Sabyasachi Mukharji, J. - (1.) In this reference under Section 66(2) of the Indian I.T. Act, 1922, the following question had been referred to this court: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that the disallowance made out of the salary paid to Mr. J. D. Somerville could be sustained under Section 10(4A) of the Indian Income-tax Act, 1922 ?"
(2.) This reference arises out of the assessment for assessment years 1960-61 and 1961-62. The assessee is a private limited company. The shareholders of the company are Mr. J. H. Somerville, the managing director of the company, his wife and son. The company originally employed Mr. J.D. Somerville on September 8, 1951, as sales manager of the company at a monthly salary of Rs. 1,200 and an increment of Rs. 300 was given with effect from January 1, 1952. Further increment of salary was given with effect from April 1, 1953. Later on, he was promoted as director with effect from July 6, 1956, at a salary of Rs. 2,000 per month. The assessee-company claimed the aforesaid amount as deduction before the ITO. The ITO, taking the earlier assessments, which were confirmed in appeal by the AAC as a guide, allowed the salary of Rs. 1,050 and Rs. 1,100 per month for the assessment years 1960-61 and 1961-62, respectively. The balance amount of Rs. 11,400 at the rate of Rs. 950 per month and Rs. 10,800 at the rate of Rs. 900 per month for the assessment years 1960-61 and 1961-62, respectively, were disallowed under Section 10(4A) of the Indian I.T. Act, 1922. In the appeal before the AAC, the claim of the assessee was allowed up to the extent of 75% of the claim made and a further sum making an allowance of Rs. 18,000 for each of these two years was allowed. There was a further appeal before the Tribunal. Before the Tribunal a chart was furnished by the assessee showing the amount of salary paid and allowed by the ITO. The Tribunal found that the AAC had followed the previous year's order and there were no fresh facts. Therefore, the Tribunal had not interfered with the view taken by the AAC and confirmed the disallowance as made by him. In the aforesaid circumstances, there was an application made by the assessee for reference of a question under Section 66(1) of the Act, which the Tribunal refused. On an application having been made under Section 66(2) of the Act the aforesaid question has been referred to this court as directed by this court. It appears from the ITO's order that the disallowance was made under Section 10(4A) of the Act. The said order appears at page 7 of the paper book, and is to the following effect: "2. Director's remuneration : J. D. Somerville is being paid remunera tion at Rs. 2,000 p.m. As discussed in the earlier assessment order and as confirmed in appeal he is allowed salary of Rs. 1,050 p.m. (inclusive of increment of Rs. 50). The balance amount of Rs. 11,400 is disallowed under Section 10(4)(a). ..... Rs. 11,400." As mentioned hereinbefore, there was an appeal before the AAC. The AAC in the previous year had observed as follows : " The Income-tax Officer has made the disallowance for the same reasons as in the earlier assessments which, on appeal, to the Tribunal have been restricted only to 25% of the claim. Following the Tribunal's decision I hold that Rs. 6,000 may be disallowed in each of the years in question. In view of this, I hold that there is no point in considering the small increment allowed by the Income-tax Officer based on his own disallowances which did not find favour in the earlier years with the Tribunal. In this view of the matter, I do not consider it necessary to allow any increments in these two years. The disallowances will be limited to Rs. 6,000." Following the previous year's judgment, the Tribunal confirmed the disallowance made by the AAC. In this case, as mentioned hereinbefore, we are concerned with the question of disallowance under Section 10(4A) of the Indian I.T. Act, 1922. The said section provides as follows: "10C (4A). Nothing in Sub-section (2) shall, in the computation of the profits and gains of a company, be deemed to authorise the making of-- (a) any allowance in respect of any expenditure which results directly or indirectlyjn the provision of any remuneration or benefit or amenity to a director or a person who has a substantial interest in the company within the meaning of Sub-clause (iii) of Clause (6C) of Section 2, or (b) any allowance in respect of any assets of the company used by any person referred to in Clause (a) either wholly or partly for his own purposes or benefit, if in the opinion of the Income-tax Officer any such allowance is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. Explanation.--The provisions of this sub-section shall apply notwithstanding that any amount disallowed under this sub-section is included in the total income of any person referred to in Clause (a)."It is similar to Section 40(c}(i) and (ii) of the I.T. Act, 1961. Before us counsel for the assessee urged two contentions. He submitted that in the case of salary which was paid to a director no question of not allowing the same under Section 10(4A) could arise because according to counsel for the assessee the section dealt with an allowance in respect of an expenditure which resulted directly or indirectly in any remuneration. Therefore, anything which was paid as remuneration to a director could not be termed as something which resulted in the remuneration payable to a director. It was, secondly, urged that on a proper construction of the section it was apparent that the disallowance that was spoken of was not in respect of a salary but other benefits or amenities by way of perquisites which might increase the remuneration of a director. In this connection, reference was made to the principles of construction in Maxwell on the Interpretation of Statues, 12th edn. at p. 289, where the learned editor puts the proposition as follows : "Noscitur a sociis--Where two or more words which are susceptible of analogous meaning are coupled together, noscuntur a sociis. They are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the" more general being restricted to a sense analogous to that of the less general. (One application of this general principle is the ejusdem generis rule.....)."
(3.) In the case of IRC v. Frere [1965] AC 402 at page 426, Viscount Radcliffe observed as follows : "The context of the words in Rule XVII appears to me to indicate exactly the same meaning. The first heading covers income upon which the claimant is directly assessable. The second heading relates to income to which he is taxable by deduction and retention on the part of the payer, in other words the kinds of payment which the Act treats as being the taxable income of payee, not payer. These payments are described in the words 'Rents, interests, annuities or other annual payments'. The word 'interests' is not qualified byiany adjective, but I think it inescapable that one must read it here, either because of its collocation with 'other annual payments' or for common sense, as meaning annual interest only, because it is only for that kind of interest that the Act has allowed deduction and retention of tax by the payer. Then there comes the third heading, described as 'Declaration of the amount of interest, annuities, or other annual payments, to be made out of the property or profits assessed on the claimant.....' The collocation of interest with annuities and other annual payments is the same as in the preceding heading, and as a straightforward question of construction alone I think that any reader would naturally suppose that the word 'interest' was being used in the same sense in each of the two successive headings, and would never guess that in the second one it was being used with a different meaning from that which he had attributed to it in the first. In my opinion, there is no change in the meaning that is intended.";