Sabyasachi Mukharji, J. - (1.) The assessee is a private limited company carrying on business of dealing in petroleum products and automobile spare parts. This reference arises out of the assessment years 1961-62 and 1962-63, the relevant previous years being Samvat years 2018 and 2019 which ended on October 20, 1960, and November 8, 1961, respectively. It appears that there were three directors of the company, namely, Sri D.N. Sinha, Sri P. N. Sinha and Smt. Karunamoyee Sinha at the material times. Sri P. N. Sinha is the son of Sri D.N. Sinha and Smt. Karurnamoyee Sinha is his wife. Sri D.N. Sinha was the managing director. On February 8, 1961, the board of directors of the assessee-company increased the remuneration of Sri D.N. Sinha from Rs. 8,400 per annum to Rs. 12,000 per annum. A chart was produced giving the turnover and profits of the assessee for the relevant years which is to the following effect: JUDGEMENT_491_ITR102_1976Html1.htm
(2.) The net profits for 1961-62 and 1962-63 indicated above were after deducting the remuneration of Rs. 12,000 per annum given to Sri D.N. Sinha. In the course of the assessment for the assessment years 1961-62 and 1962-63, the question arose as to whether the remuneration to the managing director as claimed could be allowed. In the assessment order for 1961-62, the Income-tax Officer disallowed Rs. 2,000 out of Rs. 12,000 claimed as his remuneration for the following reasons: " It is true that the assessee's business has shown an upward trend and it is quite likely that some portion of this increase is really due to additional services rendered by the managing director. But I do not fully agree with the assessee's contention that the entire increase in the turnover is due to the managing director's additional services to the company or that the increase in the remuneration is commensurate with the increase in turnover. As the business grows older the volume of transactions normally rises. Especially, in this line of business, where there is hardly no perfect competition of market, however, that progress of developing of economic transactions in this line of business will automatically go up though much labour was offered on the part of the management. The assessee has the same number of offices and pump stations as in the earlier year. There is no increase in branch offices, or pump stations as in the supervision and services on the part of the managing director. In view of the above I feel that director's remuneration to the extent of Rs. 10,000 will be quite reasonable. Keeping in view the business needs and nature of service rendered by the managing director, I, therefore, disallow Rs. 2,000 under this head."
(3.) For the same reasons he disallowed the managing director's remuneration to the extent of Rs. 2,000 in the assessment year 1962-63 also. The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner noticed that the company was controlled wholly by members of one family and the remuneration fixed by the resolution dated February 8, 1961, was passed by Sri P. N. Sinha, the son of Sri D.N. Sinhas and his mother. He felt that the increase in the remuneration to the extent of Rs. 1,000 per month could not be justified. Taking into consideration the fact that the volume of the business had increased to a certain extent, the Appellate Assistant Commissioner felt that it would be reasonable to allow remuneration @ Rs. 900, that is to say, Rs. 10,800 per annum. He thus disallowed a sum of Rs. 800 from the total income for each of the years under reference. Thereafter, the assessee preferred an appeal before the Tribunal. The Tribunal after discussing the aforesaid facts came to the conclusion that the proper test in a case of this kind was to see, having regard to the extent of the business as disclosed by the net profits of the assessee, whether the assessee would have employed an outsider giving him the same remuneration. The Tribunal felt that taking into account the result of the trading for these two years which according to the Tribunal were quite meagre, the assessee would not have employed an outsider on a salary of Rs. 1,000 per month. In the premises, the Tribunal upheld the order of the Appellate Assistant Commissioner.;