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TMI Blog1967 (8) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... cember 18, 1944. The relevant assessment years are 1958-59, 1959-60 and 1961-62, the corresponding previous years being calendar years 1957, 1958 and 1960. For the assessment year 1958-59, the assessee-company claimed a deduction of Rs. 36,500 paid as remuneration to its managing director, A. J. Patel. Similarly, for the assessment year 1959-60, the deduction claimed for such remuneration was Rs. 61,866 ; and for the assessment year 1961-62, the deduction claimed for such remuneration was Rs. 30,000. Till March 31, 1956, the assessee-company was paying to its managing director remuneration at the rate of Rs. 12,000 per annum. The Income-tax Officer came to the conclusion that the amount paid in excess of Rs. 12,000 in each of the three assessment years under consideration in this reference had nothing to do with the services rendered by the managing director to the assessee-company and further that, if services were rendered by the managing director to another company of which the assessee-company were the managing agents, the remuneration referable to the services rendered to the managed company could not be allowed as a legitimate deduction in the assessment of the assessee-compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the actual fact was that A. J. Patel was not the managing director of the managed company but was only the managing director of the assessee-company. He, however, came to the conclusion that the services rendered by A. J. Patel were rendered by him not to the assessee-company but to the managed company and, hence, no allowance could be claimed by the assessee as regards that excess remuneration and he held that the remuneration referable to such services rendered to the managed company could not form part by way of legitimate deduction in computing the assessee's income for tax purposes. Thereafter, the matter was again placed before the Tribunal for final disposal and after considering the facts and further evidence led by the assessee in both the remand proceedings, the Tribunal came to the conclusion that on the facts and in the circumstances, having regard to the admitted position that extra services rendered by A. J. Patel were not rendered by him to the assessee-company but were rendered by him to the managed company and that no additional remuneration was paid to him by the managed company, the assessee could not claim a deduction thereof in its assessments and thus up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... managed company, and he was also getting commission at the rate of 2 1/2% on the sale price of healds and reeds manufactured and sold by the managed company. Over and above these items of remuneration, A. J. Patel was being paid Rs. 3,000 per year as bonus by the managed company. The total remuneration by way of salary and commission as selling agent paid by the managed company in the calendar year 1955, came to Rs. 53,629 and, inclusive of the amount of Rs. 12,000 paid by the assessee company, the total remuneration of A. J. Patel came to Rs. 65,629. When the new Indian Companies Act came into force with effect from April 1, 1956, it was felt that under section 198 of the Companies Act, 1956, the total remuneration payable by the managed company to its directors, managing agents and treasurers, if any, could not exceed 11% of the net profits of the managed company computed as provided in the Companies Act, the percentage being exclusive of any fees payable to directors for the meetings of the board attended by them. Moreover, under section 356 of the Companies Act, 1956, no managing agent and no associate of a managing agent could receive any commission or other remuneration from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusively for the purposes of one's business but one has got to take into consideration questions of commercial expediency and the principles of ordinary commercial trading and the main consideration that has got to weigh with the court is whether the expenditure was a part of the process of profit-making. (2) The test for the purpose of deciding whether a particular amount can be allowed as deductible allowance under section 12(2) of the Act is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertakings in order indirectly to facilitate the carrying on of its business. If the transaction had been entered into on the, ground of commercial expediency in order even indirectly to facilitate the carrying on of the business of the assessee, it would attract the provisions of section 12(2) even though the transaction might have been voluntarily entered into. (3) If the payment was made with an indirect or improper motive for some considerations aliunde the business or out of generosity, then the payment is not liable to be regarded as one covered by the provisions of section 10(2)(xv): that the matter has to be viewed in the ligh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve had to pay to such other technical adviser and such other selling agent. In order to avoid this loss of ten per cent. the agency company entered into an agreement whereunder it gave away to Patel many times more than that amount. No evidence has been led which would show that expenditure of this nature had been incurred by the assessee-company for considerations of business or commercial expediency or that the expenditure was laid out wholly or exclusively for the purpose of the business of the agency company or that, as a result of the arrangement, the agency company derived any gain or a long term advantage or was expected to derive such advantage either directly or indirectly. Having regard to the facts and the circumstances of the case, it is not possible for us to come to the conclusion that the sum of Rs. 32,367, being the balance of the sum of Rs. 44,367 referred to by us earlier, was laid out or expended wholly and exclusively for the purpose of the business of the assessee-company and was liable to be allowed as a deduction under the provisions of section 10(2)(xv) of the Act." It is true that in the light of the facts on the record at the time of the earlier referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4) Letter, dated November 19, 1965, from the chartered accountants engaged by the assessee-company addressed to the Income-tax Officer setting out different contentions on behalf of the assessee-company and setting out the facts. (5) Oral evidence of A. J. Patel before the Income-tax Officer and oral evidence of Vishwas Vinayak Joshi before the Income-tax Officer. What we have to consider in the light of the legal principles culled out by the Division Bench of this High Court on the earlier occasion is whether in the light of the additional material and additional evidence on the record of the case, it can be said that the excess over Rs. 12,000 paid by the assessee-company to its managing director in the three different years of assessment under consideration in the present case was expended wholly and exclusively for the purpose of its business. On the additional materials, the findings of fact reached by the Income-tax Tribunal as set out in paragraphs 18, 19 and 20 of its order are : (a) A. J. Patel was a man of considerable experience and high training and he was greatly responsible for the progress of the mill-company. (b) At the time of the changes brought about by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the managing director of the assessee-company to the managed company. The Tribunal came to the conclusion that there was no evidence of any extra service rendered by A. J. Patel to the assessee-company and the services rendered by Patel were the same as were being rendered by him prior to April 1, 1956. These services were rendered direct to the mill-company. The Tribunal then observed : "After all, if the mill-company progressed and if the mill-company made more profits, the assessee, as the managing agents, were entitled to receive larger remuneration under the managing agency agreement. Therefore, the mere fact that the company, in fact, progressed and made more profits does not necessarily mean that there was every justification for remunerating Shri A. J. Patel through whose efforts such prosperity and such profits came to the mill-company higher than hitherto." The Tribunal further observed : "An indirect benefit that may flow to the managing agents cannot justify the employment of a person who renders services to the managed company as being in the interests of the business of the managing agents." In the light of these facts found by the Tribunal, it came to the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Tribunal in any manner. The major point which seems to have weighed with the Tribunal was the fact that the additional remuneration paid to A. J. Patel was for the services rendered to the managed company and not to the assessee-company. In this connection, the Tribunal has overlooked the observations made by this High Court at the time of the earlier reference, viz , that the mere fact that so far as the assessee is concerned, Patel did not render any extra Services could not be regarded as the only relevant circumstance, which might be considered in deciding whether the expenditure had been wholly and exclusively laid out for the purpose of the business of the assessee-company. In spite of that specific observation by the High Court on the earlier occasion, the Tribunal has treated this fact of Patel rendering services to the managed company and not to the assessee-company as the only relevant circumstance in deciding whether the expenditure has been wholly and exclusively laid out for the purpose of the business of the assessee-company. The Tribunal has overlooked, in coming to its conclusion regarding the deductibility of this particular expenditure, being the excess amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch A. J. Patel began to render to the managed company in his capacity as the managing director of the assessee-company, the gross profits of the managed company and also the commission earned by the managing agents both went up. This High Court, at the time of the earlier reference, came to the conclusion that it did because no evidence had been led to show that the expenditure of that nature had been incurred by the assessee-company for considerations of business or commercial expediency or that the expenditure was laid out wholly and exclusively for the purposes of the business of the assessee-company or that as a result of the arrangement, the assessee-company derived any gain or long-term advantage or was expected to derive such advantage either directly or indirectly. Prior to 1st April, 1956, the managing director of the assessee-company, A. J. Patel, was receiving remuneration in his personal capacity as also as selling agent of the company and as a managing director of the assessee-company. The total remuneration paid to A. J. Patel for the different years is as follows : Year Total remuneration. Rs. 1955 65,629 1956 63,112 1957 36,500 1958 61,866 1959 43,352 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly concern of the members of the Patel family and all the shares of the assessee-company have been held by members of that family. It is true that the articles of association of the assessee-company, and particularly articles 85A and 85B, provide that first Jivabhai Revabhai Patel, the father of A. J. Patel, and after him, A. J. Patel, are to be the managing directors of the company and they are to hold office until the individual concerned resigns, dies or ceases to hold his share in the capital of the assessee-company ; and as such managing director he has to exercise all the powers and discretion conferred by article 85A ; and the powers under sub-clause (2) of that article are very wide. All the other directors of the assessee-company for the time being are to be under the control of the managing director and are bound to conform to his directions in regard to the company's business. These powers were in the first instance conferred on Jivabhai and after Jivabhai's death, these powers were vested in A. J. Patel as the managing director of the assessee-company. Under article 85B, the managing director for the time being, viz., Jivabhai, and then A. J. Patel are to be the ex-offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be applied is whether, as a result of the arrangement which came into force with effect from April 1, 1956, even an indirect benefit was derived or was expected to be derived by the assessee-company. As has been observed by the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income-tax, in order to justify a deductible allowance under such circumstances, the assessee has only to show that the money was expended voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee. Here, as a result of the arrangement arrived at by the assessee-company with A. J. Patel, the managed company extended its activities and increased its profits ; thus resulting in indirect benefit to the assessee-company. What we have to consider while applying the test of commercial expediency is whether this particular expenditure can be justified, not because of any obligation under which the assessee-company pay to the managed company, but even on the ground of the amount being expended voluntarily by the assessee-company. Applying the principle approved of by the Supreme Court in Eastern Investments Ltd.'s case , i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share of the commission is thereby increased. This decision of the Bombay High Court in Tata Sons Ltd.'s case was followed by the earlier Division Bench of this High Court in the earlier reference in respect of this assessee in J. R. Patel and Sons Private Ltd. v. Commissioner of Income-tax , and we also follow the principles laid down by Chagla C.J. in that case. Applying the tests laid down by Chagla C.J. in that case to the present case, it is clear that the excess over Rs. 12,000 paid by the assessee-company to its managing director in the relevant assessment years was expended wholly and exclusively for the purposes of its business. The test of commercial expediency does not require that the assessee-company itself should derive any direct benefit from the services for which extra remuneration had been paid to its managing directors ; even if the benefit is derived by the assessee-company indirectly, it is enough. It was sought to be urged before us on behalf of the revenue by the learned Advocate-General that the statement furnished by the assessee as part of the additional evidence shows that from 1956, though the assessee-company went on receiving larger amounts of manag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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