COMMISSIONER OF INCOME TAX Vs. FAIRDEAL CORPORATION PVT LIMITED

JUDGEMENT

(1.) THE short question raised in this reference pertains to the claim for deduction made by the assessee company in respect of payment made to the widow of the ex managing director in the accounting period relevant to the asst. year 1963 64 and the precise question which has been referred to us by the Tribunal in this reference made under S. 256(1) of the IT Act, 1961, runs thus :

(2.) THE short facts giving rise to the question may be stated : The question relates to the asst. yr. 1963 64, the corresponding accounting period being the year ending on March 31, 1963. The assessee is a private limited company, carrying on business of manufacture of pharmaceutical products. One A. L. Chandavarkar was the managing director of this company for nearly 19 years, that is to say, ever since its inception on April 1, 1940, till April 6, 1959, when he died. Under an agreement made between the assessee company on the one hand and A. L. Chandavarkar on the other on December 16, 1951, for the work that he was to do as a managing director of the assessee company, Mr. Chandavarkar was entitled to a remuneration of Rs. 30,000 per year plus a commission at 10per cent on the net profits of the company as mentioned in the agreement. It appears that he was also entitled to a car allowance of Rs. 250 per month. It further appears that from the commencement of the agreement, right up to the time he died, Mr. Chandavarkar, though he was entitled to the remuneration of Rs. 30,000 per year, he drew very much less in each of these years. During the financial year 1952 53, he drew only Rs. 21,600 having forgone Rs. 8,400. For each of the successive years 1953 54 up to 1957 58, he drew the remuneration of Rs. 14,400 having forgone Rs. 15,600 in each of the said years. For the year 1958 59, he drew Rs. 21,600 having forgone Rs. 8,400. In other words, during all these seven years, as against the total remuneration of Rs. 2,10,000 to which he was entitled, he drew in the aggregate remuneration of Rs. 1,15,000 forgoing in the aggregate Rs. 94,800. It may be stated that during the first five years, since the assessee company was making losses it was understandable that Shri Chandavarkar should have drawn less remuneration as indicated above, but it may be stated that even during the 6th and 7th year, that is to say, during the financial years 1957 58 and 1958 59, even though the company made profits of Rs. 1,76,161 and of Rs. 1,69,220, respectively, he had forgone Rs. 15,600 and Rs. 8,400 and, what is more, even during those two years he had forgone the commission that became due and payable to him amounting to Rs. 34,538 and this presumably he did to enable the assessee company to wipe off its past losses. In other words, the total amount forgone by him during the period from 1951 to 1959 was more than the amount that was actually drawn by him. It further appears that the board of directors at the several meetings held during the years acknowledged the gesture of the managing director in giving up a part of his remuneration in view of the financial position of the company. The general meeting of the shareholders also noticed with appreciation the managing director's voluntary sacrifice in forgoing the commission due to him. On 21st March, 1963, some four years after Mr. Chandavarkar died during the currency of the agreement, the widow of Chandavarkar wrote a letter to the board of directors stating that though her husband was entitled to a remuneration of Rs. 2,500 per month, he was drawing only Rs. 1,200 per month for some years and Rs. 1,800 per month at the time of his demise and he having died she had orally requested the company to pay her a sum of Rs. 24,000 towards the gratuity for the services rendered to the company by her husband sincerely for about 20 years and for having helped the company in times of difficulty by drawing lesser amount than what was actually due to him. This letter was considered by the board of directors in its meeting held on 31st April, 1963, and under a resolution that was passed by the board of directors, a sum of Rs. 24,000 was decided to be paid to Smt. Mitrabai A. Chandavarkar as and by way of gratuity and after the payment was actually made to her the said amount was debited to the relevant account of the financial year 1962 63.

(3.) MR . Joshi appearing for the Revenue has strongly relied upon three or four factual aspects which emerged on record, viz. :