TaxTMI 
TaxTMI 
TaxTMI 
1971 (12) TMI 33
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....ny shares in the company. On the contrary each one of them had been promoted from lower ranks and their remuneration and service conditions were governed by the agreement they had with the company. The said directors were not related to the company's shareholders who happened to be members of the " Turner family " of England. In these references, we are concerned with the agreement between the directors and the company dated January 1, 1957. Prior to this agreement they were governed by an agreement executed in 1947. Before 1947, the said directors, in addition to a fixed salary, received commission based on the profits of the company which used to be enormous sums of money. Under the agreement of 1947, however, the said directors agreed to receive a reduced salary but they were not entitled to any commission. The assessee-company's explanation was that this was agreed upon by the directors because of an apprehension of lesser profits owing to unstable political conditions which the company thought might prevail after the independence of India. But, the said directors, under the agreement of 1947, were allowed certain benefits and perquisites, i.e., free accommodation and services,....
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....e not justified in coming to the conclusion that payment of remuneration in excess of the amount payable under the 1947 agreement was not allowable as the assessee's business had not prospered proportionately or that no added responsibilities were put on the directors. The Tribunal, therefore, held that the payment made to the directors in respect of their increased remuneration was commercially expedient and was solely and wholly for the benefit of the company itself. The Tribunal further in its order dated December 12, 1962 (" annexure " C ") held : " There is no finding by the income-tax authorities of the presence any extra-commercial consideration in the payment of the increased remuneration to the directors and there being no material on the record to lead to that conclusion we are of the opinion that the entire remuneration, even though increased enormously during these assessment years, have got to be allowed as expenditures incurred wholly and exclusively for the purpose of the assessee's business." Thereafter, the present reference has come to us for our decision. Mr. Balai Pal, on behalf of the revenue, has contended that the Tribunal's order should be set aside inasm....
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....f facts. In such a case the High Court can certainly examine theTribunal's order in its special jurisdiction but will not disturb the Tribunal's order. Where, however, the Tribunal has come to a finding of fact but the final conclusion arrived at by it is not justified inasmuch as the principle underlying the commercial expediency has not been properly applied or that the inference is perverse or is not based on any material on record the High Court should set aside the Tribunal's order. Another confusion arises when it is argued that before an expenditure is disallowed the Tribunal must hold that the expenditure incurred is due to a particular extra-commercial consideration. In our view this contention is only partially correct. Extra-commercial consideration is often described as a fact, but, in my opinion, it is really an inference or conclusion from facts. It is quite possible to come to a finding of fact that there are extra-commercial considerations like collusion, mala fide transaction, relationship, but the final conclusion that the expenditure is not commercially expedient is a question of law. It is not necessary that the revenue must prove a particular fact as an extra-....
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....no justification for another agreement in 1951; (b) there is no addition to the duties and responsibilities of the directors during the accounting periods; and (c) the directors themselves did not make any specific demand for increased remuneration. The Appellate Assistant Commissioner in dismissing the assessee's appeal has supported the conclusion of the Income-tax Officer but also added another fact that, compared to 1947, the profits of the assessee company declined to some extent during the relevant accounting years. The Tribunal after considering the arguments of the parties set aside the orders of the Appellate Assistant Commissioner and have held that both the Income-tax Officer and the Appellate Assistant Commissioner failed to prove that the payment of increased remuneration was made on the ground of extra-commercial consideration. It is argued that in paragraph 9 of its order the Tribunal has not given due consideration to two facts which have been considered by the income-tax authorities: (a) the currency of the agreement of 1947 ; (b) there is no specific demand on the part of the directors for the increase in their remuneration. Mr. Balai Pal, relying upon Swade....
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....Reliance has been placed by him on Commissioner of Income-tax v. Walchand and Co. (P.) Ltd. , where the Supreme Court has stated at page 385 : " The rule that increased remuneration can only be justified if there be corresponding increase in the profits of the employer is, in our judgment, erroneous. " He has also added that a subjective standard of reasonableness should not be applied by taxing authorities in determining whether the expenditure is permissible under section. 10(2)(xv). In my view the contention of the counsel on behalf of the revenue cannot be accepted. The reasons why I say so are as follows : It is well-settled that the Tribunal is the forum which decides the finding of fact and the High Court in its jurisdiction under section 66(1) cannot question the correctness or incorrectness of those findings of facts. It is not only the duty of the Tribunal to examine the material facts but also to come to a legal conclusion that the facts do not justify the allowance or disallowance of an expenditure. This final conclusion on the admissibility of an allowance or non-allowance of an expenditure is a question of law (vide Swadeshi Cotton Mills v. Commissioner of Income-....
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....conclusion arrived at by the Tribunal is not based upon any evidence nor has he argued that such conclusion is perverse. His main grievance is that the Tribunal has not considered some " essential facts " which the income-tax authorities considered earlier in coming to the conclusion that the expenditure was not incurred for commercial expediency. The Tribunal's order itself shows that the conclusions arrived at by it are substantiated by material basic facts and also good reasonings which may be stated as follows : (a) the persons whose remuneration have been increased, although designated as directors, are in fact only high officers of the company. They are called full directors or local directors according to their executive grade; (b) these persons hold no shares of the company and have no hand in the policy and the decision of the company itself ; (c) these directors have been promoted from the lower ranks; (d) the remuneration and service conditions were not fixed arbitrarily but governed by an agreement they have with the company; (e) there is no such extra-commercial consideration inasmuch as they are not in any way related to the company's shareholders who happen to b....
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.... coming to the conclusion that the payments made to the directors as additional remuneration were made wholly and exclusively for the purpose of the business of the assessee-company. The criticism of Mr. Pal that the Tribunal has not considered two essential facts in coming to its conclusion is not correct. The Tribunal has faithfully recorded all the aforesaid facts and the reasonings of the Income-tax Officer and the Appellate Assistant Commissioner ; and in doing so the agreement of 1947 and the fact that there was no specific demand for increased remuneration from the director,-, have been mentioned and noted. In the penultimate paragraph 9 (page 44) he has decided against the assessee after mentioning the words " having heard the parties at length and having considered the arguments ". In this connection reference may be made to the observations of the Supreme Court in Hooghly Trust (P.) Ltd v. Commissioner of Income-tax : " The Tribunal does not appear, to have discussed the entire evidence on which the findings were based, but the order of the Appellate Assistant Commissioner and his findings as also the entire record were before it and there is nothing to suggest that all ....
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....ting and recording only the history of the case t be said to have considered the said two facts to be correct, it may be said that the Tribunal did not consider the importance of the fact that there was no demand of increased remuneration from the directors. The Tribunal in coming to its conclusion can legitimately lay emphasis on certain facts and may not give importance to other facts which are not essential. It is quite possible to comment that in distinguishing essential facts from the totality of facts the test of such distinction is not subjective. But at the same time in the present case there are many facts which justify the conclusion of the Tribunal that it has applied the objective test In a proper case a demand from the employees in respect of their remuneration may be a relevant fact. But the criticism that absence of any demand by the employees concerned has not been considered by the Tribunal cannot be fatal. It is absurd to suggest that the high tives of a company must demand for their increased remuneration before the increment of their salary could at all be co by the employer. A contrary proposition would compel these officers to make representations for their in....
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....f the assessee. It is undoubtedly open to the Income-tax Officer, and indeed his duty, to scrutinise each and every item of claim for deduction made by the assessee. The Income-tax Officer has to consider the question of remuneration from the point of view of a prudent businessman. It is no part of the Income-tax Officer's function to try to lay down what should be the reasonable remuneration of a director. The duty of the income-tax Officer is to ascertain on a consideration of all relevant materials whether the amount paid to the director by way of remuneration was paid wholly and exclusively for the purpose of the business of the company or for any extra-commercial consideration. If in any particular case the Income-tax Officer cannot justifiably find any extra-commercial reason for payment of the remuneration, it is not open to the Income-tax Officer to disallow the claim for deduction of any portion of the said remuneration under section 10(2)(xv) merely on the ground that in the opinion of the Income-tax Officer the remuneration paid to the director was excessive. In such a case, whatever may be the subjective view of the Income-tax Officer, the expenditure which cannot be sa....
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.... not considered it necessary to refer to the various cases cited from the Bar. In the instant case the facts and circumstances referred to by the Tribunal may be noted. The main business of the assessee is to act as managing agents of certain public shipping companies. The number of directors in the assessment years 1952-53 and 1953-54 was 5 and these persons, although designated as " directors ", were in fact only high executives of the company, being called " full director " or " local director " according to their executive grade. They held no shares, in the company and had no hand in the policy thereof. Each one of them had risen by promotion from the lower ranks and their remuneration and service conditions are governed by the agreement they have with the company. They were not in any way related to the company's shareholders who happen to be the members of the wealthy " Turner family " of England. Prior to 1947 there was an agreement between the company and the directors, and on the basis of the said agreement remuneration of the directors consisted of fixed salary plus commission on profits of the company. On the basis of the said agreement the directors had been enjoying ....
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.... company was actually giving an impetus and an inducement to its directors to keep up their tradition of good and faithfnl service to it. The increment was also partly because of the fact that all these directors had advanced in the rank and position of hierarchy of the directors. Such an expenditure, in our opinion, is commercially expedient and wholly for the benefit of the company itself." Mr. B. L. Pal, learned counsel for the department, has criticised the finding of the Tribunal on the ground that the Tribunal has not considered two main facts, namely : (i) that the agreement of 1947 was to continue for a period of 8 years; and (ii) that no demands were made by the directors for any increment in their remuneration. In the facts of the instant case, this criticism of Mr. Pal, to my mind, does not appear to be justified and in any event this criticism is of no material consequence. It appears from the order of the Tribunal that the Tribunal has recorded all the contentions advanced on behalf of the department. The Tribunal in its order has referred to all the agreements including the agreement which was in force before 1947. The Tribunal has carefully considered the nature ....