1972 (6) TMI 18 - HC - Income Tax

Court Upheld Disallowance of Managing Directors' Bonus Payments

Sri Krishna Tiles And Potteries (Madras) Private Limited Versus Commissioner Of Income-Tax, Madras.

The court upheld the disallowance of the bonus paid to the managing directors for the assessment years 1961-62 and 1962-63 under section 10(4A) of the ... Expenditures - commission and bonus paid to the managing director – reasonableness of the expenditure claimed under various sub-clauses (i) to (xv) of section 10 should be decided with reference to section 10(4A) - totality of the allowance claimed towards remuneration etc. to a director has to be considered under section 10(4A) - since there is a specific provision in section 10(2)(x) dealing with commission, it cannot be treated as part of the salary and section 10(2)(xv) can be applied - Bonus paid to a managing director will attract section 10(4A) besides section 10(2)(x) and it must satisfy the conditions laid therein Issues Involved:1. Reasonableness of remuneration paid to the managing directors.2. Justification for the disallowance of bonus paid to the managing directors under section 10(4A) of the Indian Income-tax Act, 1922, and section 40(c)(i) of the 1961 Act.Detailed Analysis:1. Reasonableness of Remuneration Paid to the Managing Directors:The assessee, a private limited company, increased the remuneration of its two managing directors from Rs. 1,000 to Rs. 2,000 per month effective January 1, 1960. The Income-tax Officer considered this increase excessive, noting that the managing directors lacked technical qualifications and owed their positions to their father, who was in effective control of the company. The officer deemed Rs. 1,000 per month as legitimate and disallowed the excess amount.The Appellate Assistant Commissioner (AAC) found the increase in remuneration reasonable, given the company's improved financial status and the contributions of the managing directors. The Tribunal upheld the AAC's decision, agreeing that the enhanced remuneration was justified by the directors' efforts in expanding the business and improving profits.2. Justification for the Disallowance of Bonus Paid to the Managing Directors:The Income-tax Officer disallowed the entire bonus paid to the managing directors, arguing that it was unnecessary as an incentive since they already held substantial shares and received a 5% commission on net profits. The AAC confirmed the disallowance of the bonus, reasoning that the managing directors' entitlement to a commission on net profits negated the need for additional bonus payments.The Tribunal upheld the AAC's decision, maintaining that the bonus payments were unreasonable given the managing directors' substantial shareholding and the existing commission arrangement. The Tribunal found that the bonus did not serve to bridge any gap in wages, as argued by the assessee, and noted that the technical director, who also received a salary of Rs. 2,000 per month, did not receive any bonus.The assessee contended that the managing directors were employees and should receive the same bonus as other employees, citing that bonus is now considered a deferred wage. However, the Tribunal did not accept this argument, emphasizing that the reasonableness of the bonus must be assessed in the context of the total remuneration package, including salary and commission.The court referred to several precedents, including Natesan and Co. v. Commissioner of Income-tax and Nund and Samont Co. Pvt. Ltd. v. Commissioner of Income-tax, to underline that the Income-tax Officer must consider the legitimate business needs and the benefit derived by the company when assessing the reasonableness of remuneration and bonus. The court concluded that the authorities below had not acted capriciously or unreasonably in disallowing the bonus under section 10(4A).Conclusion:The court held that the disallowance of the bonus paid to the managing directors for the assessment years 1961-62 and 1962-63 was justified under section 10(4A) of the Indian Income-tax Act, 1922, and section 40(c)(i) of the 1961 Act. The question was answered in the affirmative and against the assessee, with costs awarded to the revenue.