TaxTMI 
TaxTMI 
1974 (11) TMI 10
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.... such under an agreement dated 8th December, 1926. This agreement of managing agency expired on the 14th January, 1957, but by an agreement dated the 11th March, 1957, I.G. reappointed B.L. as managing agents for a period of 10 years as and from 15th January, 1957. In the year 1958, the remuneration that was paid by I.G. to B.L. for acting as managing agent was Rs. 40,000 and the directors remuneration was Rs. 8,000. In the calendar year 1959, I.G.'s profits were Rs. 90,167. The remuneration that was paid to B.L. amounted to the same figure of Rs. 40,000, while the directors' remuneration came to Rs. 8,600. It has to be mentioned that the sum actually paid to B.L. in these years was the minimum remuneration as per clause 5 of the said managing agency agreement. Some time in 1958, the management of I.G. appears to have decided to start three new concerns, i.e., the assessee-company took over the factory of I.G. at Bombay, a company called Industrial Containers Ltd., to take over it's Calcutta factory and a third company known as Hopes Metal Windows (India) Ltd. to start a new business in metal windows. In pursuance of the aforesaid desire the assessee-company was incorpo....
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....ompany and shall duly make, keep, file or cause to be made, kept and filed all such registered returns, statements and accounts as under the provisions of the Companies Act, 1956, or any statutory modification thereof for the time being in force are required to be made, kept and filed by the company or its officers and the secretaries shall perform all such duties for the company as are ordinarily performed by secretaries. 4. The secretaries may subject to the provisions of clause 2 hereof in addition to their duties as secretaries of the company perform any other duties and work for the company as the board of directors of the company may determine. 5. The secretaries shall have power to perform all the duties which may be performed by a secretary under the Companies Act, 1956, or subject to the provisions of clause 2(m) hereof in the performance of their duties under this agreement. 6. The secretaries shall be entitled to receive from the company by way of remuneration for its services as secretaries the sum of, or in respect of any period of less than one calendar month, calculated at the rate of rupees ten thousand per calendar month, such sum being p....
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.... There was some correspondence with regard to this matter between the Income-tax Officer and the assessee, namely, the assessee's letter to the Income-tax Officer dated the 30th October, 1963, the Income-tax Officer's reply dated 3rd December, 1963, and the assessee's reply thereto dated 19th December, 1963. These three letters have been made part of the statement of case in this reference before us. We may shortly refer to these three letters. By the letter dated the 30th October, 1963, the assessee had written to the Income-tax Officer that no single person in the office of the secretary devoted his whole time to the secretarial work but the categories of persons mentioned in the said letter rendered their several expert knowledge in the service of the company as was required, namely, the directors, senior executives, chief accountant, chief personnel officer, junior executive, taxation officer, sales tax officer. On receipt of this letter the Income-tax Officer wrote back on the 3rd December, 1963, enquiring of the assessee whether apart from specific duties mentioned in the said agreement any other duties were allotted to the secretaries as part of clause 4 of the s....
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....f the controversy that has been canvassed before us, it would be necessary to set out some of the grounds of appeal before the Tribunal. The grounds of appeal before the Tribunal, inter alia, were as follows : "(1) that the Appellate Assistant Commissioner erred in upholding the disallowance of Rs. 84,000 out of Rs. 1,20,000 paid as secretaries' remuneration to Balmer Lawrie & Co. Ltd ; (2) on the facts and in the circumstances of the case, the Appellate Assistant Commissioner should have allowed the entire amount of Rs. 1,20,000 and not merely Rs. 36,000 was an admissible deduction ; (3) that the Appellate Assistant Commissioner's decision that the sum of Rs. 1,20,000 paid as remuneration to the secretaries is excessive and that the reasonable remuneration for their services would be Rs. 36,000 is wholly arbitrary and not at all justified having regard to the nature and extent of the services rendered by the secretaries ; ...... (6) that the sum of Rs. 1,20,000 paid to the secretaries in terms of the agreement entered into by the appellant and the secretaries as normal business appointment was laid out wholly and exclusively for the purp....
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....nt would have required the resolution of the company and the Tribunal noted that though opportunity had been given and the assessee was called upon to produce such a resolution, none was produced. Nor was there any evidence of any additional payments made to B.L. which would have been consistent with the allotment of additional duties in fact entrusted to them. The Tribunal found that the specialised services as per list given by the assessee did not amount to any variation of the normal duties of a secretary of a company. It was true, the Tribunal noted, that B. L. was reimbursed only for the services rendered by its staff but not towards the remuneration paid to its directors and senior executives but the Tribunal observed that B.L. was having several activities of its own and its directorial and top executive establishment was concerned with its own affairs and management. The expenses incurred in respect of the services rendered by the several departments of B.L. including those of taxation and personal officers and the Delhi representative were got reimbursed from the several companies. In fact, the Tribunal found the services of B.L. to the assessee, for which they had to be ....
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....e of the assessee's business. In the premises, the Tribunal disallowed a sum of Rs. 60,000, namely Rs. 5,000 per month, for each of the two years under appeal. 9. In the background of the aforesaid facts and circumstances of the case on an application being made, the Tribunal has referred the following questions at the instance of the assessee : "(1) In the appeal by the assessee against the disallowance sustained by the Appellate Assistant Commissioner of Income-tax under section 40(c) of the Income-tax Act, 1961, and without a cross-appeal or cross-objections by the department, and after finding that section 40(c) was not applicable was it open to the Tribunal yet to sustain the disallowance partially under section 37? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the entire remuneration allowed to the secretaries was not laid out wholly and exclusively for the purpose of the assessee's business and in determining the allowable amount of such remuneration at Rs. 60,000? " 10. At the instance of the revenue, the Tribunal has also referred a third question, namely: "Whether, on the....
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....er which it thought fit thereupon and it was contended that the subject-matter of the appeal was the propriety or validity of allowance under section 40(c)(i) of the Act and not whether allowance or disallowance could be upheld on any other provisions of law. In this connection, counsel drew our attention to the decisions in the case of Indira Balakrishna v. Commissioner of Income-tax [1956] 30 ITR 320 (Bom), in the case of Puranmal Radhakishan and Company v. Commissioner of Income-tax [1957] 31 ITR 294 (Bom), in the case of V. Ramaswamy Iyengar v. Commissioner of Income-tax [1960] 40 ITR 377 (Mad), in the case of F. Y. Khambhaty v. Commissioner of Income-tax [1966] 61 ITR 30 (Guj) and in the case of Seth Champalal Ramswarup v. Commissioner of Income-tax [1964] 52 ITR 201 (All). Reliance was placed on the decision in the case of Pathikonda Balasubba Setty v. Commissioner of Income-tax [1967] 65 ITR 252 (Mys). These decisions reiterate the principle there that the power of the Tribunal is limited to the subject-matter of the appeal and the scope of the respondent's right to support the order appealed from is also limited. The question, therefore, is what is the subject-matter of....
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....e assessee had replaced old parts. It was held by the court that the Tribunal had evidence before it from which it could be concluded that by introducing the " Casablanca conversion system " the assessee made current repairs to the machinery and plant and the sum of Rs. 93,215 was allowable as an expenditure incurred for current repairs under section 10(2)(v) of the Act. The Supreme Court further held that because the Tribunal rejected the assessee's claim for development rebate, it was not bound to disallow the claim of the assessee for allowance of the amount spent, if it was a permissible allowance on another ground. Whether the allowance was admissible under one head or another of sub-section (2) of section 10, the subject-matter of the appeal remained the same and the Tribunal having held that the expenditure incurred fell within the terms of section 10(2)(v), though not under section 10(2)(vib), it had jurisdiction to admit that expenditure as permissible allowance in the computation of the taxable income of the assessee. The Supreme Court observed that under section 33(4) of the Indian Income-tax Act, 1922, which is in similar terms to section 254 of the Income-tax Act, ....
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....s business. It was the assessee who had to see what sum was required to be spent for the purpose of the business. Therefore, it was contended that the revenue and the Tribunal had no jurisdiction at all to determine the reasonableness of the expenditure and to determine whether the sum that was paid was excessive or disproportionate to the requirement. 13. In this connection we might refer to the relevant provisions of section 37 of the Act as well as section 40(c)(i) of the Act. "37. General.--(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'. (2) Notwithstanding anything contained in sub-section (1), no expenditure in the nature of entertainment expenditure shall be allowed in the case of a company, which exceeds the aggregate amount computed as hereunder : (i) On the first Rs. 10,00,000 of the profits and gains of the bus....
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....diency was required to be applied to determine whether the expenditure was wholly and exclusively laid out for the purpose of the business. The reasonableness of expenditure should be considered from the point of view of the business and not from the point of view of an outsider including the Income-tax Officer. The revenue had no power to examine what they thought reasonable and to say that the expenditure was necessary. Soon thereafter there was the introduction of section 10(4A) of the Income-tax Act and about the scope of the new section, which is in similar terms to section 40(c)(ii), there are expressions of judicial opinions. It was held by this court in the case of Mercantile Express Company (Private) Ltd. v. Commissioner of Income-tax [1963] 47 ITR 125 (Cal), the effect of section 10(4A) of the Indian Income-tax Act, 1922, was given by the Finance Act, 1956. After the introduction of the said sub-section it was for the Income-tax Officer to decide whether remuneration paid to a director was excessive or unreasonable and if there was no suggestion that the Income-tax Officer had travelled beyond the provisions laid down in the section, legitimate business needs of the compa....
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....the assessee and to disallow it. But it was not the function of the Tribunal to determine the remuneration, which in their view, should be paid to an employee of the assessee. An employer in fixing the remuneration of the employees was entitled to consider the extent of his business, the nature of the duties to be performed and the special aptitude of the employee, future prospects of extension of the business and a host of other related circumstances. It was erroneous to think that the increased remuneration could only be justified if there was a corresponding increase in the profits of the employer. 18. Similar views were expressed in the case of J.K. Woollen Manufacturers v. Commissioner of Income-tax [1969] 72 ITR 612 (SC). In the case of Bengal Enamel Works Ltd. v. Commissioner of Income-tax [1970] 77 ITR 119, the Supreme Court observed that where an amount paid to an employee pursuant to an agreement was excessive because of "extra-commercial considerations", the taxing authority had jurisdiction to disallow a part of the amount as expenditure not incurred wholly and exclusively for the purpose of the business. Indisputably an employer in fixing the remuneration, according....
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....e. The resolution of the assessee fixing the remuneration to be paid to an employee and production of vouchers for payment together with proof of rendering services did not exclude an enquiry whether an expenditure was laid out wholly and exclusively for the purpose of the assessee's business. It was still open to the taxing officers to hold under section 10(2)(xv) of the Act--an agreement to pay and payment notwithstanding--that the expenditure was not laid out wholly and exclusively for the purpose of business. 19. In this case we have noticed the facts upon which the Tribunal has relied. 20. The validity of the primary facts found by the Tribunal cannot be challenged and have not been challenged before us by the assessee. Therefore, we must proceed on these facts. These facts were that the payments were made to a company which was the assessee's holding company or a company which could influence the assessee's voting power or decision. This is not in dispute. It was contended that so far as the Tribunal had held that the services rendered by the assessee was purely secretarial the said conclusion was an inferential conclusion and the same was open for examinati....