Ajit K.Sengupta, J. - (1.) This reference under Section 256(1) of the Income-tax Act, 1961, relates to the assessment year 1972-73.
(2.) The facts shortly stated are that, during the accounting year, the assessee claimed service charges amounting to Rs. 29,250 paid to Messrs. Karam Chand Thapar and Bros. (P.) Ltd. for doing secretarial work, carrying on of liaison work and services in the capacity of registrars. The Income-tax Officer held that no direct business was carried on for which liaison work was necessary and that the payment was illusory. Hence, he added back Rs. 29,250 to the assessee's total income.
(3.) When the assessee went in appeal before the Appellate Assistant Commissioner, he found that the assessee entered into an agreement from time to time with Messrs Standard Refinery and Distillery Ltd to lease out its factory and in consideration thereof was to receive royalty in the production of sugar and sale of molasses. The assessee appointed Messrs. Karam Chand Thapar and Bros. (P.) Ltd. as its secretaries. It was claimed earlier before the Income-tax Officer that K.C. Thapar and Co. (P.) Ltd. was supposed to look after the affairs of the assessee and its remuneration as secretary of the company was fixed at 7 1/2% of the net profit with a minimum of Rs. 12,000 per annum. He held that it was not known whether K.C. Thapar and Bros. (P.) Ltd. were, at any time, paid maximum remuneration at 7 1/2% of the net profit He further held that even a moiety of the minimum remuneration of Rs. 12,000 was forgone by Messrs K. C. Thapar and Bros. (P.) Ltd. in the preceding four assessment years and the net debit claimed by the appellant-company amounted to Rs. 6,000. It was submitted before him on behalf of the assessee that, due to change in the Companies Act with effect from April 1. 1970, resulting in the termination of the agreement for payment of remuneration to the secretaries, the assessee-company entered into two separate agreements on March. 15, 1971, whereby the following remuneration was fixed as payable to Messrs. K.C. Thapar and Bros. (P.) Ltd. at the rates indicated with effect from May 1, 1970: (i) As per the first agreement, payment in connection with services in the capacity of the registrar of the company : Rs. 750 per month. (ii) As per the second agreement (a) to perform all secretarial and legal work on behalf of the company ; Rs. 500 per month. (b) to perform work connected with maintenance of accounts, banking operations and taxation of the company : Rs. 500 per month. (c) for maintenance and carrying on liaison activities at Delhi, Chandigarh, Bombay and other places and representation before any Government, semi-Government, statutory body or corporation or authorities : Rs. 500 per month. Thus the aggregate remuneration amounted to Rs. 2,250 per month. The claim was for a period of 13 months and hence the claim was restricted to Rs. 27,000. The Appellate Assistant Commissioner did not hold that the payment was illusory but he held that the root of the matter that is to be considered is whether the payments were for business considerations. According to him, the assessee was entitled to claim Rs. 6,000 as payment to Messrs K.C. Thapar and Bros, for rendering services to the assessee and that there was no reason to increase the remuneration to Rs. 27,000.;