ORDER
Arijit Pasayat, C.J.
1. In compliance with the directions given by this Court by Order dated 30th March, 1978 in ITC No. 15/75, following question has been referred for opinion of this Court under Section 256(2) of the Incometax Act, 1961 (in short the Act) by the Incometax Appellate Tribunal, Delhi Bench 'B' (in short the Tribunal), "Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 30,000/- paid to the two Directors B.K. Khanna and K.N. Khanna is not an allowable deduction?" Factual position in nut shell is as follows.
2. Assessee is a Private Limited company. It is a closely held company and its four Directors are close relatives. For the assessment year 1966-67 relevant to the previous year ending on 31.8.1965, claim was made in respect of alleged payment of Rs. 30,000/- to two of its Directors, namely K.N. Khanna and B.K. Khanna. The payment was purportedly made for agreeing not to carry on any further business of promotion of companies for a period of five years and to carry it on only in the name of the company for that period and for its benefit. Assessing Officer disallowed the claim on the ground that the amount cannot be said to have been laid out wholly and exclusively for the purpose of company’s business. Matter was carried in appeal before the Appellate Assistant Commissioner (in short the AAC). Said authority held that the expenditure was not of capital nature as there was no benefit of enduring nature and the company had agreed to pay Rs. 30,000/- to the two Directors because of their agreement not to carry on any further business of promotion of limited companies for a limited period of five years. It was, inter alia, observed that the expenditure relating to payment was incidental to the assessee’s business and, therefore, was laid out wholly and exclusively for the purpose of its business. Matter was carried in further appeal before the Tribunal by the revenue. After considering the factual aspects Tribunal recorded the following finding :
“In view of the position of the Directors explained above, it was of utmost importance for S/Shri B.K. Khanna and K.N. Khanna to act in the best interests of the company. They were standing in a fiduciary position towards the company. Therefore, any arrangement between them and the company must be of utmost bonafides. In our opinion the arrangement entered into between the two Managing Directors S/Shri B.K. Khanna and K.N. Khanna and the company was not only not bona fide but of a collusive nature. The entire management of the affairs of the company was in the hands of these two Directors. The other two Directors in the Board of Directors of this company were ladies. In the circumstances the interests of the company coalesced with those of the Directors. Therefore in promoting the new companies on their own, there would have been a conflict with the interests of the company. As already stated above, the Directors were bound to disregard their own private interest where a regard of those interest came in conflict with the proper discharge of their duties towards the company. Apart from this there is no material on the record to test a finding that these two Directors were as a matter of fact carrying on the business of floating new companies. On the other hand, the Departmental representative produced a copy of a letter dated 3.10.1962 from the Under Secretary to the Government of India, Ministry of Steel and Heavy Industries to the address of Messers. K.N. Khanna and B.K. Khanna by which the Government revoked the licences of industrial undertakings granted to them under the Industries (Development and Regulation) Act, 1951. This letter is a clear indication that these two directors were not in a position to promote new companies after revocation of the licences. They did the same work in the name of the company and by doing so, they did not part with any valuable right vesting in them. They could not legitimately be paid anything for doing that work, which they were otherwise bound to do for the company. For the foregoing reasons, we hold that the payments made to them could not be allowed to the company as admissible deductions.”
3. “Expenditure” relates to disbursements that means something that a trader pays out indicating a sort of volition on his part. He chooses to pay out some disbursement; it is an expense; it is something which comes out of his pocket. A business expenditure is allowable if it is laid out or expended wholly and exclusively for the assessee’s business. Section 37 of the Act appears in ChapterIV, relating to Computation of Total Income. Said provision deals with “General” expenditures. Section 37(1) reads as follows:
“37(1). Any expenditure (not being 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.”
Explanation. For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.”
4. An analysis of Section 37(1) shows tha t:
(i) Any expenditure;
(ii) not being expenditure of the nature described in Sections 30 to 36 (for assessment years 1976-77 to 1985-86) and Section 80VV.
(iii) not being in the nature of capital expenditure, or
(iv) personal expenses of the assessee;
(v) laid out or expended;
(vi) wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.
In other words, to be an allowable expenditure, within Section 37(1), the money paid out or away must be (a) paid out wholly and exclusively for the purpose of the business or profession and further: (b) must not be (i) capital expenditure, (ii) personal expenses or (iii) an allowance of the character described in Sections 30 to 36 (for assessment years 1976-77 to 1985-86, and Section 80VV). “Spending” in the sense of “paying out or away” of money is the primary meaning of “expenditure”. Said word (expenditure) means what is paid out or away and is something which is gone irretrievably.
5. The word “wholly” refers to quantum of expenditure. The word “exclusively” refers to the motive objective and purpose of the expenditure and gives jurisdiction to the taxing authorities to examine these matters. The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader [See: Commissioner of Incometax Vs. Delhi Safe Deposit Co. Ltd., (1982) 133 ITR 756]. It has to be examined whether the expense has been incurred with the sole object of furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration. If the expense is found to bear an element other than the trade or business interest of the assessee the expenditure is not allowable one.
6. Tribunal noted that the assessee company is a closely held company and all the four directors are closely related. There were two working directors, i.e., male Directors and other two were ladies. Payments were made on the basis of letter dated 7.7.1960 for the two working Directors in consideration of their agreeing not to carry on business of a particular nature. It has to be noted that as is settled law, Directors are to some extent trustees for the company and to certain extent they are also its agents. They stand in a fiduciary position towards the company. In the illustrated case of Aberdeen Railway Co. Vs. Blacking, (1854) 1 Macq. 365 the position was illuminatingly summed up as follows:
“The directors are a body to whom is delegated the duty of managing the general affairs of the company. A corporate body can only act by agents and it is of course the duty of those agents so as best to promote the interests of the corporation on whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principals. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting or which may conflict, with the interests of those whom he is bound to protect. So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into……. So inflexible is the rule that no inquiry on that subject is permitted.”
7. Tribunal noticed that the payment was not for agreeing to not to carry on any similar business but for carrying it on for the assessee company. This position was accepted by assessee’s learned counsel before Tribunal. Therefore, it was held that qua the company it was a capital expenditure. Therefore, the amount was not deductible under Section 37(1).
8. Additionally, conclusion of the Tribunal is to the effect that the arrangement between the Managing Directors and the company was not only not bona fide but of a collusive nature. Above being factual findings, no question of law is involved, we, therefore, decline to answer the question referred.
9. The reference is accordingly returned unanswered.
