JUDGMENT
A. Raghuvir, C.J.
1. This reference is made under Sub-section (1) of Section 256 of the Income-tax Act, 1961, with one question. The question reads as under :
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding the order of the Appellate Assistant Commissioner refusing to allow salary to the extent of Rs. 6,000 out of the remuneration paid to the managing director on a proper construction of Section 40(c) of the Income-tax Act, 1961, relating to the assessment year 1972-73?”
2. The assessee in the case is an industrial estate, Pheros & Co. Pvt. Ltd.. at Gauhati. The company has two factories, one at Gauhati and the other at Faridabad near Delhi which was established in 1971. In the two factories, the estate forges steel sheets, iron nails, fencing posts, steel angles, steel joints and cast sheets. The question referred relates to the assessment year 1972-73.
3. The private company has only four shareholders, one among them being F. C. Agarwal. He is the managing director. His spouse and their two daughters are the other three shareholders. The question relates to the payment of remuneration to the managing director. In the preceding year, the managing director was paid Rs. 2,000 per month or Rs. 24,000 per year. In the relevant assessment year, his guarantee commission was withdrawn. He was paid Rs. 3,000 per month, that is, Rs. 36,000 per year. The Income-tax Officer held that the enhancement by Rs. 1,000 per month was not justified. The Appellate Assistant Commissioner held that the second unit started at Faridabad was commenced by the managing director and the sale proceeds of that unit were Rs. 78,605. The guarantee commission payable to the managing director was withdrawn and, therefore, he held that some increment should be permitted. He allowed Rs. 500 per month, that is, Rs. 6,000 per year, and he rejected the balance of Rs, 6,000. On further appeal, the Appellate Tribunal confirmed the order in appeal. Aggrieved thereby and at the instance of the assessee, the above question is referred to this court.
4. We see there are only four shareholders in the assessee-company. They are the managing director, his two daughters and his spouse. During the assessment year 1966-67, the net profit of the private company was Rs. 43,343. The remuneration paid to the managing director was Rs. 46,031. In the assessment year 1967-68, the net profit was Rs. 28,805 and the remuneration paid was Rs. 39,266. In the assessment year 1968-69, Rs. 40,226 was the remuneration and the net profit was Rs. 46,858. In the year 1969-70, the net profit was Rs. 27,839 and the remuneration paid was Rs, 35,674. In the assessment year 1970-71, there was a loss of Rs, 4,319. The remuneration, therefore, paid was Rs. 24,000 only. In the assessment year 1971-72, the net profit was Rs. 10,876. The remuneration paid was Rs. 24,697. Relevant to the assessment year 1972-73, the net profit was Rs. 24,531 and the remuneration paid was Rs. 37,292.
5. The question on the above facts arises under Section 40(c) of the Income-tax Act, as to whether, having regard to the benefit that accrued to the company, the payment of remuneration to the managing director at Rs. 3,000 per month or Rs. 36,000 per year was or was not warranted. The next aspect of the question is whether payment of Rs. 36,000 was excessive or unreasonable. Though we have stated the question in its three aspects, the question is whether it was justified on the facts to pay Rs. 36,000 per year to the managing director.
6. A large number of cases were cited in this case by the Revenue as well as the assessee.
7. In the cases cited, the provisions in the two statutes, viz., Section 10(4A) of the 1922 Act, which corresponds to Section 40, Clause (c) (i), of the 1961 Act, were considered. It is seen from the orders of the Income-tax Officer, the Appellate Assistant Commissioner and also the Appellate Tribunal that the whole aspect was considered from the perspective of profit and loss. This question was considered in Calcutta Art Studio (P.) Ltd. v. CIT [1979] 118 ITR 752 (Cal) and it was held that the profit or loss is not at all a relevant consideration under Section 40(c)(i) of the Act. In this regard, the words “the benefit derived by or accruing to it therefrom” is to be considered.
8. The benefit derived by or accruing to the industrial estate is crucial as the amount paid is the remuneration for services rendered and, therefore, huge profit in one year or huge loss suffered in another is not the determinative factor. Because there is a huge profit, remuneration or salary paid to the persons specified cannot be allowed as a matter of course. Similarly, no part of the remuneration or salary can be disallowed merely on the ground that the company has suffered a huge loss in the accounting year. We respectfully adopt the synthesis of the subject made in the case as the correct criteria. Therefore, it may not be proper to judge from the point of view of history of profit or loss as to whether remuneration paid was excessive or unreasonable. How then is it to be judged ?
9. The Revenue authorities should judge the reasonableness of the payment to a managing director from the point of view of services rendered and benefit accrued. We may here mention and agree with the Allahabad High Court in Kashiprasad Carpets (P.) Ltd. v. CIT [1984] 148 ITR 710 (All), at page 713, wherein it is held that the opinion as to the reasonableness or otherwise of the amount spent must be formed having regard to the legitimate business needs of the company and the benefit derived by the company or accruing to the company from the said sum expended. The Allahabad High Court made a significant observation at page 713 : “exces-siveness or unreasonableness contemplated in these sections could not be left to the subjective opinion of the income-tax authorities”. It is the objective consideration of all the circumstances that should go into the verdict.
10. We may now look into the case of Nund and Samont Co. (P.) Ltd. v. CIT [ 1970] 78 ITR 268 (SC). In that case, it was argued that striking an average of the salary for three years, was also not proper. In what manner the excessiveness and unreasonableness of the remuneration is to be determined was later considered. The Supreme Court held that it is for the assessee to adduce evidence to show that what was paid is justifiable and in that case, no evidence was tendered by the assessee relating to the duties and services rendered by the managing director and the deputy managing director or as to the special aptitude and qualifications of the two. There was no evidence adduced as to the legitimate business needs of the assessee or as to the benefit derived by or accruing to the company.
11. In another case in CIT v. Edward Keventer (P.) Ltd. [1978] 115 ITR 149, the Supreme Court considered there were two producing centres. (This is the case where the Calcutta judgment in [1972] 86 ITR 370 (Cal) was confirmed.) In that case, it was shown that four directors were attending to the business of the assessee. There were two producing centres and several distribution centres. These aspects were considered for determining the remuneration paid to the management personnel.
12. We have considered the decisions and the test laid down especially the one where producing centres and quantum of work were involved was considered. We hold that those are the two relevant circumstances which should be taken into consideration for purposes of the case in hand.
13. The managing director, in the instant case, it is seen, had established in 1971 another factory at Faridabad apart from the one at Gauhati and the sales in the former factory were Rs. 78,605 for the relevant assessment year.
14. Among the four shareholders, the managing director alone is a male member and others are his two daughters and his wife. The profit which resulted in establishing another factory at Faridabad was due to the efforts of the managing director. Having regard to the distance between Gauhati and Faridabad, the efforts in establishing a factory and also having regard to the sale proceeds, we hold that because of the efforts of the managing director, benefits accrued to the private company and, therefore, the payment made by the company towards remuneration at Rs. 36,000 for the year to the managing director is not excessive or unreasonable. The rejection of Rs. 6,000 by the Appellate Tribunal was not proper.
15. For the aforesaid reasons, we answer the question in the negative, in favour of the assessee and against the revenue. No costs.