V.K.SINGHAL, J. - (1.) THE Tribunal has referred the following question of law arising out of its order dt. 7th Feb., 1981, in respect of the asst. yrs. 1975 -76 to 1979 -80 under S. 256(1) of the IT Act, 1961 : For all the assessment years : "Whether, on the facts and circumstances of the case, the Tribunal was justified in holding the remuneration paid in excess of 50% salary per month to Shri H.V. Navani, working director of the company, as excessive and unreasonable in terms of S. 40(c) of the IT Act, 1961 - For the asst. yrs. 1976 -77 to 1978 -79 : "Whether the Tribunal was justified in holding the rent of the flat at Delhi as expenses on maintenance of guest house, under the facts and circumstances of the case -
(2.) THE brief facts of the case are that Shri Navani was working as a sales executive with M/s Jaipur Metals & Electricals Ltd., and w.e.f. 9th Aug., 1972, he was appointed as consultant by the assessee and he was provided free residential accommodation at Delhi. On 14th Aug., 1972, a resolution was passed by the assessee appointing Shri Navani, as full time working director, w.e.f. 4th Sept., 1972, on a salary of Rs. 1,000 per month plus free residential accommodation. The facility of free residential accommodation was discontinued from 1st March, 1975. On 31st Aug., 1977, Shri Navani resigned from the directorship of the company and in the year 1979 -80, he worked only for two months. The ITO disallowed the remuneration paid to the director invoking the provisions of S. 40(c) of the IT Act, 1961. It was found by the Tribunal that another director, Shri Shantilal M. Chaudhary, was also residing at Delhi and in view of the day -to -day working of the company being attended by the said director at Delhi, there was no justification in making the payment to the extent mentioned above. The assessee contended that Shri Navani was looking after the purchases and sales of finished goods and had liaison with the Government Department. A point was raised that several new customers approached the assessee and the business was augmented because of Shri Navani. The Tribunal rejected this contention and this point was not allowed to be raised for the first time, as it was not raised before the authorities below. The Tribunal came to the conclusion that the ITO is empowered to judge the excessiveness of the expenditure which relates directly or indirectly in respect of remuneration to the director. He can examine as to whether the said expenditure is excessive or unreasonable having regard to the legitimate business needs of the company. The figures of sales and purchases at Delhi and one of the directors of the assessee -company being permanently stationed at Delhi and was looking after the day -to -day business matters of the company was also taken into consideration. The Tribunal held looking to the facts and circumstances that the ITO was right in observing that payment made to Shri Navani was excessive and unreasonable and the legitimate business needs of the assessee do not warrant the payment that was made by the assessee to Shri Navani.
(3.) IN respect of the expenditure of Rs. 2,500, Rs. 6,000 and Rs. 2,500 for the asst. yrs. 1976 -77, 1977 -78 and 1978 -79 in respect of the guest house, it was observed that the expenditure having been incurred on the maintenance of the guest house was not allowable. The Tribunal found that the guest house was maintained by the assessee and in the letter dt. 27th Feb., 1978, the assessee himself has admitted the maintenance of the guest house. If the assessee wants to rebut its letter, then some cogent evidence should have been brought on record. But in the absence of any such evidence to rebut the contents of such letter, it was mentioned that the guest house expenses during the years amounted to Rs. 2,500 towards rent only. It was mentioned in the letter that in respect of the premises at Delhi taken on rent for stay of guests, no amenity or furnishings has been provided there. It was held that the authorities below took the right view that a guest house was being maintained by the assessee and the submission that a flat was taken at Delhi for the use of staff who were visiting Delhi in connection with business was not considered correct. While framing the assessment order for the asst. year 1975 -76, the ITO found that the purchases made from N.S.S.I.C. and M.M.T.C. amounted to Rs. 31,106 and Rs. 64,156, respectively, and the purchases and sales from the Delhi Office amounted to Rs. 45,956 and Rs. 32,950 for the whole year and, therefore, the expenditure incurred on Shri Navani by the company was excessive and unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. The provisions of S. 40(c) confer jurisdiction on the ITO to satisfy himself that the remuneration paid is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. In order to come to this conclusion, it has been examined from the point of view of commercial expediency. In the present matter, the provisions of S. 40(c) were invoked and it is not a case where it could be said that the provisions of S. 40(c) were not applicable. The reasonableness or otherwise of the quantum of amount could be examined by the ITO dispassionately and objectively and not in a biased or prejudiced manner, subjectively. The finding which has been recorded by the Tribunal is that the ITO has analysed the sales and purchases at Delhi and has also taken into consideration that one of the directors of the company was permanently stationed at Delhi who looked after the day -to -day business needs of the company and, therefore, the legitimate business needs of the company do not warrant the payment that was made by the assessee to Shri Navani. In Upper India Publishing House Pvt. Ltd. vs. CIT (1979) 10 CTR (SC) 101 : (1979) 117 ITR 569 (SC), it was held by the apex Court that whether a particular expenditure is excessive and unreasonable or not is essentially a question of fact. In the light of this decision and from the findings which have been recorded by the Tribunal and the assessee not having furnished any satisfactory evidence before the ITO to establish the legitimate business needs and the service rendered, no case is made out to interfere and accordingly it is held that the Tribunal was justified in holding that the remuneration paid in excess of 50 per cent salary per month to Shri Navani as working director of the company is excessive and unreasonable in terms of S. 40(c) of the IT Act, 1961.;