PETITIONER: BENGAL ENAMEL WORKS LTD. Vs. RESPONDENT: COMMISSIONER OF INCOME-TAX, WEST BENGAL DATE OF JUDGMENT: 09/12/1969 BENCH: SHAH, J.C. (CJ) BENCH: SHAH, J.C. (CJ) HEGDE, K.S. CITATION: 1970 AIR 1076 1970 SCR (3) 314 1970 SCC (1) 112 ACT: Income-tax Act (11 of 1922), s. 10(2)(xv)-Payment of remuneration by, employer to employee-Jurisdiction of tax officers to hold that expenditure was not laid wholly and exclusively for the purpose of business-Whether question of Law. HEADNOTE: The appellant, which was doing the business of manufacturing enamelled ware, appointed a technical adviser and the Board of Directors resolved to pay him 15% of the gross annual profits as his remuneration. .For the assessment years, 1951-52, 1952-53 and 1953-54, the appellant claimed the amounts paid to the technical adviser as admissible allowances under s. 10(2)(xv) of the Income-tax Act, 1922. The Income-tax Officer found, that the technical adviser was a doctor of medicine without any special qualification for the post, that he was not trained in the technique of enamelled ware, that he and his father-in law, by the number of shares they held, were able to control the voting before the Board of Directors, that good technical experts in enamelling could have been secured for a smaller remuneration, that the remuneration agreed to be paid to the technical adviser was influenced by extra-commercial considerations and therefore, disallowed a part of the amount, holding that it was expenditure not incurred wholly and exclusively for the purpose of the business. The order was confirmed by the Appellant Assistant Commissioner, the Tribunal and the High Court. In appeal to this Court. HELD : The question whether an amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of the business must be decided on the facts and circumstances of each case, and the inference drawn from the facts found is one of law. Ordinarily, an employer, in fixing the remuneration of his employee, is 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 cannot substitute their own view as to the reasonable remuneration which should have, been agreed to be paid to the employee. But, the taxing authority may disallow an expenditure claimed, on the ground that the payment is not real or is not incured by the assessee in the course of his business or that it is not laid out wholly and exclusively for the pur- pose of the business. In doing so, the authority does not substitute its own view of how the assessee's business affairs should be managed, but proceeds to disallow the expenditure, because, the condition of its admissibility is absent. [316 B, D; 317 F-H', 318 A, D] Swadeshi Cotton Mills Co. Ltd. v. C.I.T., U.P. 63 I.T.R. 57 (S.C.), followed. JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 2143 to
2145 of 1968.
315
Appeals from the judgments and orders dated March 18, 1965
of the Calcutta High Court in Income-tax References Nos.
154, 155. and 156 of 1961.
M.C. Chagla, P. C. Bhartari, and 0. C. Mathur, for the
appellant (in C.As. Nos. 2143 and 2144 of 1968).
S.Mitra, P. C. Bhartari and 0. C. Mathur, for the
appellant (in C.A. No. 2145 of 1968).
S.T. Desai, S. K. Aiyar and B. D. Sharma, for the respondent
(in all the appeals).
The Judgment of the Court delivered by
Shah, Actng C.J. These appeals relate to the assessment to
tax of M/s. Bengal Enamel Works Ltd.-a public limited com-
pany-for the assessment years 1951-52, 1952-53 and 1953-54.
The Company is doing business of manufacturing “enamelled-
ware. It had originally employed a “technician’ at a
monthly salary of Rs. 5001-. In June 1941 the technician
was relieved, and one Col. Bhattacharya who was a director
of the Company was appointed its “Technical Adviser.” He was
to receive as remuneration 15% of the gross annual profits
of the Company. Col. Bhattacharya resigned his office and
Dr. Ganguly (son-inlaw of Col. Bhattacharya) was appointed
to that office. The Board of Directors resolved on May 18,
1950 to pay to Dr. Ganguly 15% of the gross annual profits
(without deducting depreciation) as his remuneration.
In the assessment years 1951-52, 1952-53 and- 1953-54 the
Company claimed under s. 10(2) (xv) of the Income-tax Act,
1922, as admissible allowance, in computing its taxable
income, Rs. 52,947/-, Rs. 64,356/- and Rs. 79,227/-
respectively, paid as remuneration to Dr. Ganguly under the
terms of the resolution dated May 48, 1950. The Income-tax
Officer, Companies District III, Calcutta, allowed for each
of the years remuneration at the rate of Rs. 42,000/- only
as a permissible deduction. The order was confirmed in
appeal to the Appellate Assistant Commissioner and by the
Tribunal.
The Tribunal referred in respect of each of the three years
the following question:
“Whether on the facts and in the circumstances of the case,
the disallowance of a part of the expenses incurred by the
assessee ‘for payment of remuneration to its Technical
Adviser is permissible under the Provisions of s. 10(2) (xv)
of the Indian Income-tax Act)”
216
The High Court answered the question in the affirmative, and
-disallowed the claim of the Company. With certificate of
fitness, these appeals are preferred against the order of
the High Court.
In computing the taxable income of an assessee, whether an
amount claimed as expenditure was laid out or expended
wholly and exclusively for the purpose of the, business,
profession or vocation of the assessee must be decided on
the facts and in the light, of the circumstances of each
case : Swadeshi Cotton Mills Co. Ltd. vs. Commissioner of
Income-tax, U.P.(1). Resolution of the assessee fixing the
remuneration to be paid to an employee and production of
vouchers for payment together with proof of rendering
service do not exclude an enquiry whether the expenditure
was laid out wholly and exclusively for the purpose of the
assessee’s business. It is open to the Tax Officers to
hold agreement to pay and payment notwithstanding-that the
expenditure was not laid out wholly and exclusively for the
purpose of the business: Swadeshi Cotton Mills Co.Ltd.’s
case(‘). But an inference from the facts found that the
expenditure was, wholly and exclusively laid out for the
purpose of the business is one of law and not of fact, and
the High Court in a reference under s. 66 of the Income-tax
Act is competent to decide that the inference raised by the
Tribunal is erroneous in law.
In the present case, the facts found are these : Col.
Bhattacharya and his son-in-law Dr. Ganguly were two of the
directors of the Company who between them held on January 1,
1950 49% of the total number of shares of the Company and
the other directors of the Company held only I % of the
shares. Dr. Ganguly had received no training in the
technique of enamelling : he was a medical practitioner
earning Rs. 20,000/- per annum by the exercise of his
profession. Apparently no applications were invited for the
appointment of a Technical Adviser when Col. Bhattacharya
resigned his office. In the resolution passed by the
Directors it was recorded that many “personal enquiries”
regarding the post were made, but no candidate was found
suitable The Board, it was recorded, considered the
applications of S. Urbeneck and J. Schulser but the
qualifications of these two candidates did not impress the
directors: moreover the terms of service offered by J.
Schulser were not acceptable to the Board and therefore the
only applicant Dr. Ganguly who was working on Probation in
the post for some time past and had worked without
remuneration up to December 31, 1949 was considered the
applications of S. urbeneck and J. Schulser though called
for by the Incometax Officer were not produced by the Com-
pany. At the relevant time “a good technical expert in
enamelling”
(1) 63 I.T . R. 57.
317
could be secured for a monthly remuneration of Rs. 1,000/-
or Rs. 1,200/- provided that appointment was not for a short
period.
In the view of the Income-tax Officer, Dr. Ganguly came to
be appointed to the post of Technical Adviser of the Company
as soon as, his father-in-law vacated the post and “the
generous remuneration offered to him was influenced by
factors other than commercial considerations, and
considering that Dr. Ganguly was giving up his professional
practice in allopathic medicine which yielded him an annual
income of Rs. 20,000/- to engage himself as a whole-time
Adviser attending to the development of the industry a gross
remuneration of Rs. 3,500/- per month, beside
the .remuneration of Rs. 1,000/- per month that he obtained
as Secretary of the Managing Agents of the Company, would be
adequate.” With that view the Applicate Assistant
Commissioner and the Income-tax Appellate Tribunal have
substantially agreed. The Tribunal observed that they were
inclined to conclude that “extra-commercial considerations”
had influenced the fixation of remuneration of Dr. Ganguly
and that partial disallowance of the remuneration “so
influenced seems quite fair”.
Counsel for the Company urged, relying upon the judgments of
this Court in J. K. Woollen Manufacturers v. Commissioner of
Income-tax, U.P.(1) and Commissioner of Income-tax, Bombay
v. Walchand & Co. Private Ltd.(‘) that in determining the
admissibility of an allowance as expenditure laid out and
expended wholly and exclusively for thee purpose of the
business has to be adjudged from the point of view of the
employer and not of the revenue, the Taxing authorities had
no power to disallow the remuneration paid to its Technical
Adviser, merely because they think that the Company may
probably have secured the services of another Adviser for a
smaller remuneration. But these cases, in our judgment,
have no bearing here. The departmental authorities have not
attempted to reduce the allowance on the ground that the
remuneration paid to Dr. Ganguli was in their view
excessive. Indisputably an employer in fixing the remu-
neration of his employee is 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 cannot
substitute their own view as to the reasonable remuneration
which should have been agreed to be paid to the employee.
But the taxing authority may disallow an expenditure claimed
on the ground that the payment is not real or is not
incurred by the assessee in the course of his business, or
that it is not laid out wholly and exclusively for the
purpose of the business
(1) A.I.R. 1969. S.C. 609.
(2) 65 I.T.R. 381.
318
of the assessee. Thereby the authority does not substitute
its own view of how, the assessee’s business affairs should
be managed, but proceeds to disallow the expenditure because
the condition of its admissibility is absent.
It, has been uniformly found by all the authorities that the
remuneration agreed to be paid to Dr. Ganguly was influenced
by “extra-commercial considerations”. Dr. . Ganguly and
Col. Bhattacharya were able to control the voting before
the Board of Directors. Dr. Ganguly was not trained in the
technique of . enamelled-ware,” and had no special
qualifications for the post. The remuneration agreed to be
paid was much in excess of what was normally payable, and
also of what Dr. Ganguly was earning by practising his
profession as a doctor of medicine. The criticism that the
Tribunal’s finding was based on no evidence or was based on
irrelevant considerations cannot therefore be accepted.
Where an amount paid to an-employee pursuant to an agreement
is excessive because of “extra-commercial considerations,”
the taxing authority has jurisdiction to disallow a part of
the amount as expenditure not incurred wholly and “elusively
for the purpose of the business : Swadeshi Cotton Mills Co.
Ltd.
The appeals fail and are dismissed with costs. One hearing
fee.
V.P.S. Appeals dismissed.
(1) 63 I.T.R. 57.
319