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TMI Blog1974 (8) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... rs which is to the following effect: Assessment year Turnover Profit as per P L A/C. Rs. Rs. 1960-61 9,19,234 314 1961-62 9,41,963 460 1962-63 10,91,800 1,838 The net profits for 1961-62 and 1962-63 indicated above were after deducting the remuneration of Rs. 12,000 per annum given to Sri D. N. Sinha. In the course of the assessment for the assessment years 1961-62 and 1962-63, the question arose as to whether the remuneration to the managing director as claimed could be allowed. In the assessment order for 1961-62, the Income-tax Officer disallowed Rs. 2,000 out of Rs. 12,000 claimed as his remuneration for the following reasons: "It is true that the assessee's business has shown an upward trend and it is quite likely that some portion of this increase is really due to additional services rendered by the managing director. But I do not fully agree with the assessee's contention that the entire increase in the turnover is due to the managing director's additional services to the company or that the increase in the remuneration is commensurate with the increase in turnover. As the business grows older the volume of transactions normally rises. Especially, in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of law to this court under section 256(1) of the Income-tax Act, 1961. The Tribunal declined to refer any question. On an application made to this court under section 256(2) of the Income-tax Act, 1961, the following two questions have been referred to this court: "(1) Whether, on the facts and in the circumstances of the case, the increase in the managing director's remuneration, having regard to commercial expediency, and the future prospect of extension of the company's business, which resulted in an increase in the volume of transaction without a corresponding increase in the company's net profit, would be an admissible item of expenditure within the meaning of section 10(2)(xv) ? (2) If the answer to question No. (1) is in the negative, whether, on the facts and circumstances of the case, the test applied by the Tribunal in determining the admissibility of increased remuneration paid to the managing director in the year under account would be erroneous in law after the judgment delivered by the Supreme Court formulating the rule of test in similar case for determining the admissibility of increased remuneration paid to the employee of a companv in Commissioner of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earning the profits it was not necessary to show that the same was incurred out of "necessity". If, however, the reality of the payment was challenged or was in dispute, different considerations might arise or in case where there was an evidence pointing to some other considerations other than the purpose of business as accounting for payment of any remuneration made to an employee or a director. In such cases such portion of the amount claimed which was either not held to have been paid or paid for reasons other than the business expediency should be disallowed; and the reason for this was that either the portion disallowed was not paid or that the expenditure or a portion of it was not incurred solely and exclusively for the business of the assessee, and not on the ground that the taxing authority considered the remuneration was high or that with lesser remuneration the same services could have been obtained. Where, however, action is taken under section 10(4A) of the Act, different considerations arise. Under the said provision the Income-tax Officer can disallow an expenditure or portion thereof in the case of companies, which results either directly or indirectly in the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... month and this was not considered by the directors to be inadequate for discharging their responsibility. The Supreme Court recorded that though in the accounting year the gross profits had been increased by about Rs. 30 lakhs, the increase was due to control of cloth having been lifted and not due to any effort on the part of the directors. It was also found that the assessee had stated that the payment of additional remuneration was made to the directors because there were three other companies to whom the assessee had also paid similar additional remuneration but no evidence to this effect was also forthcoming. In those special features of the case the Supreme Court found that there was evidence for the income-tax authorities to come to the conclusion that the increased remuneration was not due exclusively and wholly for the purpose of the assessee's business but for other considerations. In that case, in our opinion, the increased remuneration was not disallowed because the revenue authorities found that the increased remuneration was unreasonable or that same services could have been had without the increased remuneration. It is true that certain facts might justify disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e conclusion either that the alleged payment was not real or that it was not incurred by the assessee in the character of a trader or it was not laid out wholly and exclusively for the purpose of business of the assessee and to disallow it. It was not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee. In the case of Commissioner of Income-tax v. S. Krishna Rao, the Andhra Pradesh High Court observed that the test to find out whether a particular expenditure was wholly or partly justified or exclusively incurred for the purpose of business was not to see whether it was necessary nor would it be proper to see whether any other person similarly situated would have thought it reasonable to incur the expenditure to that extent. The true test, the Andhra Pradesh High Court felt, was to find out whether the businessman when he expended the money was acting reasonably in the interest of the business or influenced by any irrelevant and extraneous considerations. In the case of Bengal Enamel Works Ltd. v. Commissioner of Income-tax, the Supreme Court reiterated that where an amount paid to an employee pursuant to an a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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