Masud, J. - (1.) This reference under Section 66(2) of the Income-tax Act 1922 relates to the assessment year 1954-55, the corresponding previous year of which ended on the 30th June 1953. The facts are briefly stated as follows:
(2.) The assessee was a Private Limited Co. prior to October 1949 when it was converted into a public Limited Co. The private company had been incorporated on 6th November 1942 with a fully paid share capital of Rs. 10 lacs divided into 10,000 shares of Rs. 100/- each and the shares were held by Shri Dayaram Poddar and the members of his family and, in particular, Shri Dayaram Poddar and his two sons, who were also the Directors of the private company, held 6365 shares, i.e., more than 63 per cent of the total share holding. Remuneration of the Directors was provided for in the Art. 16 of the Articles of Association of the Private Company at the rate of Rs. 16/- at every meeting in addition to travelling allowance etc. as might be decided upon. The conversion of the private company into a public company was effected by the share-holders of the former company at an extraordinary general meeting by means of a resolution. The capital structure of the company was not changed but the relevant article for the remuneration of the Managing Director was modified in the following manner: "The remuneration of the Managing Director shall be as follows: (a) An office allowance of Rs. 500/- per mensem payable monthly; (b) A commission of the net annual profits of the company at the rate of 10 per cent. The net profit will be calculated in accordance with the provisions of Section 87(3) of the Indian Companies Act."
(3.) In the relevant previous year a sum of Rs. 6,000/- was paid to Shri Dayaram Poddar, the Managing Director as his office allowance besides a sum of Rs. 4,078/- as commission. The Income-tax Officer allowed only Rs. 200/-as office allowance per month and disallowed the balance of Rs. 300/- per month as well as the entire amount of commission as expenditure not incurred for the purpose of the business. The assessee's appeal was dismissed by the Appellate Assistant Commissioner. Thereafter, in second appeal, the Tribunal confirmed the order of the Income-tax Officer as to the Managing Director's remuneration of Rs. 200/- per month but it held that a commission of 5 per cent of the net profits should also be allowed as the remuneration and accordingly allowed the appeal in part. On the above facts the following question of law has been referred to us; "Whether the Tribunal was justified in refusing to allow deduction in respect of the remuneration of the Managing Director at Rs. 500/- per month plus commission of 10 per cent on net profits as provided in the company's articles on the ground that the fixing such remuneration was not for the business purpose but for some extra commercial reasons and, therefore, the amount was not wholly and solely laid out for the business.";