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TMI Blog1974 (11) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... managing agents for a period of 10 years as and from 15th January, 1957. In the year 1958, the remuneration that was paid by I.G. to B.L. for acting as managing agent was Rs. 40,000 and the directors remuneration was Rs. 8,000. In the calendar year 1959, I.G.'s profits were Rs. 90,167. The remuneration that was paid to B.L. amounted to the same figure of Rs. 40,000, while the directors' remuneration came to Rs. 8,600. It has to be mentioned that the sum actually paid to B.L. in these years was the minimum remuneration as per clause 5 of the said managing agency agreement. Some time in 1958, the management of I.G. appears to have decided to start three new concerns, i.e., the assessee-company took over the factory of I.G. at Bombay, a company called Industrial Containers Ltd., to take over it's Calcutta factory and a third company known as Hopes Metal Windows (India) Ltd. to start a new business in metal windows. In pursuance of the aforesaid desire the assessee-company was incorporated in Calcutta on the 16th June, 1958, with a share capital of Rs. 14,00,070 comprised of 1,40,007 shares of Rs. 10 each. A company known as Industrial Containers was also formed. The assessee-company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of for the time being in force are required to be made, kept and filed by the company or its officers and the secretaries shall perform all such duties for the company as are ordinarily performed by secretaries. 4. The secretaries may subject to the provisions of clause 2 hereof in addition to their duties as secretaries of the company perform any other duties and work for the company as the board of directors of the company may determine. 5. The secretaries shall have power to perform all the duties which may be performed by a secretary under the Companies Act, 1956, or subject to the provisions of clause 2(m) hereof in the performance of their duties under this agreement. 6. The secretaries shall be entitled to receive from the company by way of remuneration for its services as secretaries the sum of, or in respect of any period of less than one calendar month, calculated at the rate of rupees ten thousand per calendar month, such sum being payable in arrear on the last day of each calendar month. 7. The remuneration payable under clause 6 hereof shall not be regarded as in any manner or to any extent intended to reimburse the secretaries in respect of any expenses in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eply thereto dated 19th December, 1963. These three letters have been made part of the statement of case in this reference before us. We may shortly refer to these three letters. By the letter dated the 30th October, 1963, the assessee had written to the Income-tax Officer that no single person in the office of the secretary devoted his whole time to the secretarial work but the categories of persons mentioned in the said letter rendered their several expert knowledge in the service of the company as was required, namely, the directors, senior executives, chief accountant, chief personnel officer, junior executive, taxation officer, sales tax officer. On receipt of this letter the Income-tax Officer wrote back on the 3rd December, 1963, enquiring of the assessee whether apart from specific duties mentioned in the said agreement any other duties were allotted to the secretaries as part of clause 4 of the said agreement and if so, to produce the necessary resolution of the board of directors. The Income-tax Officer further stated that the main duties as under the said agreement were that the secretaries should be responsible for keeping and the custody of the books and the statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000 out of Rs. 1,20,000 paid as secretaries' remuneration to Balmer Lawrie Co. Ltd ; (2) on the facts and in the circumstances of the case, the Appellate Assistant Commissioner should have allowed the entire amount of Rs. 1,20,000 and not merely Rs. 36,000 was an admissible deduction ; (3) that the Appellate Assistant Commissioner's decision that the sum of Rs. 1,20,000 paid as remuneration to the secretaries is excessive and that the reasonable remuneration for their services would be Rs. 36,000 is wholly arbitrary and not at all justified having regard to the nature and extent of the services rendered by the secretaries ; ...... (6) that the sum of Rs. 1,20,000 paid to the secretaries in terms of the agreement entered into by the appellant and the secretaries as normal business appointment was laid out wholly and exclusively for the purpose of the appellant's business and no part of it was disallowable under the provisions of section 40(c) of the Income-tax Act, 1961." It was contended on behalf of the assessee that the provisions of section 40(c)(i) were applicable only in the case of an individual whether he was a director or shareholder substantially interested ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und that the specialised services as per list given by the assessee did not amount to any variation of the normal duties of a secretary of a company. It was true, the Tribunal noted, that B. L. was reimbursed only for the services rendered by its staff but not towards the remuneration paid to its directors and senior executives but the Tribunal observed that B.L. was having several activities of its own and its directorial and top executive establishment was concerned with its own affairs and management. The expenses incurred in respect of the services rendered by the several departments of B.L. including those of taxation and personal officers and the Delhi representative were got reimbursed from the several companies. In fact, the Tribunal found the services of B.L. to the assessee, for which they had to be remunerated under the agreement were in fact only those of a secretary of a company. Having regard to the facts that B.L. had got much less remuneration in the earlier two years, that their responsibilities as secretary were much less than before and there was no secretary of the company in the earlier two years, the Tribunal was of the opinion that the remuneration paid from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax under section 40(c) of the Income-tax Act, 1961, and without a cross-appeal or cross-objections by the department, and after finding that section 40(c) was not applicable was it open to the Tribunal yet to sustain the disallowance partially under section 37 ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the entire remuneration allowed to the secretaries was not laid out wholly and exclusively for the purpose of the assessee's business and in determining the allowable amount of such remuneration at Rs. 60,000? " At the instance of the revenue, the Tribunal has also referred a third question, namely : " Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the provisions of section 40(c) of the Income-tax Act, 1961, could not be invoked to disallow any portion of the remuneration paid to Messrs. Balmer Lawrie Co. Ltd. ?" The first question with which we are concerned in this case is whether the Tribunal was competent to disallow a portion of the remuneration paid to B. L. under section 37 of the Income-tax Act, 1961, in the facts and cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax [1957] 31 ITR 294 (Bom), in the case of V. Ramaswamy Iyengar v. Commissioner of Income-tax [1960] 40 ITR 377 (Mad), in the case of F. Y. Khambhaty v. Commissioner of Income-tax [1966] 61 ITR 30 (Guj) and in the case of Seth Champalal Ramswarup v. Commissioner of Income-tax [1964] 52 ITR 201 (All). Reliance was placed on the decision in the case of Pathikonda Balasubba Setty v. Commissioner of Income-tax [1967] 65 ITR 252 (Mys). These decisions reiterate the principle there that the power of the Tribunal is limited to the subject-matter of the appeal and the scope of the respondent's right to support the order appealed from is also limited. The question, therefore, is what is the subject-matter of the appeal. We have noted the grounds of the appeal before the Tribunal. The assessee's grievance before the Tribunal was in fact that as the assessee stated in the grounds of appeal that the Appellate Assistant Commissioner erred in upholding the disallowance of Rs. 84,000 out of Rs. 1,20,000, so the grievance that was before the Tribunal was the disallowance of the sum of Rs. 84,000. It is not so much the grounds of disallowance that was appealed from but the factum of disallowance fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to disallow the claim of the assessee for allowance of the amount spent, if it was a permissible allowance on another ground. Whether the allowance was admissible under one head or another of sub-section (2) of section 10, the subject-matter of the appeal remained the same and the Tribunal having held that the expenditure incurred fell within the terms of section 10(2)(v), though not under section 10(2)(vib), it had jurisdiction to admit that expenditure as permissible allowance in the computation of the taxable income of the assessee. The Supreme Court observed that under section 33(4) of the Indian Income-tax Act, 1922, which is in similar terms to section 254 of the Income-tax Act, 1961, the Tribunal was competent to pass such orders on appeal " as it thinks fit ". There was nothing in the Income-tax Act which restricted the Tribunal to the determination of the questions raised before the departmental authority. All questions, whether of law or of fact, which related to the assessment of the assessee might be raised before the Tribunal. If for reasons recorded by the departmental authority in respect of a contention raised by the assessee, grant of relief to him on another gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'. (2) Notwithstanding anything contained in sub-section (1), no expenditure in the nature of entertainment expenditure shall be allowed in the case of a company, which exceeds the aggregate amount computed as hereunder : (i) On the first Rs. 10,00,000 of the profits and gains of the business (computed before making any allowance under section 33 or in respect of entertainment expenditure) at the rate of 1 % or Rs. 5,000, whichever is higher. (ii) On the next Rs. 40,00,000 of the profits and gains of the business (computed in the manner aforesaid) at the rate of 1/2% (iii) on the next Rs. 1,20,00,000 of the profits and gains of the business (computed in the manner aforesaid) at the rate of 1/4% (iv) on the balance of the profits and gains of the business (computed in the manner aforesaid) nil." " 40. Amounts not dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are expressions of judicial opinions. It was held by this court in the case of Mercantile Express Company (Private) Ltd. v. Commissioner of Income-tax [1963] 47 ITR 125 (Cal), the effect of section 10(4A) of the Indian Income-tax Act, 1922, was given by the Finance Act, 1956. After the introduction of the said sub-section it was for the Income-tax Officer to decide whether remuneration paid to a director was excessive or unreasonable and if there was no suggestion that the Income-tax Officer had travelled beyond the provisions laid down in the section, legitimate business needs of the company and the benefit derived by or accruing to the company therefrom and there was also no suggestion that the decision of the Income-tax Officer was arbitrary or capricious no question of law could be said to arise from the decision of the Income-tax Officer for reference to the High Court. This court observed that the result of the introduction of the new section was to get round the effect of the provision of the previous decision under section 10(2)(xv) and similar expression used in section 12(2) of the Indian Income-tax Act, 1922, reflected in the decision of the Newtone Studios Ltd. v. Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... views were expressed in the case of J.K. Woollen Manufacturers v. Commissioner of Income-tax [1969] 72 ITR 612 (SC). In the case of Bengal Enamel Works Ltd. v. Commissioner of Income-tax [1970] 77 ITR 119, the Supreme Court observed that where an amount paid to an employee pursuant to an agreement was excessive because of "extra-commercial considerations", the taxing authority had jurisdiction to disallow a part of the amount as expenditure not incurred wholly and exclusively for the purpose of the business. Indisputably an employer in fixing the remuneration, according to the Supreme Court, of his employee was entitled to take into consideration the extent of his business, the nature of duties to be performed, the special aptitude of the employee, the future prospects of the business and other related circumstances and the taxing authorities could not substitute their own view as to the reasonable remuneration which should have been agreed to be paid to the employees. But the taxing authority might disallow an expenditure claimed on the ground that the payment was not real or was not incurred by the assessee in the course of his business or that it was not laid out wholly and exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts found by the Tribunal cannot be challenged and have not been challenged before us by the assessee. Therefore, we must proceed on these facts. These facts were that the payments were made to a company which was the assessee's holding company or a company which could influence the assessee's voting power or decision. This is not in dispute. It was contended that so far as the Tribunal had held that the services rendered by the assessee was purely secretarial the said conclusion was an inferential conclusion and the same was open for examination in the frame of the question that has been posed before us. In this connection reliance was placed on the decision in the case of Commissioner of Income-tax v. S. P. Jain [1973] 87 ITR 370 (SC). Without entering into any detailed examination of the said decision we are of the opinion that the inference drawn by the Tribunal on the said agreement is a possible one. The other facts, as mentioned in the beginning of the judgment, upon which the Tribunal has relied, cannot be termed as irrelevant and are not inferential findings. Therefore, having regard to the facts and circumstances of the case, if the Tribunal has come to the conclusion t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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