GULATI, J. - (1.) IN compliance with the order of this Court under S. 66(2) of the IT Act, the Tribunal, Allahabad, has submitted a statement of the case and has referred the following three questions for our opinion : "1. Whether, on the facts and in the circumstances of this case, any part of the sum of Rs. 2,000 paid as remuneration to Sri Satyandrajit Singh was liable to be disallowed under S. 10(4A) of the Act ? 2. Whether, on the facts and in the circumstances of the case, a part of the expenditure of Rs. 11,700 incurred on the purchase of crockery and linen was liable to be disallowed as capital expenditure ? 3. Whether, on the facts and in the circumstances of the case, the deduction claimed by the assessee -company of the sum of Rs. 1,500 on account of the medical expenses incurred on the treatment of its chairman was allowable ?"
(2.) THE assessee is a private limited company and runs a hotel known as "Carlton Hotel" at Lucknow. The assessment year involved is 1960 -61. Prior to the previous year, the assessee - company was managed by its Chairman, Sri Ranjit Singh, and his two sons as joint managing directors. During the previous year, the assessee also appointed Sri Satyandrajit Singh, the third son of Sri Ranjit Singh, as a joint managing director on a salary of Rs. 200 per month from June, 1959. From November, 1959, the salary was raised to Rs. 500 per month. The total salary claimed to have been paid to Sri Satyandrajit Singh thus comes to Rs. 2,000. This amount was claimed by the assessee -company as a deduction in the computation of its net income from the hotel business. The Tribunal has disallowed a sum of Rs. 600 and has allowed the balance as a permissible deduction. The ITO had disallowed the entire salary on the ground that the same was not justified having regard to the legitimate business needs of the assessee -company. The AAC concurred with this view. The Tribunal, however, found that having regard to all the circumstances, it was legitimate for the assessee company to have appointed another joint managing director. The Tribunal has also found that after the appointment of the third director, the business of the company improved. The remuneration of this additional director was fixed by the company at Rs. 200 to begin with, but later on it was raised to Rs. 500 per month to bring it at par with the salaries drawn by other joint managing directors. On this finding it cannot be said that the appointment of the third director or the salary paid to him was unjustified. Section 10(4A) no doubt gives a power to the ITO as also to the Tribunal to disallow an expenditure, if it has not been incurred for the legitimate business needs of the assessee. The legitimate need having been found a part of the salary could not be disallowed, particularly when the salary paid to the third joint managing director was the same as was being drawn by the other directors. There was thus no material for the Tribunal to hold that the remuneration paid to the additional director was excessive. We, accordingly, answer question No. 1 in the negative in favour of the assessee and against the Department. The next question relates to the expenditure incurred on the purchase of crockery and linen for the purpose of the assessee's hotel business. The assessee claimed an expenditure of Rs. 11,700 on this count on the ground that the expenditure represented replacement of crockeries and linen, etc. The ITO and the AAC allowed a sum of Rs. 4,300 and disallowed the balance of Rs. 8,400. The Tribunal also concurred with this finding, but finding that there was a mistake in calculation, disallowed a sum of Rs. 7,490.
(3.) NOW , it is not the case of the Department that the sum of Rs. 11,700 was not spent on the purchase of the items like crockery and linen, etc. The contention is that only Rs. 4,300 should be deemed to be the expenditure for replacement and the balance should be considered to be a capital expenditure. This approach, in our opinion, is erroneous. In a hotel business no depreciation is allowed on crockery and linen. But the expenditure incurred on such items is allowed as a deduction by way of replacement. It is, therefore, not expected that an assessee engaged in a hotel business would purchase crockery and linen in excess of its needs. The replacement need not be exactly the same every year. From the nature of things it is bound to vary depending on the actual loss by way of breakage and pilferage, etc. The claim does not appear to be excessive particularly having regard to the fact that a similar claim in respect of the succeeding year has been allowed by the Tribunal to the extent of Rs. 11,000. In the circumstances, we are satisfied that there was no material whatsoever before the Tribunal for disallowing a portion of the claim on this count. Accordingly, question No. 2 is answered in the negative, in favour of the assessee and against the Department.;