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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

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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

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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

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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

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