BALAKRISHNA ERADI, J. -
(1.) THIS is a reference made by the Income-tax Appellate Tribunal, Madras Bench, under section 66(1) of the Income-tax Act, 1922 (hereinafter referred to as the Act) and the question referred to this court for decision is :
"Whether, on the facts and in the circumstances of the case, the disallowance of Rs. 16,977 from out of the salary paid to T. Mohammed Farooq is justified."
(2.) THE assessee, Haji K. Assainar, was carrying on business in rice and provisions on wholesale basis with head office at Changanacherry and branches at Kottayam and Cochin. THE relevant assessment year is 1959-60 and the accounting period is the Malayalam year 1133 ending on August 16, 1958.
In the Cochin branch the assessees main business consisted of commission agency sales. The net profit of this branch as per the assessees books was Rs. 1,16,265. In arriving at this amount, the assessee had claimed deduction of a sum of Rs. 19,377 stated to have been paid to one Mohammed Farooq by way of remuneration. The said Mohammed Farooq is the son of a sister-in-law of the assessee. He was employed by the assessee under an agreement dated August 17, 1957, executed between the assessee and Farooq, whereunder his remuneration was fixed at Rs 0-2-0 per rupee in the profit of the Cochin branch or Rs. 2,400 whichever was higher. He was designated as secretary, and as per the agreement his duties were to exercise administrative control over the staff and to initiate and carry out the policies of the business, subject to overall control and directions of the assessee. At the time of the agreement Farooq was aged only 20 year and he had passed the Pre-University Examination held in March, 1957. He had joined the B.Sc. Degree Course at the beginning of the academic year 1957-58, but abandoned his studies in August, 1957, in order to take up employment under the assessee as per the aforesaid agreement. A copy of the agreement has been forwarded to this court as annexure "A" to the statement of the case.
The Income-tax Officer was of opinion that, having regard to the fact that Mohammed Farooq was only a student aged 20 year on the date of the agreement, and had no special training in commercial accountancy or business organisation, and considering the nature of the duties actually performed by him in the Cochin branch, where even the experienced accountants were being paid by the assessee only salaries less than Rs. 150 per month, the entire amount of remuneration credited to the account of Farooq could not be regarded as expenditure laid out or expended wholly and exclusively for the purpose of the assessees business. In the view of the Income-tax Officer the payment was motivated by considerations other than commercial expediency. The accounts disclosed that Mohammed Farooq had actually drawn only Rs. 1,716.89 during the accounting year in question. But, nevertheless, the Income-tax Officer allowed an amount of Rs. 2,400, being the minimum salary mentioned in the agreement as payable to Farooq and he added back the balance as payment made for consideration other than business.
(3.) THE assessee took up the matter in appeal to the Appellate Assistant Commissioner. It was contended before the appellate authority that, even though Mohammed Farooq had not qualified himself in accountancy and business management, he had read some books on these subjects and that he was also familiar with three languages, viz., English, Hindi and Tamil. It was further urged on behalf of the assessee that there was an increase of one lakh in the commission receipts in the Cochin branch during the accounting period due to the efforts of Mohammed Farooq. On these grounds it was contended that the disallowance by the Income-tax Officer of the major portion of the remuneration paid to Farooq was unjustified. THE Appellate Assistant Commissioner did not accept the aforesaid contentions of the assessee. He was not satisfied that the increase in the commission receipts was to any extent due to the employment of Farooq in the Cochin branch. On the other hand he was of the view that the probability was that the increase was due to more favorable trading conditions and also to the circumstance that the assessee was himself concentrating his personal attention on the business at Cochin during the relevant accounting period. It was also found by the Appellate Assistant Commissioner that, although the recitals in the agreement would create the impression that Farooq was to exercise administrative control over the staff and to initiate and carry out the policies of the business in the Cochin branch, he was not, as a matter of fact, entrusted with any such responsible functions and the business was being conducted under the direct supervision and control of the assessee himself. He, therefore, concurred with the Income-tax Officer in his finding that the expenditure of which deduction was claimed by the assessee was not laid out or expended wholly and exclusively for the purpose of his business, but was, on the other hand, motivated by considerations which were not relevant to the business. He, therefore, sustained the disallowance of Rs. 16,977.
The assessee appealed to the Income-tax Appellate Tribunal, but the Tribunal also held that the disallowance of Rs. 16,977 from out of the salary paid to Mohammed Farooq was fully justified on the facts and in the circumstances that obtained in the year under consideration.;