9911796707
TMI Blog1972 (6) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... be managing directors for a period of 10 years from December 1, 1956, on a remuneration of Rs. 1,000 per month for each and a commission of 5% each on the net profits of the company. The share capital of the company was 3,500 preference shares of Rs. 100 each and 35,000 ordinary shares of Rs. 10 each. The shareholding of the above two persons and their father, A. K. Ranganathan, were as under : Ordinary Preference A. R. Krishnamoorthy 7,881 334 A. R. Rajagopalan 7,656 436 A. K. Ranganathan 3,200 16 ------------- -------------- 18,737 786 ------------- -------------- The father, A. K. Ranganathan, was the technical director and he was being paid a remuneration of Rs. 1,500 per month, from July 1, 1954, and it was increased to Rs. 2,000 per month from January 1, 1960. At a meeting of the board of directors of the company held on January 23, 1960, it was resolved that the remuneration payable to the two managing directors should be increased to Rs. 2,000 per month with effect from January 1, 1960, as against a remuneration of Rs. 1,000 per month paid earlier. The commission payable to them was retained at the original figure of 5% each of the net profits and the period of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irs of the company was not justified, that the two managing directors had considerable experience in the business, that it is only because of their efforts in starting new avenues of business they expanded the business of the company in various ways and that it is only in view of the improved profits of the company the enhancement of salary as well as bonus had been voted by the company. The Appellate Assistant Commissioner found that the remuneration of Rs. 1,000 each per month was fixed by the company as early as 1956, having regard to the conditions which then prevailed and that as the company has made tremendous strides, the increase in remuneration from Rs. 1,000 to Rs. 2,000 voted by the company in respect of the two managing directors was quite reasonable. He, however, considered that there was no reason for payment of bonus to the managing directors as they were entitled to a 5% commission on the net profits. Thus, he allowed the remuneration in full as claimed by the assessee, but confirmed the orders of the Income-tax Officer in regard to the disallowance of the whole of the bonus. The assessee appealed to the Appellate Tribunal on the question of the disallowance of bon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ionship between a managing director and a company and, after a consideration of the various decisions on the point, expressed the view that in that particular case having regard to the terms of the agreement and the functions assigned to the assessee as the managing director and the reservation to the board of directors of the right of superintendence, direction and control, the relationship between the managing director and the company was that of employer and employee. In Catherine Lee v. Lee's Air Farming Ltd., the Judicial Committee, while construing the scope of the definition of the word " worker " in section 2 and the liability of the employer-company to pay compensation to the governing director of the company under section 3(1) of the Workers' Compensation Act, 1922, of New Zealand, expressed the view that the sole governing director was a worker within the meaning of the Act, that his position as sole governing director did not make it impossible for him to be a servant of the company in the capacity of chief pilot, that the director and the company were separate entities which could enter and had entered into a valid contractual relationship which was not invalidated by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as only with reference to the claim of deduction made under section 10(2)(xv) and not under section 10(2)(x). The learned counsel also contends that bonus is a deferred wage, that the old concept that it is a gratuitous payment no longer survives and that, therefore, the bonus paid should be treated as part of the wages or salary paid to the managing directors. In this connection reference is made to Shyamlal Pragnarain v. Commissioner of Income-tax, where the following observations have been made at page 413 : " It does not appear to be necessary to enter into the history of the relations between the industrialists and their workmen in order to determine the nature of 'bonus'. There can be no doubt, however, that, in modern times, bonus is clearly regarded as deferred wages payable to employees which may be claimed by them as of right under the terms of employment. In the conditions under which modern industries function, bonus has now come to be recognised as a right of employees which they can claim from their employers under certain circumstances. The practice of payment of bonus or commission out of the profits of a business has grown by reason of the recognition that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riteria laid down by the statute would not be a considered opinion, but dogmatic assertion, and that the statute does not permit the department to adopt such a course. In Nund and Samont Co. Pvt. Ltd. v. Commissioner of Income-tax, the Supreme Court had occasion to consider the scope of section 10(4A). There, the assessee-company had provided certain amounts in accordance with its articles of association as remuneration for its managing director and deputy managing director. The Income-tax Officer, in the absence of evidence in support of the company's claim for deduction of the entirety of the remuneration so provided, allowed remuneration at an average of the amounts allowed during the last three years and disallowed the balance under section 10(4A) and the Tribunal as well as the High Court confirmed the same. Their Lordships of the Supreme Court held that in the absence of evidence relating to the duties of the managing director and the deputy managing director, the services rendered by them, the manner in which the profits of the company were enhanced by reason of their special aptitude or qualifications, the legitimate business needs of the company and the benefit derived by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility had been effected, sales had increased considerably and new products had been put in the market and these findings which found acceptance by the Tribunal are themselves sufficient to hold that the bonus paid is reasonable and not excessive. It is also contended by the learned counsel that once the nexus is shown between payment of bonus and the business needs and the benefit of the company, the Income-tax Officer will have to perforce accept the amount of bonus paid as reasonable and that it is not open to him to go into its reasonableness. We find it very difficult to accept both the above contentions. It is true the Tribunal has found that the two managing directors were responsible for improving the status and financial stability of the company and that such of those services as have been rendered by the two managing directors deserve a rise in remuneration from Rs. 1,000 to Rs. 2,000, in addition to the 5% commission each on the net profits. But, the finding that the services of the two managing directors were such as to entitle them to claim a higher salary in addition to the commission will not automatically be taken to justify the payment of bonus as contended by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sufficient to constitute proper incentive for promoting efficiency to the managing directors. As a matter of fact in Nund and Samonta Co. (P.) Ltd. v. Commissioner of Income-tax, the articles of association of the company authorised payment of 30 per cent. of the net profits as the remuneration to directors and 30 per cent. was allowed by the income-tax authorities for some years. But, for the assessment year 1959-60, the income-tax authorities acting under section 10(4A) felt that the payment of remuneration to the directors of the company in the ratio of 30 per cent. of the net profits was excessive and unreasonable, regard being had to the legitimate business needs of the company and the benefit derived by or accruing to it from the services rendered by the directors. As a matter of fact in the assessment year 1959-60, the company had made more profits than in the previous years. Nonetheless, the Income-tax Officer took the view that as the extra profits earned by the company in that year cannot necessarily be correlated to the services rendered by its director or directors, but various other factors might have contributed to the earning of the extra profits and that it is unrea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same. Further, payment of bonus to the managing directors seems to be on an ad hoc basis and not on the basis of four months' salary. Even otherwise, the considerations which will weigh with the court in determining the reasonableness of the bonus paid to the employees and that paid to the managing directors will have to be naturally different, for while payment of bonus to workers may be necessary due to business considerations forgiving an incentive to them with a view to promoting efficiency and contentment and to have their services continued, payment of bonus to a managing director who has got a substantial interest in the company and who derives benefit by way of dividend from the shareholding has to be treated on a different footing. The learned counsel for the revenue puts forward a plea that the authorities below, after taking into account all the relevant considerations, found that the payment of bonus was unreasonable and such a finding based on relevant considerations cannot be said to be a question of law warranting an interference from this court in reference proceedings. He refers to the decision in Commissioner of Excess Profits Tax v. N. M. Rayaloo Iyer & Sons, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... primary duty was vested by the legislature in the Excess Profits Tax Officer and that it is not open to the High Court to substitute its own view as to what might be regarded as reasonable and necessary. We find that section 10(4A) also vests the power to find out the reasonableness or excessiveness primarily on the Income-tax Officer and his decision is only subjsct to review by the Tribunal. The legislature having specially empowered the Income-tax Officer to find out the reasonableness or otherwise of an allowance claimed, giving certain criteria and that officer having considered those criteria and decided the allowability of the deduction one way or the other, and the same has been confirmed by the Tribunal, this court cannot interfere unless the decision of the Income-tax Officer or the Tribunal is unreasonable or capricious. In this case it is not possible for us to say that the inference drawn by the Tribunal from the basic facts is unreasonable or perverse so as to call for interference by this court on reference. The question is, therefore, answered in the affirmative and against the assessee. The assessee will pay the costs of the revenue. Counsel's fee Rs. 250. X X X X Extracts X X X X X X X X Extracts X X X X
|
