JUDGMENT
V.K. Singhal, J.
1. The Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated February 7, 1981, in respect of the assessment years 1975-76 to 1979-80 under Section 256(1) of the Income-tax Act, 1961 :
For all the assessment years :
“Whether, on the facts and circumstances of the case, the Tribunal was justified in holding the remuneration paid in excess of 50 per cent. salary per month to Shri H.V. Navani, working director of the company, as excessive and unreasonable in terms of Section 40(c) of the Income-tax Act, 1961 ?”
For the assessment years 1976-77 to 1978-79 :
“Whether the Tribunal was justified in holding the rent of the flat at Delhi as expenses on maintenance of guest house, under the facts and circumstances of the case ?”
2. The brief facts of the case are that Shri Navani was working as a sales executive with Messrs. Jaipur Metals and Electricals Ltd., and with effect from August 9, 1972, he was appointed as consultant by the assessee and he was provided free residential accommodation at Delhi. On August 14, 1972, a resolution was passed by the assessee appointing Shri Navani, as full time working director, with effect from September 4, 1972, on a salary of Rs. 1,000 per month plus free residential accommodation. The facility of free residential accommodation was discontinued from March 1, 1975. On August 31, 1977, Shri Navani resigned from the directorship of the company and in the year 1979-80, he worked only for two months. The Income-tax Officer disallowed the remuneration paid to the director invoking the provisions of Section 40(c) of the Income-tax Act, 1961. It was found by the Tribunal that another director, Shri Shantilal M. Chaudhary, was also residing at Delhi and in view of the day-to-day working of the company being attended by the said director at Delhi, there was no justification in making the payment to the extent mentioned above. The assessee contended that Shri Navani was looking after the purchases and sales of finished goods and had liaison with the Government Department. A point was raised that several new customers approached the assessee and the business was augmented because of Shri Navani. The Tribunal rejected this contention and this point was not allowed to be raised for the first time, as it was not raised before the authorities below. The Income-tax Appellate Tribunal came to the conclusion that the Income-tax Officer is empowered to judge the excessiveness of the expenditure which relates directly or indirectly in respect of remuneration to the director. He can examine as to whether the said expenditure is excessive or unreasonable having regard to the legitimate business needs of the company, the figures of sales and purchases at Delhi and one of the directors of the assessee-company being permanently stationed at Delhi and was looking after the day-to-day business matters of the company was also taken into consideration. The Tribunal held looking to the facts and circumstances that the Income-tax Officer was right in observing that payment made to Shri Navani was excessive and unreasonable and the legitimate business needs of the assessee do not warrant the payment that was made by the assessee to Shri Navani.
3. In respect of the expenditure of Rs. 2,500, Rs. 6,000 and Rs. 2,500 for the assessment years 1976-77, 1977-78 and 1978-79 in respect of the guest house, it was observed that the expenditure having been incurred on the maintenance of the guest house was not allowable. The Tribunal found that the guest house was maintained by the assessee and in the letter dated February 27, 1978, the assessee himself has admitted the maintenance of the guest house. If the assessee wants to rebut its letter, then some cogent evidence should have been brought on record. But in the absence of any such evidence to rebut the contents of such letter, it was mentioned that the guest house expenses during the years amounted to Rs. 2,500 towards rent only. It was mentioned in the letter that in respect of the premises at Delhi taken on rent for stay of guests, no amenity or furnishings has been provided there. It was held that the authorities below took the right view that a guest house was being maintained by the assessee and the submission that a flat, was taken at Delhi for the use of staff who were visiting Delhi in connection with business was not considered correct.
4. While framing the assessment order for the assessment year 1975-76, the Income-tax Officer found that the purchases made from N.S.S.I.C. and M. M. T. C. amounted to Rs. 31,100 and Rs. 64,156, respectively, and the purchases and sales from the Delhi Office amounted to Rs. 45,956 and Rs. 32,950 for the whole year and, therefore, the expenditure incurred on Shri Navani by the company was excessive and unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. The provisions of Section 40(c) confer jurisdiction on the Income-tax Officer to satisfy himself that the remuneration paid is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. In order to come to this conclusion, it has been examined from the point of view of commercial expediency. In the present matter, the provisions of Section 40(c) were invoked and it is not a case where it could be said that the provisions of Section 40(c) were not applicable. The reasonableness or otherwise of the quantum of amount could be examined by the Income-tax Officer dispassionately and objectively and not in a biased or prejudiced manner, subjectively. The finding which has been recorded by the Tribunal is that the Income-tax Officer has analysed the
sales and purchases at Delhi and has also taken into consideration that
one of the directors of the company was permanently stationed at Delhi
who looked after the day-to-day business needs of the company and,
therefore, the legitimate business needs of the company do not warrant
the payment that was made by the assessee to Shri Navani. In Upper India
Publishing House Pvt. Ltd. v. CIT [1979] 117 ITR 569, it was held by the
apex court that whether a particular expenditure is excessive and unreason
able or not is essentially a question of fact. In the light of this decision
and from the findings which have been recorded by the Tribunal and the
assessee not having furnished any satisfactory evidence before the Income-
tax Officer to establish the legitimate business needs and the service
rendered, no case is made out to interfere and accordingly it is held that
the Tribunal was justified in holding that the remuneration paid in excess
of 50 per cent. salary per month to Shri Navani as working director of
the company is excessive and unreasonable in terms of Section 40(c) of
the Income-tax Act, 1961. . .
5. Regarding the findings which have been recorded by the Tribunal with regard to the guest house, it has been observed : “Prima facie, the purport of the letter dated February 27, 1978, clearly established that a guest house was being maintained by the assessee and there being no evidence on the part of the assessee to rebut such letter, we hold that the authorities below took the right view that a guest house was being maintained by the assessee”.
6. The Income-tax Appellate Tribunal has proceeded only on the basis of the letter given by the assessee and has not given any finding as to what was the nature of the expenditure incurred, whether it pertains to the payment of rent or other expenditure. According to the statement of the assessee, the expenditure was in respect of payment of rent. If the payment has been made on rent, then the expenditure could not be considered to be an expenditure for maintenance of the guest house, which is its liability under Section 37.
7. Accordingly, we are of the view that the matter should be sent back to the Tribunal for examining this issue as to what was the nature of the expenditure incurred by the assessee and then to give a decision in accordance with law. This question, therefore, is returned unanswered.
8. Accordingly, the first question is decided in favour of the Revenue and against the assessee and the second question is returned unanswered.