Masud, J. - (1.) As directed by the High Court under Section 66(2) of the Indian Income-tax Act, 1922, the following common question of law has been referred to in these two references : " Whether, on the facts and in the circumstances of this case, the Tribunal was right in law in allowing the entire remuneration to the directors as an admissible deduction for the purpose of assessment under the Income-tax Act. "
(2.) The assessee is an Indian company and its main business is to act as managing agents to certain public shipping companies. The assessment orders concerned are of 1952-53 and 1953-54 and the corresponding accounting years are calendar years 1951 and 1952. Out of the six directors during the accounting years three persons, although designated as directors, were in fact high officers of the company being called " full directors " or " local directors " according to their executive grade. They do not hold any shares in the company. On the contrary each one of them had been promoted from lower ranks and their remuneration and service conditions were governed by the agreement they had with the company. The said directors were not related to the company's shareholders who happened to be members of the " Turner family " of England. In these references, we are concerned with the agreement between the directors and the company dated January 1, 1957. Prior to this agreement they were governed by an agreement executed in 1947. Before 1947, the said directors, in addition to a fixed salary, received commission based on the profits of the company which used to be enormous sums of money. Under the agreement of 1947, however, the said directors agreed to receive a reduced salary but they were not entitled to any commission. The assessee-company's explanation was that this was agreed upon by the directors because of an apprehension of lesser profits owing to unstable political conditions which the company thought might prevail after the independence of India. But, the said directors, under the agreement of 1947, were allowed certain benefits and perquisites, i.e., free accommodation and services, superannuation fund, use of car, entertainment allowances and in certain cases additional facilities to the directors' children by way of scholarships provided by the company. In 1951 the company realised that their apprehensions were unfounded and accordingly the portion in the cut in their remuneration was substantially restored under the said agreement dated January 1, 1951. According to this agreement the salary of the directors was increased, although the benefits and the perquisites granted under the agreement of 1947 remained. During the course of assessment for the years 1952-53 and 1953-54, the Income-tax Officer noticed a rise in the remuneration paid to the directors in comparison with such remuneration paid in earlier years. The comparative position of the remuneration paid to the directors was as follows : JUDGEMENT_385_ITR93_1974Html1.htm
(3.) The Income-tax Officer by the assessment order rejected the said increased remuneration as an allowable deduction under Section 10(2Xxv) of the Act, and held that the total remuneration paid to the directors under 1947 agreement, i.e., Rs. 4,40,000, was adequate and that the additional remuneration of Rs. 5,30,000 was not paid out of any commercial expediency for the purpose of the business (vide assessment order being annexures " A-1 " and " A-2 " of the statement of case). The assessee preferred appeal to the Income-tax Appellate Assistant Commissioner and the Appellate Assistant Commissioner upheld the disallowances and dismissed the assessee's appeals (vide the orders of the Appellate Assistant Commissioner being annexures " B-1 " and " B-2 " to the statement of case). On a further appeal by the assessee to the Tribunal, the Tribunal held that the Income-tax Officer and the Appellate Assistant Commissioner were not justified in coming to the conclusion that payment of remuneration in excess of the amount payable under the 1947 agreement was not allowable as the assessee's business had not prospered proportionately or that no added responsibilities were put on the directors. The Tribunal, therefore, held that the payment made to the directors in respect of their increased remuneration was commercially expedient and Was solely and wholly for the benefit of the company itself. The Tribunal further in its order dated December 12, 1962 (" annexure " C ") held : " There is no finding by the income-tax authorities of the presence of any extra-commercial consideration in the payment of the increased remuneration to the directors and there being no material on the record to lead to that conclusion we are of the opinion that the entire remuneration, even though increased enormously during these assessment years, have got to be allowed as expenditures incurred wholly and exclusively for the purpose of the assessee's business." Thereafter, the present reference has come to us for our decision.;