Ajit K.Sengupta, J. - (1.) In this reference made at the instance of the Revenue, the following question has been referred by the Tribunal for the opinion of this court under Section 256(1) of the Income-tax Act, 1961 : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the consultancy fee of Rs. 7,25,000 paid by the assessee-company to Shri K.N. Tapuria, a director of the company did not fall within the purview of the Section 40(c)(i) of the Income-tax Act, 1961, and thereby deleting the addition of Rs. 6,53,000 made by the Assessing Officer to the total income of the assessee ?"
(2.) This reference relates to the income-tax assessments of the assessee-company for the previous year being the calendar year 1983 corresponding to the assessment year 1984-85. At all material times, the principal business of the assessee-company was to render consultancy services to Boeing Company of U. S. A. for promotion of their sales of various types of aircraft as per agreement. In return, the assessee-company was to receive a commission on sale of aircraft. The Boeing Company of U. S. A. used to remit substantial amounts to the assessee-company as service charges in order to enable the assessee-company to meet various overhead expenses hi canvassing sale of aircraft in any particular year.
(3.) During the calendar year 1983, the assessee-company received service charges amounting to Rs. 25,50,000 from the Boeing Company of U. S. A. The assessee-company claimed various expenses against the service charges so received. One such expenditure as claimed by the assessee-company was payment of consultancy fee of Rs. 7,25,000 to Sri K.N. Tapuria in terms of an agreement entered into by the assessee-company with Sri Tapuria on January 19, 1983. In fact, Sri Tapuria was also appointed as one of the directors of the assessee-company on the very day on which the agreement for payment of consultancy fee was entered into by the assessee-company with him. The Income-tax Officer applying the provisions of Section 40(c)(i) of the Income-tax Act, 1961, disallowed a sum of Rs. 6,53,000 being the excess of the consultancy fee paid to Sri Tapuria, a director of the assessee-company, in excess of Rs. 72,000, the statutory limit laid down in that section. On appeal by the assessee before the Commissioner of Income-tax (Appeals), it was contended on behalf of the assessee-company that Sri Tapuria was paid the consultancy fee of Rs. 7,25,000 not in his capacity as the director of the assessee-company but as an adviser for rendering specific services to the Boeing Company. Such payment according to the assessee-company was not covered by Section 40(c)(i) of the Income-tax Act, 1961, and the same could at best have been considered by the Income-tax Officer under Section 40A(2)(a) of the said Act. It was explained to the Commissioner of Income-tax (Appeals) that in the later half of the year 1982, the assessee-company received information that the Boeing Company of U. S. A. was in need of some experienced consultancy services in India for providing them necessary assistance with regard to the promotion of their sales of various types of Boeing aircraft. The assessee-company found that Sri K.N. Tapuria, at Calcutta, had considerable experience in the aforesaid line of business and had also good contacts with the officials of the Boeing Company in the U. S. A. In view of the keen competition, the assessee-company approached Sri Tapuria for negotiating with the Boeing Company on its behalf. Sri Tapuria started negotiations with the Boeing Company. Subsequently, the assessee-company was informed by the Boeing Company that it was keen to secure the personal services of Sri Tapuria as a consultant and adviser and if the assessee-company was able to secure the personal services of Sri Tapuria along with the services of other personnel, the Boeing Company was prepared to appoint the assessee-company as its agent in India for promoting the sale of various types of Boeing aircraft. On this understanding, the assessee-company was able to secure from the Boeing Company through Sri Tapuria a draft of the agreement to be executed between the assessee-company and the Boeing Company of U.S.A. containing the broad terms and conditions. At this stage, the assessee-company entered into an agreement with Sri Tapuria on January 29, 1983, under which Sri Tapuria agreed to guide and advise the Boeing Company on behalf of the assessee-company in the promotion of the sale of various types of Boeing aircraft in India. Sri Tapuria agreed to render all possible assistance to the Boeing Company on the assessee's behalf in carrying out negotiations with various prospective purchasers including Air India and Indian Airlines in connection with the sale of Boeing aircraft. Sri Tapuria was also appointed a director of the assessee-company on the same date, i.e., January 19, 1983. This was done with a view to enabling Sri Tapuria to finalise the negotiations with the Boeing Company and execute the formal agreement with them on behalf of the assessee-company. It was clearly understood that Sri Tapuria would be able to secure a final agreement with the Boeing Company within April, 1983, and with retrospective effect from January 1, 1983, as was originally proposed by the Boeing Company. On February 7, 1983, the assessee-company wrote to the Boeing Company confirming, inter alia, that it will be possible for the assessee-company to secure and provide to the Boeing Company the personal services of Sri Tapuria including the benefit of his vast experience and skill in this line of business. Sri Tapuria negotiated with the Boeing Company on behalf of the assessee-company and the final agreement with the Boeing Company was signed by Sri Tapuria on behalf of the assessee-company on April 15, 1983. Under this agreement, the assessee-company was appointed as the agent of the Boeing Company for promotion and sale of different types of Boeing aircraft manufactured by them in the U. S. A.;