TaxTMI 
TaxTMI 
1961 (7) TMI 76
X X X X Extracts X X X X
X X X X Extracts X X X X
....uctions claimed by the assessee in respect of salaries paid to the managing director, Narayana Iyer, and the technical qualified director, Kasiraman, during the two years of account relevant to the assessment years 1953-54 and 1952-53. The assessee's year of account coincides with the financial year. Originally Narayana Iyer was having a business in running buses and lorries in Thanjavur district as a proprietary concern. On December 8, 1937, a private limited company known as Messrs. Raman and Raman Ltd. was formed and the business, goodwill and assets till then belonging to Narayana Iyer were transferred to the company, the present assessee. The company issued 500 shares of which Narayana Iyer as managing director owned 350 shares. His son, Kasiraman, owned 20 shares and most of the remaining shares were held by certain near relations of the aforesaid persons. Kasiraman who and qualified himself in automobile engineering become director from 1950. There was also another director by name Srinivasan. The managing director and the other directors were paid remuneration in accordance with resolutions passed by the directors and the general body from time to time. It is evident ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l and further appeal form the subject matter of the latter part of the two questions. The claim for deduction of the entire amounts paid over to the managing director and to Mr. Kasiraman is sought to be supported under the provisions of section 10(2)(xv) of the Income-tax Act as an expenditure wholly and exclusively devoted for the purpose of the business carried on by the assessee. As the years of assessment are prior to the enactment of the Finance Act of 1956, the provisions of section 10(4A) of the Act will not apply and the only questions is whether the expenditure can be regarded as one wholly devoted for the purpose of the business. There is no dispute about the facts. Narayana Iyer, the managing director, and acquired great experience in the business of plying motor buses and has been guiding the entire concern since its inception. During the course of number of years the company was granted permits for a number of routes. The Income-tax Officer himself has realised this. The expansion of the assessee's business would undoubtedly require greater effort and efficiency on the part of persons in management and would necessarily involve greater work on their part. This re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ended the money was acting reasonable in the interests of his own business uninfluenced by any irrelevant or extraneous considerations. For example, if the assessee company resolves upon payment of sum of money to a director unrelated to services rendered by him, out of regard to the fact he is a relation of the controlling members of the company, it cannot be said that the expenditure is justifiable on the ground of commercial expediency. At the same time it must be noticed that the mere fact that a director happens to be relation of the persons in control of the company does not mean that the ought not to be paid his legitimate remuneration for his services. Where the amount expended or paid by way of salary to a director is correlated to the servicea rendered of the majority of the members of the company money is a relation of the majority of the members of the company would not affect the question. The Tribunal has stated: "Considering that large amounts have been allowed without any regard to the working profits in our opinion the treatment accorded by the department should not be interfered with. No case has, in our opinion, been made out for any larger allowance." ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s opinion would have been the proper expenditure. The department as well as the Tribunal failed to correlate the services rendered by the directors with the amount of remuneration paid to them before making the disallowance. Reliance was placed on behalf of the department on Aspro, Limited v. Commissioner of Taxes [1936] 4 I.T.R. 264; [1932] A.C. 683 to show that in a private limited company the onus is very great on the assessee to justify the expenditure. In that case the directors who were also the sole shareholders were allowing themselves fees for a number of years as two-thirds of the net profits after ascertaining the trade results of each year. In one year they arbitrarily fixed a sum far in excess of their usual remuneration. The Privy Council held that having regard to the circumstances of the case, namely, that the directors of the company were identical with the shareholders and that they were not very particulars as to what amounts were paid to them or retained by the company, the court was entitled to hold that the company had failed to prove that the amount paid out had been exclusively incurred in the production of assessable income. We cannot see how that case whi....