1961 (3) TMI 123 - HC - Income Tax

Summary

Issues Involved:
1. Disallowance of a part of the remuneration paid to an employee under section 10(2)(xv) of the Income-tax Act, 1922.
2. Determination of whether the expenditure was incurred wholly and exclusively for the purpose of the assessee's business.
3. Evaluation of the reasonableness of the remuneration paid to the technical adviser.

Issue-wise Detailed Analysis:

1. Disallowance of a part of the remuneration paid to an employee under section 10(2)(xv) of the Income-tax Act, 1922:
The primary issue to be decided was whether the remuneration paid to Dr. U.P. Ganguli, the technical adviser of the assessee-company, could be disallowed in part by the Income-tax Officer (ITO) under section 10(2)(xv) of the Income-tax Act, 1922. The ITO allowed only Rs. 42,000 out of the claimed Rs. 52,947, disallowing the balance on the grounds that it was not incurred wholly and exclusively for the purposes of the business. This disallowance was upheld by the Appellate Assistant Commissioner and the Appellate Tribunal.

2. Determination of whether the expenditure was incurred wholly and exclusively for the purpose of the assessee's business:
The court examined whether the remuneration paid to Dr. Ganguli was justified as an expenditure incurred wholly and exclusively for the purpose of the assessee's business. The court noted that the burden of proof lies on the assessee to demonstrate that the expenditure was necessary and reasonable. The court emphasized that the reasonableness of the expenditure should be evaluated based on commercial expediency and from the perspective of a businessman, rather than the revenue authorities.

3. Evaluation of the reasonableness of the remuneration paid to the technical adviser:
The court analyzed the facts and circumstances surrounding the appointment and remuneration of Dr. Ganguli. It was noted that Dr. Ganguli, who was a medical practitioner with no special technical qualifications in enamel goods, was appointed as a technical adviser and was also a significant shareholder and director of the company. The court found that the appointment did not follow a transparent selection process, and there were no advertisements for the vacancy. Additionally, Dr. Ganguli was already drawing a remuneration of Rs. 1,000 per month as the secretary of the managing agents of the assessee-company.

The court observed that while Dr. Ganguli was found to be an excellent officer rendering valuable services, the ITO considered a monthly sum of Rs. 3,500 (in addition to his remuneration as secretary) to be sufficiently remunerative. The court also took into account the company's profits and the increase in turnover, noting that these improvements could be attributed to factors other than Dr. Ganguli's employment, such as the increase in the company's capital and restrictions on the import of enamelware.

The court referred to several precedents, including Newtone Studios Ltd. v. Commissioner of Income-tax, Raman & Raman Ltd. v. Commissioner of Income-tax, and Walchand & Co. Private Ltd. v. Commissioner of Income-tax, to illustrate that the reasonableness of an expenditure must be determined based on the facts of each case and should consider commercial expediency.

The court concluded that, given the circumstances, there were sufficient reasons to disallow the balance remuneration claimed by the assessee. The answer to the question was in the affirmative and against the assessee, who was ordered to pay the costs of the reference.

Conclusion:
The court upheld the disallowance of a part of the remuneration paid to Dr. Ganguli, finding that the expenditure was not wholly and exclusively incurred for the purposes of the assessee's business. The decision was based on an evaluation of the facts and circumstances, emphasizing the need for commercial expediency and the burden of proof on the assessee to justify the claimed expenditure.