Malik, C.J. - (1.) This is a reference under Section 66 (1), Income-tax Act. The question referred to us is as follows : "Whether, in the circumstances of the case, the payment of Rs. 10,000 to Mr. J.N. Cocolas is a legitimate expense?"
(2.) The assessee Messrs J.K. Cotton Manufacturers, Kanpur was a private registered company and one Shri J.N. Cocolas was the Director in charge of the company till September, 1938. He was previously drawing a salary of Rs. 6,000 per year and later his salary was increased to Rs. 10,000 per year. He ceased to be the Director in charge in September 1938 and since then he was working merely as one of the Directors of the company. The private limited company decided to go into voluntary liquidation with effect from 30-9-1941, and the actual order of dissolution was passed by the District Judge of Kanpur on 8-12-1941. From the 1-10-1941, a new public company, which was floated, took over the business of the private limited company. The Board of Directors of this dissolved company, by their resolution dated 2-2-1942 approved and confirmed the payment of a Sum of Rs. 10,000 to Shri Cocolas in recognition of his past services to the company and this sum of RS. 10,000 was debited to the profit and loss account of the company for the year commencing l-10-1940. The Income tax Officer did not allow this sum of Rs. 10,000 as an admissible deduction and, before the Income-tax Appellate Tribunal, Allahabad, the point was raised whether, in the circumstances of the case, this payment of Rs. 0,000 to Shri Cocolas was "an expenditure laid out wholly and exclusively for purposes of the business of the private company". The Tribunal held against the assessee and relied on three circumstances firstly, that there was no obligation on the part of the company to pay any such allowance to Shri Cocolas; secondly, that there was no practice of making any such payment to the employees of the company; and, lastly, that the company had decided to enter into voluntary liquidation. On a consideration of these three facts, the Tribunal was of the opinion that the payment of Rs. 10,000 to Shri Cocolas could not be said to amount to an expenditure laid out wholly and exclusively for purposes of the company.
(3.) On behalf of the assesses, Shri Pathak has relied on Clause (x) of Sub-section (2) of Section 10, Income-tax Act. Section 10 (2) (x), Income-tax Act, allows deduction of an amount payable to an employee as bonus or commission for services rendered, provided that the amount of bonus or commission is reasonable, keeping in view the pay of the employee and the conditions of his service, the profits of the business, profession or vocation for the year in question and the general practice in similar businesses, professions or vocations. As no reliance was placed on this section of the Act and as the amount was not claimed as bonus or commission to an employee for the services rendered, the tribunal has not considered whether the amount paid to Shri Cocolas was a reasonable amount. In the application under Section 66 (1), In come-tax Act, for reference of the question to this Court, the assessee appears to have relied on Clause (xv) of Sub-section (2) of Section 10, Income-tax Act as was done by him before the Income-tax Appellate Tribunal. This is clear from para. 4 of the application which runs as follows : "4. That, in arriving at the findings of fact mentioned at No. in para 3 of this application, the Bench committed an error of law, namely, a provision in favour of an employee made at a time when the company had decided to close down and when, in fact, the employee as such has retired about three years earlier cannot be taken to be an expenditure which was required for keeping the trade going.";