- (1.) The appellant-company is a public limited which is managed by a firm of managing agents known as Jaipuria Brothers I Ltd., another public limited company. Under article 135 of the articles of association of the appellant-company the managing agents were entrusted with the general management of the affairs of the company. The remuneration for such management was an office allowance at Rs. 5,000.00 per month plus a commission at 10 per cent. of the net profits of the company. The total remuneration of the managing agents for the relevant accounting year was computed at Rs. 11,70,899.00. For the relevant accounting year then five directors of the appellant-company. Two of these directors were Gajadhar Jaipuria and Sri Mungturam Jaipuria. These two directors were the nominees of the managing agents and were also the directors of Jaipuria Brothers Ltd., the managing agents. Under article 118 of the articles of association of the appellant-company, the five directors were entitled during the accounting year to director's fees at the rate of Rs. 100.00 per month to each. director besides travelling expenses for attending the meetings. For the accounting period a sum of Rs. 6,900.00 was paid on account of such director's fees five directors. On 26.07.1948, the directors of the appellant-company passed a resolution recommending to the shareholders of the company amend article 118 by providing that the directors should be paid a commission at the rate of 1 per cent of the net profits of the company after perioding for necessary expenses and charges, but before deducting the amount commission itself in addition to their fees at the rate of Rs. 100.00 per month for each one of the directors. This recommendation was adopted at an extraordinary general meeting of the shareholders of the company held on 26.08.1948, by a special resolution by which article 1 18 was amended to make provision for payment of commission also in addition to fees of the directors. By reason of the amendment of the article the directors became entitled to and were paid an additional remuneration amounting to Rs. 1,11,000.00 for the accounting year ending 31.12.1948. Out of this amount each of the directors became entitled to a sum of Rs. 22,218.00. Before the Income-tax Officer the appellant-company claimed the said remuneration of Rs. 1,11,000.00 the directors as a deduction under section 10(2)(xv) of the Income-tax the ground that the said sum had been laid out or expended wholly exclusively for the purposes of the company's business. The Income tax Officer disallowed the claim of the appellant-company on the ground that directors had not rendered any extra service so as to entitle them to the additional remuneration. The appellant-company preferred an appeal to the Appellate Assistant Commissioner but the appeal was dismissed. The company took the matter in further appeal to the Appellate tribunal affirmed the view of the income-tax authorities that the amount was admissible as a deduction under section 10(2)(xv) of the Income-tax Act
(2.) Under section 66(2) of the Income-tax Act the Appellate tribunal referred following question of law for the opinion of the High court: Whether the sum of Rs. 1,11,090.00 paid as remuneration to the five directors of the assessee-company during the relevant previous year was an expenditure incurred wholly and exclusively for the purpose of the business under section 10(2)(xv) of the Income-tax Act " By its order dated 23.04.1962, the High court answered this question of law in favour of the income-tax department and against the assessee. This appeal is brought, by special leave, against the order of the High court dated 23.04.1962, in the income-tax reference.
(3.) On behalf of the appellant learned counsel put forward the argument that the amount of Rs. 1,11,090.00 paid to the directors was spent wholly and exclusively for the purpose of the company and was therefore properly claimed as a deduction under section 10(2)(xv) of the Income-tax Act. It was pointed out that the amendment to article 1 18 was adopted by a special resolution of the shareholders and the amendment was made in accordance with law and the payment cannot be called in question in income-tax proceeding. In our opinion, there is no substance in this argument. It is true as between the directors and the company the resolution had a binding effect and the payment had to be legally made. But it is for the Income-tax Officer to decide whether the amount so paid to the directors was wholly and exclusively spent for the purpose of the business within the meaning of section 10(2)(xv) of the Income-tax Act. It is an erroneous proposition to contend that as soon as an assessee has established two facts, viz., the existence of an agreement between the employer and the employee and the fact of actual payment, no discretion is left to the Income-tax Officer except to hold that the payment was made wholly and exclusively for the purposes of the business. Although the payment might have been made and although there might be an agreement in existence, it would still be open to the Income tax Officer to take into consideration all the relevant factors which will go to show whether the amount was paid as required by section 10(2)(xv). The question as to whether an amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of such business, profession or vocation has to be decided on the facts and in the light of the circumstances of each case. But, as observed by this court in Eastern Investments Ltd. V/s. Commissioner of Income-tax ', the final conclusion on the admissibility. of an allowance claimed is one of law. It is for example open to the assessee to contend that the decision arrived at by the income-tax authorities was based evidence at all. If the assessee satisfies the court that the decision income-tax authorities is based on no evidence then the question becomes one of law and the court would be entitled to say the decision of the Income-tax Officer is defective in law. But, have already stated, it is not open to the assessee to contend merely because of the existence of an agreement between the employer the employee and the fact of actual payment, the Income-tax Officer must hold that the payment was made exclusively and wholly for the pose of the business. It is manifest that the Income-tax Officer is en to examine the circumstances of each case to determine for himself which the remuneration paid to the employee or any portion thereof was process deducted under section 10(2)(xv) of the Income-tax Act. The view the have expressed is borne out by the decision of the Judicial Commissioner Aspro Limited V/s. Commissioner of Taxes. In that case, there were two holders of a company and they were also the sole directors of the At the end of each trading year the company fixed at a general about two-thirds of the profits as directors' fees, and in the year 1932 large a sum as 10,000.00 was debited in the accounts as directors' fees Commissioner of Income-tax disallowed this item to the extent of f8,,00 the question that fell for determination of the Judicial Committee was this disallowance was justified. At page 269 of the Report, the Jaipur Committee pointed out that the true issue that arises in cases likes is whether there was evidence before the magistrate on which he entitled to refuse to hold it proved that the 10,000.00 had been exchual incurred in the production of the assessable income and that the assesses was excessive. A similar view was expressed by the Bombay High court in Jethabhai Hirji and Co. V/s. Commissioner of Income-tax ' and it was held in case that the Income-tax tribunal was right in disallowing under sec10(2)(xv)thesum of Rs. 11,000.00 out of the sum of Rs. 12,000.00 paid by assessee to his employees as commission.;