1. SABYASACHI MUKHARJI, J.-In this reference under section 256 (1) of the I. T. Act, the following question has been referred to this Court "Whether, on the facts and in the circumstances, of the case, the Ap--pellate Tribunal was correct in holding that the disallowance made out of salary paid to Mr. J. D. Somerville could be sustained under sec--petition 40 (c) of the Income-tax Act, 1961 ?"
2. The assessee is PI/s. Eastern Scales Pvt. Ltd. And the present statement elates to the assessment years 1973-7d and 1974-75 for which the corresponding previous years are the financial years ending on 31st March, 1973, and 31st March, 1974, respectively. In the appeals which were filed by the assesses for these two years the Tribunal was called upon to decide two issues ; one relating to the curtailment of the deduction in respect of the managing director's salary from Rs. 42,350 per annum as claimed, to Rs 36,000 per annum under the provisions of section 40 (c) and the other regarding the disallowance of Rs. 14,572 (for the assessment years 1973-74) .Nd Rs. 15,295 (for the assessm ent year 1974-75) being the deduction claimed by way of gratuity liability under the Compulsory Gratuity Act, 1971.
3. "The contention now sought to be raised before us by the learned counsel for the assessee was never urged in earlier years. There is also no material on record to show that there was any necessity for the appointment of any director other than the managing director from the assessm ent year 1970-71. He also not been able to show any improvement in the business of the assessee-Company is the assessme nt years under consideration. We, therefore, do not find any reason to take a view different from what the Tri--bunal has taken from the assessment years 1970-71 to 1972-73. We, therefore, affirm the orders of the Appellate Assistant Com--missioner."
4. It appears that the previous years' assessments were concerned really with the assessment years 1967-68, 1969-69 and 1969-70. The decision of the Tribunal for these assessment years came up for consideration before this Court Eastern Scales (P.) Ltd. v. C. I. T. ((1979) 117 I T R 477). There is, however, one significant factor different from those _ years, in the present year, that is to say, on the 1st of May, 1968, Mr. J. H. Somerville retired and in those years there were two directors. In the year under question there was only one director. The question of the allowability of the sum of Rs.
5. 3,530 per month must be judged in this changed perspective that one director was doing the job of two directors. This question was really considered by the Division Bench of this Court in the case of C. I. T. v. Edward Keventer (P.) Ltd. ((1972) 86 I T R 370). There, the Division Bench of this Court held that the I. T. O. Did not apply the correct principles informing his opinion as to the reasonable--ness of the sum paid to the directors. It was, further, held, he bad not given any proper consideration to the legitimate business needs of the company and, on the aspect of benefit, his view was mainly influenced by applying his mind only to the kind of physical or hard labours done by the directors.
6. The I. T. O. Considered the sums paid to the directors to be unreasonable on the basis of the percentage in relation to the profits of the company. The I. T. O. Did not appreciate that for a company of the kind with which the Court was concerned, on the. Relevant fact, the Court found, there was no justification for his finding that the payment of a commission was by way of allocation of profit. In these circumstances, so far as the Rani was concerned, in that case she happened to be the chairman of the board of directors. It appeared that any and every matter of importance was referred to the Rani and her advice and decision in all such matters were of vital importance in guiding the affairs of the company and its smooth and efficient administration.
7. Among the directors there might be a division of labour for the efficient administration of the affairs of the company and there might be a managing director with larger powers and greater responsibility in the matter of management of the affairs of the company. Therefore, in these circumstances, the Court upheld the decision of the Tribunal that the dis--allowance of the amounts paid to the directors under section 10(4A) was justified. But this Court in the case of Eastern Scales (P.) Ltd. After referring to the aforesaid decision in the case of Edward Keventer (P.)
8. Ltd. Noted that the Division Bench had reiterated that the two tests were the legitimate business needs of the company and, secondly, the benefit derived by or accruing to the company. Whether in a particular case, however, such tests had been correctly applied or not and whether in a particular case the legitimate business needs of the company or the benefit derived by the company bad been correctly appreciated or not would depend upon the facts and circumstances of each case. It appears that the decision of this Court in Edward Keventer's case referred to hereinbefore, went up in appeal before the Supreme Court in the case of C. I. T. v. Edward Keventer (P.) Ltd. ((1978)115 I T R 149) and at pp. 151 and 152 of the said report, the Supreme Court approved of the :aid reasoning of the Calcutta High Court. ---The legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman, It is not for the Income-tax Officer to dictate: what the business needs of the company should be and he is only to judge the legitimacy of the business needs of the company from the point of view of a prudent businessm an. The benefit derived or accruing to the company must also be considered from the angle of a prudent businessman. The term 'benefit' to a company in relation to its business, it must be remembered, has a very wide connotation and may not necessarily be capable of being accurately measured in terms of pound, shillings and pence in all cases. Both these aspects have to be considered judiciously, dispassionately without any bias of any kind from the view-point of a reasonable and honest person in business".
9. This reasoning has been approved of by the Supreme Court in the decision referred to hereinbefore. In the premises, the question is answered as we have indicated before, in the