Sabyasachi Mukharji, J. - (1.) The assessee is a private limited company. This reference relates to the assessment years 1967-68, 1968-69 and 1969-70. In the three aforesaid assessment years, the assessee-company claimed that there had been an increase in the salary of Sri J. H. Somerville, managing director, from Rs. 3,000 per month to Rs. 4,500 per month with effect from 1st September, 1966, and even after retirement with effect from 1st May, 1968, he continued to draw the same amount as pension. Similarly, in the case of the other director, viz., J. D. Somerville, the assessee-company claimed that his salary was increased from Rs. 2,250 per month to Rs. 3,530 per month with effect from 1st September, 1966, and he had continued to draw the same salary on being appointed as the managing director on the retirement of his father, Sri J. H. Somerville, with effect from 1st May, 1968. It may also be noted here that Sri J. H. Somerville held most of the shares of the assessee-company and was the managing director of the company till his retirement on 30th April, 1968. On 1st May, 1968, Sri J. D. Somerville, who was his son and director of the company till 30th April, 1968, became the managing director with, effect from 1st May, 1968. It was further claimed that for the assessment years 1967-68 and 1968-69, Sri J. H. Somerville, the then managing director, was paid a bonus of Rs. 9,000 in cash for two years. Similarly, in the case of the other director, Sri J, D. Somerville, it was claimed by the assessee-company that he was paid a bonus of Rs. 4,560 for the assessment year 1967-68 and also Rs. 6,300 for each of the two assessment years 1968-69 and 1969-70. The ITO considered all the facts and circumstances of the case and held that there was no justification for any increase in the remuneration of the then managing director, Sri J. H. Somerville, or the other director, Sri J. D. Somerville. He also held that on the retirement of Sri J. H. Somerville, there was no justification whatsoever on his being paid the same amount as pension which he was drawing as salary prior to retirement. He further held that there was no justification for payment of bonus to these persons. It may be appropriate in this connection to set out the relevant portion of the order for the assessment year 1967-68. The reasons and grounds of the order in the other two assessment years were identical. In the said assessment order, the ITO observed, inter alia, as follows: "(3) Rs. 10,500 on account of increment given to the managing director, I do not see any justification when the income of the company has gone down and no additional work has been entrusted by the company. Financial position of the assessee also is no better than before. The other employees of the company have not received any similar gains in their emoluments 10,500 (4) Rs. 8,950 on account of increment to Mr. J. D. Somerville, director, for the same reasons as given above 8,950 (5) Rs. 10,113 out of salary of Sri J. D. Somerville including perquisites 1/4th disallowed following the decision of the Tribunal in the earlier years 10,113 (6) Rs. 69,074 on account of depreciation considered separately 69,074 (7) Rs. 13,500 on account of bonus paid to the directors for the same reasons 13,500 " The result was that in the assessment year, the salary allowed to Sri J. H. Somerville was only Rs. 3,000 per month till his retirement, that is, up to 30th April, 1968, and thereafter the pension was allowed only at Rs. 1,000. Similarly, in the case of the other director, Sri J. D. Somerville, the salary was allowed to him at Rs. 2,250 till the time he remained only as director, that is, up to 30th April, 1968, and thereafter with effect from 1st May, 1968, he was allowed the salary at Rs. 3,000 as managing director. The rest of the salary paid to these persons and claimed as deduction was disallowed by the ITO.
(2.) Against the orders of the ITO, appeals were filed before the AAC. The AAC held on consideration of the facts and circumstances of the case that an increment of Rs. 500 per month to Sri J. H. Somerville would be reasonable with effect from 1st September, 1968, and reasonable pension on his retirement with effect from 1st May, 1966, in his case would be Rs. 1,750. Similarly, in the case of the other director, Sri J. D. Somerville, he held that he should be allowed an increment of Rs. 200 per month with effect from 1st September, 1966, and on his appointment as managing director he should be given a salary of Rs. 3,000 per month. The disallowance of excess over these amounts which were claimed as deduction was confirmed by the AAC. He also confirmed the disallowance of bonus claimed to have been paid by the assessee-company to these persons.
(3.) There were further appeals to the Tribunal. The Tribunal came to the conclusion that provisions of Section 40(c) of the I.T. Act, 1961, were applicable. The Tribunal took into consideration all the facts and circumstances of the case in order to hold, looking at the legitimate business needs of the company and the benefit derived by it that the salary and bonus paid to these directors as worked out by the AAC was reasonable and the excess was rightly disallowed under the provisions of Section 40(c) of the I.T. Act,-1961. The Tribunal also upheld the disallowance of bonus paid to these persons under the provisions of Section 40(c) of the I.T. Act, 1961.;