B.L.GUPTA, J. - (1.) THIS is an income-tax reference. It comes on a requisition by this court on an application under section 66(2). The question for the opinion of the court is : Whether, in the circumstances of the case, the sum of Rs. 37,733 paid to the general manager, Shri J.P. Vaish, which has been disallowed by the Income-tax Appellate Tribunal, was an amount laid out or expended wholly and exclusively for the purpose of the business of the assessee ?
(2.) THE facts giving rise to the reference are : that the assessee which is a registered firm took on lease a woollen mills called Baijnath Bankebehari Lal Woollen Mills. THE terms of the lease appear to have been that a minimum amount of Rs. 24,000 as lease money was payable to Smt. Indramani Singhania, the widow of the proprietor of the mills, and in case the profits of the lessee from the mills exceeded the sum of Rs. 1,00,000 the lease money was to be payable at the rate of 0-7-9 in the rupee. It appears that the partners of the assessee firm appointed one Sri Shital Prasad by a power of attorney to manage the business of the mills on behalf of the partnership. Sri Shital Prasad, by letter dated September 20, 1944, appointed his own son, Sri J.P. Vaish, to be the general manager of the lessee firm. THE terms regarding his remuneration are stated in this letter in paragraph 6 as follows : Your remuneration and allowances will be as follows : (a) A fixed salary at the rate of Rs. 1,000 p.m. including the period of probation from 1st May, 1944, up to date. (b) A commission of 12% on the net profits of the firm payable after the accounts have been ascertained and vouched by the auditors, the certificate of the auditors to be conclusive : Provided, firstly, that the net profits shall be arrived at after defraying all manufacturing charges, including cost of raw materials, stores, coal, steam power, electric energy consumed, wages, salaries of clerks, supervisors, accountants, mill staff including technical experts, depreciation on machinery employed in the business, interest, taxes, overhead charges and only the minimum sum of Rs. 24,000 per annum payable to Mrs. Indramani Singhania on account of rental of the mills. Any amount found payable to her in excess of Rs. 24,000 in any year shall not be deducted for arriving at net profits for the purposes of this clause : Provided, secondly, that if in any year the profits calculated above exceed Rs. 1,00,000 the commission payable to you will be 25% of such profits. (c) You will be allowed Rs. 250 p.m. as car allowance and you will use your own car till the firm is able to purchase one for your use. (d) You will be entitled to free medical attendance and treatment for yourself and your family. It will be noticed that one extraordinary feature of these terms regarding the determination of the remuneration of Sri. J.P. Vaish was that even when the profits exceeded Rs. 1,00,000 only the minimum amount of Rs. 24,000 as lease money was to be deducted in arriving at the figure of profits on which the commission of Sri J.P. Vaish at 25% was to be worked out. THE figure of profits for determination of the commission was not to be worked out after the deduction of the entire amount of lease money at 0-7-9 in the rupee which was to be paid to Smt. Indramani Singhania when the profits exceeded one lakh of rupees. The year in question in this reference is the assessment year 1948-49. In this year the total remuneration paid to Sri J.P. Vaish was as follows : JUDGEMENT_346_ITR48_1963Html1.htm The commission was worked out in this way : JUDGEMENT_346_ITR48_1963Html2.htm It will be noticed that if the entire lease money of Rs. 1,21,285 had been deducted from the total profits of Rs. 3,25,860 then the net profits would have been only Rs. 2,04,575 and commission at 25% of this amount would have been only Rs. 51,143-12-0. Apart from the salary, car allowance and expenses on medical treatment which were debited by the assessee to the profit and loss account, the assessee claimed the amount of Rs. 75,465 paid as commission to Shri J.P. Vaish as an allowable deduction under section 10(2). The Income-tax Officer, by notice under section 23(3), called upon the assessee to prove the allowability of this amount. The notice required the assessee to state : 1. the previous employment of Shri J.P. Vaish, 2. the salary drawn by him and 3. the technical and other qualifications by reason of which this amount of Rs. 75,465 became payable to Shri Vaish. The assessee filed a written reply dated June 16, 1949. In this reply regarding point No. 1 viz., previous employment, it was stated as follows : He had training in the Aluminium Corporation of India Ltd., Laxmiratan Cotton Mills Ltd. and the Food Products Ltd., Rampur. From this it is clear that he was not previously employed anywhere. He was merely a trainee in the three concerns mentioned. None of these concerns was a woollen textile mills. The period of his training was not mentioned. The particular line in which he took training was also not mentioned. Regarding point No. 2, viz., the salary drawn by him, it was mentioned : His salary during the period is not known. It is clear that the assessee (sic.) withheld information about his salary, if any. It may be that as he was merely a trainee and not an employee, he may not have been in receipt of any salary at all. It has already been pointed out that the period of his training was not mentioned. Regarding the third point, viz., his technical and other qualifications by reason of which the commission of Rs. 75,465 was paid to Shri J.P. Vaish, it was stated as follows :
(3.) MR. Vaish was educated in the Public School, Dehra Dun, and passed the Senior Cambridge from that school. He then joined the Banaras College and passed the Intermediate Examination. He studied for a year in the Engineering College of the Banaras Hindu University for electrical and mechanical engineering and then joined the Commerce College at Delhi. After that he had training in the Aluminium Corporation of India Ltd., Laxmiratan Cotton Mills Ltd. and the Food Products Ltd., Rampur. From this it is clear that he had merely a general education but was not even a graduate. He could not possess any qualification, worth speaking of, as an electrical and mechanical engineer, having been in the Engineering College only for a year. The period of his stay at Commerce College is not mentioned. Presumably, the stay at that college was of very short duration. Thereafter, he was apprenticed to the three companies mentioned, none of which was a woollen textile mills. The period of his training or the line in which he took training, were not mentioned. Upon a consideration of these facts and upon a consideration of the fact that the appointment was made by the father of Shri J.P. Vaish, the Income-tax Officer came to the conclusion that the letter of appointment is not solely actuated by business, considerations. It was also observed by the Income-tax Officer that there was no reason why the lease money which increased by 0-7-9 in a rupee if the profits exceeded one lakh of rupees should not be made deductible for calculating the percentage of commission. He concluded that this clause was not dictated by business consideration. It was also pointed out by him that commission at 25% was a very high rate of commission particularly when no maximum has been fixed. On this last ground the Income-tax Officer did not treat the case of one Shiv Bhagwan, manager of another concern, as a parallel case. Lastly, the Income-tax Officer observed that, having regard to the share of profits of the three partners of the assessee, the remuneration of Shri J.P. Vaish amounting to Rs. 92,465 was highly excessive and unreasonable. As a matter of law the Income-tax Officer took the view that irrespective of the fact that commission was payable to Shri J.P. Vaish under the letter of appointment, the question of reasonableness or otherwise of the commission paid fell to be determined under section 10(2)(x). He went on to apply tests laid down under that provision and observed that having regard to the salary and allowances of Shri J.P. Vaish and further having regard to the profits of the year the amount of Rs. 75,465 commission was very excessive and unreasonable. He also found that there was no general practice of giving commission at 25% of the net profits of business in the assessees line of business. In the result he allowed a sum of only Rs. 5,000 on account of commission and disallowed the balance of Rs. 70,465. From the above it will be clear that, even though the Income-tax Officer ultimately determined the question of the allowability of the commission by reference to section 10(2)(x), in the earlier part of his order, he also considered the question on considerations which are relevant only under the provisions of section 10(2)(xv), viz., 1. That the appointment was made by the father, Sri Shital Prasad, of his own son, Sri J.P. Vaish. The reference to the relationship shows that the Income-tax Officer attached some importance to the fact and was possibly of the view that the total remuneration of Sri J.P. Vaish might have been influenced by that consideration and not by purely business consideration. 2. He appears to have derived support for this view from the facts that Sri J.P. Vaish possessed no special qualification and had no particular experience and in reply to the notice under section 23(3) information about his previous salary, if any, was withheld. 3. He concluded that the remuneration was not solely actuated by business considerations, from the extraordinary clause in the letter of appointment about working out the net profits for purpose of computation of commission by deducting the minimum amount of lease money of Rs. 24,000 only and not the increased amount of lease money at 0-7-9 in the rupee when the profits exceeded one lakh of rupees. 4. Lastly he considered the general practice in this line of business regarding the percentage of profits allowable as commission to managers and held that there was no practice of allowing commission at 25% and also noticed that in the alleged comparable case of Shiv Bhagwan, manager, there was a maximum fixed but in the present case there was no such maximum fixed. It is true that he also examined and ultimately determined the question of allowability from the point of view of the considerations under section 10(2)(x) but it is clear from what has been stated above that the considerations which are relevant under section 10(2)(xv) were fully present to his mind and from his view of these considerations, it appears that it would have made no difference to his decision if he had not even referred to section 10(2)(x) and had relied solely upon section 10(2)(xv). The assessee went up in appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner did not confirm the finding of the Income-tax Officer that the rate of commission was not dictated by business consideration for the reasons that : 1. the annual accounts showing the payment of commission were signed by the proprietors and 2. that Mr. Vaish was not related to the proprietors. It is noticeable that the Appellate Assistant Commissioner did not fully meet the point raised by the Income-tax Officer. The Income-tax Officer had observed that the letter of appointment was not solely actuated by business considerations. An agreement may be entered into for business considerations but it may not be solely for such considerations. Under section 10(2)(xv) unless the expenditure is wholly and exclusively for purposes of business, it is not allowable. From what the Appellate Assistant Commissioner went on to hold it is clear that he was of the view that the whole of the commission was not paid exclusively for business purposes even though has the Appellate Assistant Commissioner considered the payment under section 10(2)(x) he did not specifically use the language which he would have used if he had applied section 10(2)(xv). He was, however, not very much impressed by the qualifications and experience of Sri Vaish and observed that the commission of 25% over and above the salary and allowances of Sri Vaish were quite high. He significantly remarked No other businessman is known to have been allowing commission at such high rates. He also observed that there was no reason why the deduction of only the minimum lease amount of Rs. 24,000 should have been stipulated as being deductible for arriving at the net profits for purposes of computation of a commission at 25%. Lastly, he observed in this connection that having regard to the fact that the net profits were only Rs. 1,29,110 the incidence of commission at Rs. 75,465 worked out to a much higher percentage (nearly 59%) of the net profits rather than 25%. He went on to negative the argument of the assessee that increased profits in this year were due to the skill or the effort of the manager and found that the extraordinary profits were due to war conditions and the efforts of the director of this concern rather than to the skill or the effort of the manager. The Appellate Assistant Commissioner also referred to the practice in similar business and to the alleged comparable case of Shiv Bhagwan where a maximum was fixed even though the commission to be paid was a graded commission and concluded that half of the amount of Rs. 74,465, viz., 37,732, was allowable and not merely Rs. 5,000 nor the entire amount of Rs. 75,465.;