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TMI Blog1971 (12) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... s to certain public shipping companies. The assessment orders concerned are of 1952-53 and 1953-54 and the corresponding accounting years are calendar years 1951 and 1952. Out of the six directors during the accounting years three persons, although designated as directors, were in fact high officers of the company being called " full directors " or " local directors " according to their executive grade. They do not hold any shares in the company. On the contrary each one of them had been promoted from lower ranks and their remuneration and service conditions were governed by the agreement they had with the company. The said directors were not related to the company's shareholders who happened to be members of the " Turner family " of England. In these references, we are concerned with the agreement between the directors and the company dated January 1, 1957. Prior to this agreement they were governed by an agreement executed in 1947. Before 1947, the said directors, in addition to a fixed salary, received commission based on the profits of the company which used to be enormous sums of money. Under the agreement of 1947, however, the said directors agreed to receive a reduced salary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e preferred appeal to the Income-tax Appellate Assistant Commissioner and the Appellate Assistant Commissioner upheld the disallowances and dismissed the assessee's appeals (vide the orders of the Appellate Assistant Commissioner being annexures " B-1 " and " B-2 " to the statement of case). On a further appeal by the assessee to the Tribunal, the Tribunal held that the Income-tax Officer and the Appellate Assistant Commissioner were not justified in coming to the conclusion that payment of remuneration in excess of the amount payable under the 1947 agreement was not allowable as the assessee's business had not prospered proportionately or that no added responsibilities were put on the directors. The Tribunal, therefore, held that the payment made to the directors in respect of their increased remuneration was commercially expedient and was solely and wholly for the benefit of the company itself. The Tribunal further in its order dated December 12, 1962 (" annexure " C ") held : " There is no finding by the income-tax authorities of the presence any extra-commercial consideration in the payment of the increased remuneration to the directors and there being no material on the reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the many essential facts, the Tribunal's final, conclusion is erroneous in law inasmuch as a wrong conclusion of law is arrived at from proved facts or surmises. In such cases the Tribunal's order is challenged as a matter of wrong inference of law sometimes by the assessee and sometimes by the revenue, as the case may be. It is quite possible that the Tribunal's conclusion is inextricably connected or directly flows from the findings of facts. In such a case the High Court can certainly examine theTribunal's order in its special jurisdiction but will not disturb the Tribunal's order. Where, however, the Tribunal has come to a finding of fact but the final conclusion arrived at by it is not justified inasmuch as the principle underlying the commercial expediency has not been properly applied or that the inference is perverse or is not based on any material on record the High Court should set aside the Tribunal's order. Another confusion arises when it is argued that before an expenditure is disallowed the Tribunal must hold that the expenditure incurred is due to a particular extra-commercial consideration. In our view this contention is only partially correct. Extra-commercial c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1952-53 and Rs. 4,84,500 for 1953-54 were paid not out of any commercial expediency for the purpose of the assessee's business. The Income-tax Officer came to the said conclusion on the basis of three facts : (a) that the agreement between the directors and the assessee company in 1947 were made for 8 years under which the remuneration payable for the said two assessment years would be Rs. 4,40,000 each year and, as such, there is no justification for another agreement in 1951; (b) there is no addition to the duties and responsibilities of the directors during the accounting periods; and (c) the directors themselves did not make any specific demand for increased remuneration. The Appellate Assistant Commissioner in dismissing the assessee's appeal has supported the conclusion of the Income-tax Officer but also added another fact that, compared to 1947, the profits of the assessee company declined to some extent during the relevant accounting years. The Tribunal after considering the arguments of the parties set aside the orders of the Appellate Assistant Commissioner and have held that both the Income-tax Officer and the Appellate Assistant Commissioner failed to prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consider another essential fact that there was no specific demand of remuneration on the part of the persons concerned and, as such, it has erred in arriving at the conclusion that the expenditure was laid out wholly and exclusively for the business. He has further criticised the emphasis of the Tribunal in its order on a non-essential fact, that is, there is no additional profits of the business in the relevant years compared to the previous years. Reliance has been placed by him on Commissioner of Income-tax v. Walchand and Co. (P.) Ltd. , where the Supreme Court has stated at page 385 : " The rule that increased remuneration can only be justified if there be corresponding increase in the profits of the employer is, in our judgment, erroneous. " He has also added that a subjective standard of reasonableness should not be applied by taxing authorities in determining whether the expenditure is permissible under section. 10(2)(xv). In my view the contention of the counsel on behalf of the revenue cannot be accepted. The reasons why I say so are as follows : It is well-settled that the Tribunal is the forum which decides the finding of fact and the High Court in its jurisdict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contrary, there are good reasons to conclude that those payments were made to the directors on grounds of commercial expediency. Mr. Pal's contention that the Tribunal has failed to consider and examine the essential facts on the basis of which the Income-tax Officer and the Appellate Assistant Commissioner came to the conclusion is not correct. In the context of the form in which the question of law has been referred, it cannot be Mr. Pal's case that the conclusion arrived at by the Tribunal is not based upon any evidence nor has he argued that such conclusion is perverse. His main grievance is that the Tribunal has not considered some " essential facts " which the income-tax authorities considered earlier in coming to the conclusion that the expenditure was not incurred for commercial expediency. The Tribunal's order itself shows that the conclusions arrived at by it are substantiated by material basic facts and also good reasonings which may be stated as follows : (a) the persons whose remuneration have been increased, although designated as directors, are in fact only high officers of the company. They are called full directors or local directors according to their executive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithful service. Their faithful service is further indicated by the fact of their having forgone a big slice of their remuneration in 1947, when they could have insisted that the company should continue to pay remuneration in accordance with the agreement prior to 1947 ; and (1) these directors were all advanced in the ranks and position in the hierarchy of the directors. All the aforesaid findings of facts and reasonings are sufficient materials, in my opinion, for coming to the conclusion that the payments made to the directors as additional remuneration were made wholly and exclusively for the purpose of the business of the assessee-company. The criticism of Mr. Pal that the Tribunal has not considered two essential facts in coming to its conclusion is not correct. The Tribunal has faithfully recorded all the aforesaid facts and the reasonings of the Income-tax Officer and the Appellate Assistant Commissioner ; and in doing so the agreement of 1947 and the fact that there was no specific demand for increased remuneration from the director,-, have been mentioned and noted. In the penultimate paragraph 9 (page 44) he has decided against the assessee after mentioning the words " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration. I agree with the argument of Mr. Pal that the Tribunal should have discussed the legal effects of the four facts on the basis of which the Appellate Commissioner disallowed the increased remuneration. But the Tribunal is the final authority in coming to the conclusion in respect of finding of facts. The High Court would only examine if the conclusion arrived at by the Tribunal has not been legitimately arrived. Even assuming Mr. Pal's contention that the Tribunal by noting and recording only the history of the case t be said to have considered the said two facts to be correct, it may be said that the Tribunal did not consider the importance of the fact that there was no demand of increased remuneration from the directors. The Tribunal in coming to its conclusion can legitimately lay emphasis on certain facts and may not give importance to other facts which are not essential. It is quite possible to comment that in distinguishing essential facts from the totality of facts the test of such distinction is not subjective. But at the same time in the present case there are many facts which justify the conclusion of the Tribunal that it has applied the objective test In a prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the entire remuneration to the directors as an admissible deduction for the purpose of assessment under the Income-tax Act. The principles which govern such cases of allowance of remuneration of directors under section 10(2)(xv) appear to be well-settled. The onus rests on the assessee who claims deduction in respect of any such expenditure incurred on payment of remuneration to directors to prove that the expenditure was wholly and exclusively laid for the purpose of the business of the assessee. It is undoubtedly open to the Income-tax Officer, and indeed his duty, to scrutinise each and every item of claim for deduction made by the assessee. The Income-tax Officer has to consider the question of remuneration from the point of view of a prudent businessman. It is no part of the Income-tax Officer's function to try to lay down what should be the reasonable remuneration of a director. The duty of the income-tax Officer is to ascertain on a consideration of all relevant materials whether the amount paid to the director by way of remuneration was paid wholly and exclusively for the purpose of the business of the company or for any extra-commercial consideration. If in any particu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure incurred by any company for payment of remuneration to directors, other officers and employees was laid out or expended wholly and exclusively for the purpose of the business of the company or was for some extra-commercial consideration must necessarily depend on the facts and circumstances of each particular case. As these principles governing the question of allowance of remuneration of directors under section 10(2)(xv) appear, to my mind, to be firmly established, I have not considered it necessary to refer to the various cases cited from the Bar. In the instant case the facts and circumstances referred to by the Tribunal may be noted. The main business of the assessee is to act as managing agents of certain public shipping companies. The number of directors in the assessment years 1952-53 and 1953-54 was 5 and these persons, although designated as " directors ", were in fact only high executives of the company, being called " full director " or " local director " according to their executive grade. They held no shares, in the company and had no hand in the policy thereof. Each one of them had risen by promotion from the lower ranks and their remuneration and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich prevailed before 1947. In the light of these facts and circumstances the Tribunal came to the conclusion that the entire amount of remuneration paid to the directors was laid wholly and exclusively for the purpose of the business of the company and was not paid for any extra-commercial consideration. The Tribunal has found that there was no collusion between the directors and the company and the Tribunal further held : " We further find that by granting the increased remuneration the company was actually giving an impetus and an inducement to its directors to keep up their tradition of good and faithfnl service to it. The increment was also partly because of the fact that all these directors had advanced in the rank and position of hierarchy of the directors. Such an expenditure, in our opinion, is commercially expedient and wholly for the benefit of the company itself." Mr. B. L. Pal, learned counsel for the department, has criticised the finding of the Tribunal on the ground that the Tribunal has not considered two main facts, namely : (i) that the agreement of 1947 was to continue for a period of 8 years; and (ii) that no demands were made by the directors for any ..... X X X X Extracts X X X X X X X X Extracts X X X X
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