1971 (12) TMI 33 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the entire remuneration to the directors as an admissible deduction for the purpose of assessment under the Income-tax Act? - In the present case the facts and circumstances did not suggest that there was any extra commercial consideration. Therefore, the entire remuneration must be considered to have been spent wholly and exclusively for the purpose of assessee s business

Summary

Issues Involved:
1. Whether the Tribunal was right in law in allowing the entire remuneration to the directors as an admissible deduction for the purpose of assessment under the Income-tax Act.

Detailed Analysis:

Issue 1: Admissibility of Directors' Remuneration as Deduction
- Facts and Background: The assessee is an Indian company engaged in managing public shipping companies, with assessment years 1952-53 and 1953-54. The remuneration paid to the directors increased significantly from the amounts stipulated in a 1947 agreement, leading to scrutiny by the Income-tax Officer (ITO). The ITO disallowed the increased remuneration as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922, asserting that the additional remuneration was not paid out of commercial expediency.

- Income-tax Officer's Findings: The ITO concluded that the additional remuneration was not justified based on three main points:
1. The 1947 agreement was for 8 years, and there was no justification for a new agreement in 1951.
2. There were no additional duties or responsibilities for the directors during the accounting periods.
3. The directors did not specifically demand increased remuneration.

- Appellate Assistant Commissioner's Findings: The Appellate Assistant Commissioner upheld the ITO's decision, adding that the company's profits had declined compared to 1947.

- Tribunal's Findings: The Tribunal reversed the decisions of the ITO and the Appellate Assistant Commissioner, stating that the increased remuneration was commercially expedient and wholly for the benefit of the company. The Tribunal emphasized that there was no evidence of extra-commercial considerations influencing the increased payments.

- High Court's Analysis:
- Mixed Question of Law and Fact: The Court noted that determining whether an expenditure is wholly and exclusively for business purposes under section 10(2)(xv) involves a mixed question of law and fact.
- Tribunal's Role: The Tribunal is the final arbiter of facts, and its conclusions can be examined by the High Court only if they are based on no evidence or are perverse.
- Commercial Expediency: The Court emphasized that the ITO must prove any extra-commercial considerations for disallowing the expenditure. The Tribunal correctly found that the increased remuneration was commercially expedient based on several factors:
- The directors were high officers with no shares in the company and were promoted from lower ranks.
- Their remuneration was governed by an agreement, and they were not related to the company's shareholders.
- The 1947 agreement had reduced their remuneration due to political instability fears, and the 1951 agreement partially restored their original remuneration.
- The directors' loyalty and responsibility were demonstrated by their voluntary acceptance of reduced remuneration in 1947.

- Supreme Court Precedents: The Court referred to several Supreme Court cases, including Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Walchand and Co. (P.) Ltd., to support its reasoning.

- Conclusion: The High Court concluded that the Tribunal did not err in law and that the increased remuneration was wholly and exclusively for the business's benefit. The question referred to the High Court was answered in the affirmative, favoring the assessee and against the department.

Separate Judgment by A. N. Sen:
- Agreement with Majority Judgment: A. N. Sen J. agreed with the majority judgment but provided additional reasoning.
- Principles Governing Remuneration: He emphasized that the onus is on the assessee to prove that the remuneration was wholly and exclusively for business purposes. The ITO must scrutinize the claim but cannot impose subjective standards of reasonableness.
- Case-Specific Analysis: He reiterated the facts and circumstances considered by the Tribunal, highlighting the directors' loyalty and the commercial expediency of the increased remuneration.
- Final Agreement: He agreed with the majority judgment that the entire remuneration was laid out wholly and exclusively for the business, answering the question in favor of the assessee and against the department.

Conclusion:
The High Court affirmed the Tribunal's decision, allowing the entire remuneration paid to the directors as an admissible deduction under the Income-tax Act, emphasizing the commercial expediency and absence of extra-commercial considerations.