunal, Madras Bench C.,. The Tribunal confirmed the order of the Appellate Assistant Commissioner, holding that the lower authorities had taken into consideration the three conditions specified in section 40A(2) of the Act relating to the market value of the services rendered, legitimate needs of the business and also the increase in the extent of business, while disallowing the abovesaid amounts claimed for deduction.

Learned counsel for 'he assessee contended that the three conditions embodied in section 40A(2)(a) of the Act were not taken into consideration by the lower authorities while disallowing a portion of the remuneration and commission shown to have been paid to the brothers of the assessee and that the order of the Tribunal is liable to be set aside.

The fact remains that the assessee owns a business of manufacturing of three wheeler cycles and hr declared an income of Rs.21,000 as assessable income for the assessment year 1975‑76. It is not in dispute that the assessee had claimed to have paid a sum of Rs.23,024 towards remuneration of his brother, K.R. Madhukar, for the alleged technical and supervisory services rendered by him to the assessee during the abovesaid assessment year, as against a sum of Rs.13,908 shown as remuneration to K.R. Madhukar for the previous assessment year. Likewise, the assessee had claimed a deduction to an extent of Rs.21,412 towards commission payable to his another brother, K.R. Vijayakumar, for the services rendered by him to the assessee in the abovesaid business during the assessment year 1975‑76 as against a sum of Rs. 12,000 paid as commission paid to him in the previous assessment year.

The Income‑tax Officer has held that a remuneration of Rs.15,000 paid to K.R. Madhukar and commission of Rs.13,000 paid to K.R. Vijayakumar the brothers of the assessee, for the services rendered during the assessment year 1975‑76 are reasonable and disallowed the balance of Rs.8,024 and Rs.8,412 towards remuneration and commission to K.R. Madhukar and K.R. Vijayakumar; respectively, as unreasonable for the reasons stated in the assessment order.

A perusal of section 40A(2)(a) of the Act would disclose that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this subsection, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. Clause (b) of the abovesaid section mentions about the nature of the persons.

A perusal of the order of the Income‑tax Appellate Tribunal would disclose that the Tribunal had taken into consideration the abovesaid three conditions specified in section 40A(2)(a) of the Act while confirming the order of the Appellate Assistant Commissioner, who, in turn, had confirmed the order of the Income‑tax Officer with regard to the dispute under reference. Ultimately, the fact that K.R. Madhukar and K.R. Vijayakumar are the brothers of the assessee is considered, apart from their qualifications. A perusal of the record would disclose that K.R. Madhukar is only a B.A. Psychology graduate of 27 years with no technical qualification and training. Though it was claimed on behalf of the assessee that K.R. Madhukar was employed in the Bendweld Industries and acquired some skill, no certificate has been produced to show any such employment or training. In the absence of any certificate for such technical qualification, the authorities below are justified in rejecting the affidavit filed for such technical skill as unacceptable, and also in holding that K.R. Madhukar had not acquired any technical skill, which was claimed to have been utilized by the assessee for manufacturing three‑wheeler cycles. The fact remains that K.R. Madhakar had not acquired any technical skill during the assessment year 1975‑76 so as to have his remuneration, increased from Rs.13,908 to Rs.23,024. It is evident that the turnover of the assessee during 1975‑76 was Rs.4,28,170 as against Rs.3,99,530, the turnover of the previous assessment year. As rightly pointed out by learned counsel for the, Revenue, there was no significant increase in the turnover in the assessment year 1975‑76 when the turnover of the previous assessment year was taken into consideration.

Taking into consideration the fact that K.R. Madhukar may not get more than Rs.15,000 as remuneration if he has to work with third parties, the remuneration paid to him to the extent of Rs.15,000 for the assessment year 1975‑76 was held to be reasonable, thereby giving an allowance towards the increment payable to K.R. Madhukar.

K.R. Vijayakumar has passed only S.S.L.C. and he was doing commission business only for the last three years. It is also seen that the assessee has produced a letter, dated September 10, 1974, on August 27,

1975, only when the Income‑tax Officer questioned the reasonableness of commission paid to K.R. Vijayakumar towards the assessment year 1975‑96.

Taking into consideration the mutual agreement for enhancement of the commission, experience and educational qualification, the commission allowed by the Income‑tax Officer to the extent of Rs.13,000 during the assessment year 1975‑76 as against Rs.12,000 paid during the previous assessment year, was held reasonable. It is relevant to point out that the Tribunal had also taken into consideration the insignificant increase in the turnover during the assessment year 1975‑76 from the turnover of the previous assessment year. Therefore, we are of the opinion that the Tribunal has considered the three conditions specified in section 40A(2)(a) of the Act while confirming the order of the Appellate Assistant Commissioner regarding the excess or unreasonableness of the remuneration and commission alleged to have been paid by the assessee to his brothers, K.R. Madhukar and K.R. Vijayakumar.

In support of her contention, viz., that the conditions embodied in section 40A(2)(a) of the Act were not taken into consideration while disallowing a portion of the remuneration and commission paid to the brothers of the assessee and that, therefore, the order of the Tribunal is liable to be set aside, learned counsel for the assessee relied upon the decision in CIT v. Kundan Sugar Mills (P.) Ltd. (1980) 121 ITR 848 (All). In that case, the assessee was a sugar manufacturing company. The Managing Director and the director in charge were paid Rs.3,500 and Rs.2,500 per month towards their remuneration and a sum of Rs.10,050 out of the above said remuneration was disallowed by the Income‑tax Officer for the assessment year 1964‑65. Such disallowance was the subject‑matter of the reference in the abovesaid case. While sustaining the order of the Tribunal is setting aside the order of the Income‑tax Officer in disallowing the sum of Rs.10,050 under section 40(c)(i) of the Act, the following facts were taken into consideration. The Managing Director had experience for over 30 years in the sugar manufacturing business. There was no general manager or any other top executive to look after the purchases and sales and financial affairs of the company. The Director had to look after the Office correspondence, cane purchases, transport, stores purchases and maintenance, staff, mill, school, time office accounts, mill working, etc., and was also authorized to make purchases and enter into contracts on behalf of the company, and to draw, sign, endorse, accept and negotiate all bills of exchange, hundis and other negotiable instruments and to sign cheques for the assessee‑company. The chief chemist and the chief engineer were drawing a salary of Rs.1,500 and Rs.2,500 respectively, as remuneration per month and the salary of the Managing Director and the director‑in‑charge had to be commensurate with the payment made to the abovesaid officers. The Managing Director and the director‑in‑charge were members of the Hindu undivided family, whose assets were used in the business of the assessee‑company. Apart from that the Hindu undivided family, of which both the directors were members, had made no attempt to enhance the lease money and the Hindu undivided family, had made additions to the buildings, plant and machinery year after year by incurring expenses, which had to be borne by the assessee‑company: The Hindu undivided family had also offered its assets as security for making funds available to the assessee‑company. In view of the abovesaid circumstances, the Tribunal held that the remuneration of Rs.3,500 and Rs.2,500 per month paid to the Managing Director and the director‑in‑charge was reasonable, the allowance of which was affirmed by the decision referred to above. Taking into consideration of the facts and circumstances pleaded in this case in the light of the facts and circumstances stated in the case cited above, we are of the opinion that the above referred to decision will not render any help to the assessee to succeed in his attempt to get a deduction as

Learned counsel for the Revenue has brought to the notice of this Court the decision of the apex Court in Upper India Publishing House (P.) Ltd. v. CIT (1979) 117 ITR 569. In that case, the question referred to was whether a particular expenditure on rent is excessive and unreasonable or .not. It was held that such question is a question of fact and does not involve any issue of law and, therefore, it could not be referred to the High Court for opinion. If the principles laid down in the case cited above are applied by way of analogy to the facts and circumstances of this case, we are of the opinion that there can be no reference for the opinion of this Court with regard to the question of fact involved in the issue referred for our opinion.

In view of the foregoing reasons, the. question of law referred to us is answered in the affirmative and against the assessee. There will be no order as to costs.

MBA./381/FCReference answered