1969 PLP 868 (PTD)
COMMISSIONER OF INCOME‑TAX, UTTAR PRADESH Versus MOTOR AND GENERAL SALES (P.) LTD.
| Citation | 1969 PLP 868 (PTD) |
| Forum / Court | Allahabad (India) |
| Bench Members | Jagdish Sahai and M. H. Beg, JJ |
| Parties | COMMISSIONER OF INCOME‑TAX, UTTAR PRADESH Versus MOTOR AND GENERAL SALES (P.) LTD. |
| Primary Law | STATEMENT OF CASE |
Q1: What are the key laws and sections cited in 1969 PLP 868 (PTD)?
This judgment primarily cites: STATEMENT OF CASE as referenced in Pakistani case law index.
Q2: Which judicial bench decided the case 1969 PLP 868 (PTD)?
The case was heard and decided by the Allahabad (India) bench comprising: Jagdish Sahai and M. H. Beg, JJ.
Q3: What is the official citation format for this judgment on Pakistan Law Portal?
Cite this legal precedent as: 1969 PLP 868 (PTD) (COMMISSIONER OF INCOME‑TAX, UTTAR PRADESH Versus MOTOR AND GENERAL SALES (P.) LTD.). Read the full summary and cross-referenced laws free on Pakistan Law Portal.
Laws Cited
Headnotes / Summary
Business expenditure‑Monthly allowance paid to directors for financing the company‑Whether business expenditure‑Indian Income‑tax Act, 1921, S. 10(2)(xv), (4‑A). By a resolution of the directors of the assessee, a private limited company, a remuneration of R s. 2,000 a month was fixed for each of two directors of the company, the share of each of whom was Rs. 34,
000. The department did not allow this remuneration as a business expenditure. The Appellate Tribunal while agreeing with this view, allowed a sum of Rs. 500 per month to each of the said two directors on the ground that they were entitled to some amounts by way of return for financing the enterprise. On a reference to the High Court: Held, that in view of the provisions of section 10(4‑A) of the Act, the remuneration of Rs. 500 per month allowed by the Tribunal to the two directors was not an allowable business expenditure under section 10(2)(xv) of the Act, as the said section permits the allowance of only a business expenditure and not of a return for the investment made. As directed by the High Court in I. T. Misc. Appeal No. 719 of 1961, dated August 31, 1962, read with Misc. I. T. A. No. 217 of 1960, dated April 4, 1962, we hereby draw up a consolidated statement of the case and refer the following question of law as directed; "Whether, on the facts and in the circumstances of the case, and in view of the provisions of section 10(4‑A) of the Income -tax Act, 1922, the remuneration of Rs. 500 per month allowed by the Tribunal to Sarvsri C. M. Gupta and M. C. Gupta is an allowable business expenditure under section 10(2)(xv) of the said Act?".
2. The facts found by the Tribunal or otherwise on record may be stated as under: The assessee is a private limited company and the assessment years involved are 1956‑57, 1957‑58 and 1958‑
59. The company was incorporated on March 26, 1955, and commenced business on Alay 26, 1955, as distributor of Tata‑Mercedes‑Benz trucks and motor chassis in the eastern districts of U. P. The share holders of the company, when it was started, were Sarvsri C. M. Gupta, M. C. Gupta and R. P. Gupta. The former two were cousins, while the last named was a stranger. All the three were also directors of the company. On May 28, 1955, the directors in a meeting passed a resolution to the effect that the directors would receive remuneration at the rate of Rs. 2,000 per month. There was also a resolution regarding the remuneration payable to Ishwar Chandra, manager, and the quantum of remuneration paid to the manager has also been the subject matter of controversy between the respondent‑company and the department, but we do not consider it necessary to include in this statement facts relating to the manager's remuneration. So far as remuneration to the directors was concerned in the assessment for 1956‑57, the Income‑tax Officer allowed in full the remuner ation paid to Shri R. P. Gupta. In the case of the other two directors, the Income‑tax Officer held that the salary paid to them was unjustified by any business considerations. Both C. M. Gupta and M. C. Gupta were college students, had no business experience and were residing at Debra Dun while the business was carried on at Lucknow. The assessee contended that the remuneration to the directors was paid in accordance with the resolution dated May 28, 1955, and the reasonability of the amounts paid could not be questioned by the department in view of the ruling in Newtone Studios Ltd. v. Commissioner of Income- tax ((1955) 28 I T R 378). The Income‑tax Officer held that the ruling in that case was not applicable and in any case the enactment of sec tion 10(4‑A) made a difference. He, therefore, disallowed in toto the amounts paid to C. M. Gupta and M. C. Gupta. A copy of the assessment order for 1956‑57 is enclosed as Annexure "A".
3. When the matter went up in first appeal, the Appellate Assistant Commissioner, after examining the account books of the company, held that the resolution fixing the remuneration of the directors was not passed on May 28, 1955, as alleged, but at a later date, after the potentiality of the company's business had been definitely established and the extent of profits could be reasonably anticipated. In his opinion, the resolution on which the assessee before him relied was irregular and sham, and what was really intended by the belated resolution was to distribute the expected profits of the company to the director‑shareholders, and not to fix their remuneration for any business services rendered. The Appellate Assistant Commissioner also held that the two directors could or did not render any business service to the company and the disallowance of their remuneration was justified under section 10(4‑A) of the Act. However, since one of the directors, M. C. Gupta, had actually attended five meetings‑of the board of directors, he allowed director's fee of Rs. 8,000 to him at the rate of Rs. 400 per meeting. A copy of the Appellate Assistant Commissioner's order dated February 21, 1958, is enclosed as Annexure "B" and forms part of the statement of the case.
4. The assessee‑company appealed to the Tribunal and they held that the two cousins, C. M. Gupta and M. C. Gupta had no background which could justify these remunerations paid to them. However, it is equally true that they purchased shares in this limited concern of equal value as the shares purchased by R. P. Gupta. Even a financier had to be given an adequate return for financing. The return for financing in this enterprise must accordingly be taken into account in the shape of remuneration apart from the expectation of dividends to be declared by the company. Keeping all these factors in view, we feel that a remuneration of Rs. 500 per mensem to each of these two directors would be just and reasonable in the facts of this case. The balance of the remuneration paid to C. M. Gupta and M. C. Gupta must, in our opinion, be considered to be a payment "for extra‑commercial reasons. The assessment would be modified in accordance with this order. A copy of the Tribunal's order dated April 28, 1959, is enclosed as Annexure "C" and forms part of the statement of the case.
5. In 1957‑58 and 1958‑59, the Income‑tax Officer dis allowed remuneration to the two directors, but the Appellate Assistant Commissioner following the Tribunal's order for 1956‑57 allowed them remuneration on the same scale as fixed by the Tribunal for 1956‑5
7. The departmental appeals for these years were dismissed by the Tribunal. The assessment orders for 1957‑58 and for 1958‑59 and the orders of the Appellate Assistant Commissioner and the consolidated orders of the Tribunal for these‑years are enclosures as Annexures "D", "E", "F" "G' and "H" to this statement and form part of the case.
6. On the above facts, the question of law set out in the beginning of the statement is referred for favour of opinion.
7. The statement of the case was placed before the parties. The departmental representative pointed out certain verbal corrections which have been incorporated in the statement. The assessee did not put in appearance nor were any written suggestions received. The statement has accordingly been finalised. R. L. Gulati for the Commissioner. B. L. Gupta and Ashoke Gupta for the Assessee.
Judgment & Decree
JAGDISH SAHAI, J.‑This reference has been made by the Income‑tax Appellate Tribunal, Allahabad Bench (hereinafter referred to as the Tribunal), under section 66(2) of the Indian Income‑tax Act, 1922 (hereinafter referred to as the Act). The following question of law has been referred to us, as directed by this Court by means of its orders dated August 31, 1962, and April 4, 1962: "Whether, on the facts and in the circumstances of the case and in view of the provisions of section 10(4‑A) of the Income Act, 1922, the remuneration of Rs. 500 per month allowed by the Tribunal to Sarvsri C. M. Gupta and M. C. Gupta is an allowable business expenditure under section 10(2)(xv) of the said Act?" The assessee is a private limited company which was incor porated on March 26, 1955. It commenced business on May 26, 1955, at Lucknow, as distributors of Tata‑Mercedes‑Benz trucks and motor chassis in the eastern districts of Uttar Pradesh. The shareholders of the company at the time of its start were Sarvsri C. M. Gupta, M. C. Gupta and R. P. Gupta. The first two are cousin brothers while third one is an outsider. All these three persons are also directors of the company. In the meeting dated May 28, 1965, the directors passed a resolution to the effect that they would be entitled to receive a remuneration of Rs. 2,000 per month each. Another resolution that was passed is to the effect that the manager, Iswar Chandra, would receive Rs. 1,000 per month as salary and a certain percentage as commis sion over the profits of the company. The assessment years involved are 1956‑57, 1957‑58 and 1958‑
59. Sarvsri C. M. Gupta and M. C. Gupta are students of the D. A. V. College, Dehra Dun, and reside in that city. The Income‑tax Officer allowed in full the remuneration paid to Sri R. P. Gupta as business expenditure but not the amounts paid to Sarvsri C. M. Gupta and M. C. Gupta. On appeal, the Appellate Assistant Commissioner, after examining the account books of the company, held that the resolution fixing the remuneration of the directors was not passed in the meeting held on May 28, 1955, but on a subsequent date. He further held that the resolution was irregular and sham and what was really intended by the belated resolution was to distribute the expected profits of the company to the director-shareholders and thus avoid income‑tax, and not to fix the remuneration for any services rendered. He, therefore affirmed the disallowance as business expenditure of the remuneration paid to Sarvsri C. M. Gupta and M. C. Gupta. He, however, allowed as business expenditure a sum of Rs. 2,000 out of the remuneration paid to Sri M. C. Gupta as fees payable to him for having attended five meetings of the board of directors (at the rate of Rs. 400 per meeting). The assessee‑company appealed to the Tribunal. The Tribunal held that even though it was true that Sarvsri. C. M. Gupta and M. C. Gupta had no background which should justify this remuneration paid to them, they having purchased shares in this limited concern of equal value as the shares purchased by Sri R. P. Gupta, were entitled to some amounts by way of return for financing the enterprise. It, therefore allowed a sum of Rs. 500 per month each to the aforesaid two directors as allowable expenditure and held that the balance of the remunera tion paid to them must be considered to be a payment for extra commercial reasons. For the years 1957‑58 and 1958‑59, the Income‑tax Officer disallowed the remuneration to the two directors but the Appellate Assistant Commissioner, on appeal, allowed them a sum of Rs. 500 each per month as allowed by the Tribunal for the year 1956‑
57. The department appealed to the Tribunal for both the years but the two appeals were dismissed. We have heard Sri Brijlal Gupta for the assessee‑company and Sri Gulati for the Income‑tax department. It is clear that there were only three shareholders of the com pany, i.e., Sarvsri C. M. Gupta, M. C. Gupta and R. P. Gupta and they were also the directors. They held shares to the tune of Rs. 34,000 each. Admittedly Sarvsri C. M. Gupta and M. C. Gupta were college students residing at Debra Dun and not at Lucknow where the business of the company was being transacted. They bad no background which could justify the remuneration. They did not carry on the management of the company and did no work for the company beyond attending some meetings. The sole ground on which the Tribunal allowed Rs. 500 to each of these two directors for the year 1956‑57 and the Appellate Assistant Commissioner for the years 1957‑58 and 1958‑59 was that they were financiers and that to be compensated for financing the enterprise. Section 10(2)(xv) of the Act reads: "10. (2) Such profits or gains shall be computed after making the following allowances, namely: . . . (xv) any expenditure (not being an allowance of the nature des cribed in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation." Allowance could, therefore, be made of an expenditure incurred exclusively for the purpose of the business of the company. Section 10(4‑A) of the Act, so far as relevant for our purposes, reads: "10. (4‑A) Nothing in subsection (2) shall, in the com putation of the profits and gains of a company, be deemed to authorise the making of:‑ (a) any allowance in respect of any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or a person who has a substantial interest in the company within the meaning of sub -clause (iii) of clause (6‑C) of section 2, or . . . if in the opinion of the Income‑tax Officer any such allowance is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom." On the basis of the facts stated by the Tribunal in the reference order it is clear that Sarvsri C. M. Gupta and M. C. Gupta only lent their names and the remuneration paid to them was not warranted by business consideration. The view of the Tribunal that they were entitled to Rs. 500 per month each for having financed the business cannot be accepted because sec tion 10(2)(xv) of the Act permits the allowance of only business expenditure and not of a return for the investment made, Besides, a remuneration of Rs.24,000 on an investment of Rs. 34,000 only cannot but be treated as a device to distribute the expected profits of the company to the director‑shareholders. Before any allowance could be made, the case has to fall under the provisions of section 10(2)(xv) of the Act. That is not so in the present case. We, therefore, answer the question referred to us against the assessee‑company and in favour of the department by saying that a sum of Rs. 500 each as remuneration to Sarvsri C. M. Gupta and M. C. Gupta is not an allowable business expenditure. The assessee shall pay to the department its costs which we assess at the figure of Rs.