http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

PETITIONER: COMMISSIONER OF INCOME-TAX, BOMBAY

       Vs.

RESPONDENT: M/S.  WALCHAND & CO. (PVT.) LTD., BOMBAY

DATE OF JUDGMENT: 17/03/1967

BENCH: SHAH, J.C. BENCH: SHAH, J.C. SIKRI, S.M. RAMASWAMI, V.

CITATION:  1967 AIR 1435            1967 SCR  (3) 214  CITATOR INFO :  F          1969 SC 609  (5)  RF         1970 SC1076  (8)  R          1973 SC 520  (9)  F          1976 SC 640  (11)

ACT: Indian Income-tax Act (11 of 1922), ss. 10(2)(xv) and 33(4)- Increase   in  Director’s  remuneration  not  reflected   in assessee’s profits--If allowable. Appellate   Tribunal-Jirisdiction-Reasons  in   support   of decisions, if necessary.

HEADNOTE: The  Income-tax  Officer  disallowed  the  increase  in  the remuneration off the Directors and Officers of the assessee- company  since  the  increase  was  not  reflected  in  ’,he increase  in  the profits of the assessee and  was  on  that account not expenditure laid out wholly and exclusively  for the  purposes  of  the business under s.  10(2)(xv)  of  the Income-,tax  Act.  The order was modified by  the  Appellate Tribunal.  On reference the High Court answered the question against the Revenue, holding that the Tribunal acted without evidence in partially disallowing the increase in respect of certain officers. In appeal to this Court, HELD : The appeal must be dismissed. The  practice  of recording a decision  without  reasons  in support  cannot  but  be severely  deprecated.   Though  the Tribunal is not a Court, it is invested with judicial  power to  lie  exercised  in  manner  similar  to  the  procedure. Authority to "pass such orders thereon as it thinks fit"  in s.  33(4) of the Income-tax Act, 1922 is not arbitrary;  the expression is intended   to  define the jurisdiction or  the Tribunal  to deal with and determine questions  which  arise out of the subject-matter of the appeal in the light of  the evidence, and consistently with the justice of the case.  In the  hierarchy of authorities the Appellate Tribunal is  the final factfinding body : its decisions on questions of  fact are  not  liable  to be questioned before  the  High  Court. [216H-217C] When a claim for allowance under s. 10(2)(xv) of the  Income

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

tax  Act is made, the income-tax authorities have to  decide whether the expenditure claimed as an allowance was incurred voluntarily  and  on grounds of commercial  expediency.   In applying  the test of commercial expediency for  determining whether the expenditure was wholly and exclusively laid  out for  the purpose of -the business, reasonableness,  of  tile expenditure  must be adjudged from the point of view of  the businessman and not of the Revenue.  An employer in,  fixing the  remuneration of his employees is entitled  to  consider the  extent of his business, the nature of the duties to  be performed, and the special altitude of the employee,  future Prospects  of extension of the business and a host of  other related circumstances.  The rule that increased remuneration can only be justified if there be corresponding increase  in the profits of the employer is erroneous. [217F-218B] 218B]

JUDGMENT: CIVIL APPELLATE,ARE JURISDICTION : Civil Appeals Nos. 279 and 280 of 1966, 215 Appeals  by special leave from the judgment and order  dated September  4,  1962 of the Bombay High Court  in  Income-tax Reference No. 23 of 1961. S.   K.  Mitra, T. A. Ramachandran, S. P. Nayyar for  R.  N. Sachthey, for the appellant (in both the appeals). J.   B. Dadachanji and O. C. Math r, for the respondent  (in both the appeals). The  Judgment  of the Court was delivered by  Shah,  J.  The respondent (hereinafter called ’the assessee’) is a  private limited  Company registered under the Companies  Act,  1913. The  assessee carries on the business of acting as  Managing Agents  for nine public limited Companies.  The business  of the assessee was managed by three Directors.  Each  Director was  paid  a  remuneration  of Rs.  2,500  per  month.   The assessee had employed three executive officers to administer its  affairs.   By  resolution  dated  July  9,  1952,   the remuneration  of each of the Directors of the  assessee  was increased  with retrospective effect from April 1,  1952  by Rs. 1,000 per month and of two out of the three officers  by Rs.  500 per month and of the remaining officer by  Rs.  750 per month.  In the year 1953 the remuneration of each of the Directors was increased by Rs. 500 per month and of each  of the officers by Rs. 250 per month. In proceedings for assessment of income for the years  1953- 54  and  1954-55  the Income-tax  Officer  called  upon  the assessee to show cause why the increase in the  remuneration of  the Directors and officers should not be  disallowed  in the computation of the taxable income of the assessee.   The assessee   submitted   that  the   managed   Companies   had considerably  increased  the  area  and  activities  of  the business  and they had undertaken new lines  which  entailed greater  burden  on  the  Directors  and  officers  of   the assessee.  The Income-tax Officer disallowed the increase in the  remuneration  of  the Directors  and  officers  of  the assessee.  He was of the view that since the increase in the remuneration  or  the  salary  of  the  officers  "was   not reflected  in the increase in the profits of the  assessee", it was not expenditure which could be justified as laid  out wholly  and  necessarily for the purposes  of  the  business under  s.  10 (2) (xv) of the Indian  Income-,tax  Act.   In appeal,  the Appellate Assistant Commissioner confirmed  the order.  The Income-tax Appellate Tribunal modified the order of  assessment.  The Tribunal observed that "it was not  for

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

the Income-tax Officer to run the assessee’s business and to fix the salary of every member of the staff.  That, however, does  not  mean  that it is open to  an  assessee  to  allow unreasonable  rise in the salaries without a  valid  reason. It  may  amount to giving a gift in the garb of  a  salary". The Tribunal then directed that 216 considering the salaries previously drawn ’by the Directors, "salary  at the rate of Rs. 4,000 per month in each case  be allowed  as a revenue deduction".  In making this order  the Tribunal  apparently  lost  sight of the fact  that  in  the account  year 1952-53 the Directors received Rs.  42,000  as remuneration for the whole year, and it was only in the year 1953-54   that   the  Directors  received  Ps.   48,000   as remuneration.  The Tribunal also directed that in regard  to each employee increase in salary not exceeding Rs. 3,000 per annum  as  compared to the preceding  year’s  assessment  be allowed  as a permissible deduction.  The Tribunal  gave  no reasons  for disallowing the balance of the salary  paid  to the three officers. The Tribunal submitted the following question for determina- tion of the High Court of Bombay :-               "Whether on the facts and in the circumstances               of   the  case  the  Tribunal  acted   without               evidence  in  disallowing Rs.  30,000  (Rupees               thirty thousand) ?" The  High  Court  was of the view that  the  Tribunal  acted without  evidence in partially disallowing the  increase  in the remuneration of the three executive officers during  the assessment  years 1953-54 and 1954-55.  The Commissioner  of Income-tax has appealed to this Court, with special leave. The assessee claimed the additional remuneration paid to the Directors  and  to the executive officers as  a  permissible allowance  under s. 10(2)(xv) of the Indian Income-tax  Act, 1922 which reads "Such  profits or gains shall be computed after making  tile following allowances, namely               (xv)  any  expenditure not being an  allowance               of the nature described in any of the  clauses               (i)  to (xiv) inclusive, and not being in  the               nature  of  capital  expenditure  or  personal               expenses of the assessee laid out or  expended               wholly and exclusively for the purpose of such               business, profession or vocation." The  remuneration paid to the executive officers was not  of the nature allowable under cls. (i) to (xiv) : nor was it of the  nature of capital expenditure, or personal expenses  of the, assessee.  The Income-tax Officer disallowed the entire increase  in  the  remuneration  holding  that  it  was  not expended  "wholly and necessarily" for the purpose  of  such business.   The  Tribunal without  recording  ’lily  reasons partially disallowed the amount as a permissible. deduction. It is necessary to emphasize that though the Tribunal 217 is  not  a Court, it is invested with judicial power  to  be exercised  in manner similar to the exercise of power of  an appellate  Court acting under the Code of  Civil  Procedure. Authority to ’;pass such orders thereon as it thinks fit" in s. 33(4) of the Income-tax Act, 1922, is not arbitrary : the expression  is intended to define the jurisdiction  ’of  the Tribunal  to deal with and determine questions  which  arise out of the subject-matter of the appeal in the light of  the evidence, and consistently with the justice of the else.  In the  hierarchy of authorities the Appellate Tribunal is  the final fact-finding body; its decisions on questions of  fact

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

are not liable to be questioned before the High Court.   The nature at the jurisdiction predicates that the Tribunal will approach  and decide the case in a judicial spirit  and  for that purpose it must indicate the disputed questions  before it  with  evidence  pro and con and record  its  reasons  in support  of  the  decision.  The  practice  of  recording  a decision  without reasons in support cannot but be  severely deprecated. In paragraph 2 of their order the Tribunal correctly set out the   principle  applicable  to  claims  for  deduction   of expenditure  incurred  in  payment of  remuneration  to  its employees by the assessee.  But for partially rejecting  the claim  for  allowance of the amount paid,  no  reasons  were recorded.    If   the  Tribunal  was  satisfied   that   the expenditure was laid out or expended wholly and  exclusively for the purpose of the business of the assessee there was no reason  why  the full amount expended should not  have  been allowed.  It is open to the Tribunal to come to a conclusion either  that the alleged payment is not real or that  it  is not incurred by the assessee in the character of a trader or that  it  is  not laid out wholly and  exclusively  for  the purpose of the business of the assessee and to disallow  it. But it is not the function of the Tribunal to determine  the remuneration  which  in  their view should  be  paid  to  In employee of the assessee.  When a claim for allowance  under s. 10 (2) (xv) of the Income-tax Act is made, the Income-tax authorities  have to decide whether the expenditure  claimed as  an allowance was incurred voluntarily and on grounds  of commercial  expediency.  In applying the test of  commercial expediency  for  determining  whether  the  expenditure  was wholly  and  exclusively  laid out for the  purpose  of  the business,  reasonableness  of  the  Expenditure  has  to  be adjudged  from the point of view of the businessman and  not of  the  Revenue.  The Income-tax Officer was  of  the  view that  there was no adequate increase in the earnings of  the assessee, for the increase in remuneration was not reflected in   the  increase  in profits of the assessee and  that  it appeared  that  is  compared  to  the  previous  years,  the business profits disclosed by the assessee had fallen by Rs. 2  lakhs and therefore the increase a expenditure could  not be  justified  as laid out wholly and  necessarily  for  the purposes  of  the business.  But an employer in  fixing  the remuneration  of his employees is entitled to  consider  the extent 218 of his business, the nature of the duties to be  performed., and  the special aptitude of the employee, future  prospects of  extension  of the business and a host of  other  related circumstances.   The  rule that increased  remuneration  can only be justified if there be corresponding increase in  the profits of the employer is, in our judgment, erroneous. The Tribunal did not agree with the view, of the  Income-tax Officer.   That  is  clear from  the  observations  made  in paragraph  2  of their order.  But,  without  assigning  any reasons, the Tribunal allowed the claim only partially.  The High  Court on a careful consideration has pointed out  that the work of the assessee has increased considerably and  has become  more  strenuous by reason of the prosperity  of  the managed Companies and it would be reasonable and natural  to infer  -that "the strain on both the Directors and  the  top executives  had  increased  justifying  increase  in   their remunerations.  In their view the fact that additional remu- neration  was  not sanctioned in favour of  other  executive officers  is  by  itself  not a  ground  for  regarding  the expenditure   incurred   as  otherwise   than   wholly   and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5  

exclusively  laid  out or expended for the put-pose  of  the business.   We agree with the High Court that the  order  of the  Tribunal  disallowing the claim for  allowance  of  the whole  of the additional remuneration was not  supported  by any evidence. The appeals therefore fail and are dismissed with costs. One hearing fee. Y.P.                                                 Appeals dismissed. LA Sup.C1/67--2,500,-23-1-68-GlPF. 219