1966 (9) TMI 30 - SC - Income Tax

Whether the sum of ₹ 1,11,090 paid as remuneration to the five directors of the assessee-company during the relevant previous year was an expenditure incurred wholly and exclusively for the purpose of the business under section 10(2)(xv) of the Income-tax Act ? Held that - The payment of the commission was made to the directors for extra-commercial reasons and was not wholly and exclusively made for the purpose of the business. the expenditure was not incurred wholly and exclusively for the purposes of the business of the appellant-company thus the appellant was not entitled to claim deduction of this expenditure under section 10(2)(xv) of the Income-tax Act. Appeal dismissed.

Summary

Issues:
1. Whether the payment of remuneration to the directors is an expenditure incurred wholly and exclusively for the purpose of the business under section 10(2)(xv) of the Income-tax Act?

Analysis:
The appellant-company, managed by a firm of managing agents, paid additional remuneration to its directors following an amendment to the articles of association. The company claimed this remuneration as a deduction under section 10(2)(xv) of the Income-tax Act, but the Income-tax authorities disallowed the claim. The Appellate Tribunal affirmed this decision, leading to a reference to the High Court. The High Court ruled against the appellant, prompting an appeal to the Supreme Court.

The appellant contended that the payment to directors was solely for the benefit of the company and should be deductible under section 10(2)(xv). However, the Supreme Court emphasized that the Income-tax Officer has the discretion to determine if the payment was wholly and exclusively for the business, despite the existence of an agreement and actual payment. The court cited precedents to support the view that the decision on deductibility is a matter of law, and the Income-tax Officer can consider all relevant factors in making this determination.

The Appellate Tribunal found that the payment of commission to directors was not wholly and exclusively for business purposes. It noted that the directors did not provide special services justifying the extra remuneration and that most work was done by the managing agents. Additionally, the abnormal increase in profits was attributed to external factors, not the directors' efforts. The High Court concurred with this view, denying the appellant's claim for deduction under section 10(2)(xv).

The appellant's argument about industry practice in remunerating directors was rejected by the Appellate Tribunal due to insufficient evidence. The Tribunal found the appellant's evidence inadequate to establish the alleged practice, leading to the dismissal of this argument. Ultimately, the Supreme Court upheld the decisions of the lower courts, concluding that the appellant failed to demonstrate any legal flaws in the High Court's ruling. The appeal was dismissed with costs.