MASUD, J. - (1.) THE short point to be decided in this reference under s. 66(2) of the IT Act, 1922, is to determine how far the remuneration of an employee of the assessee-company could be disallowed on the ground that the expenditure is not laid out or expended wholly and exclusively for the purpose of the assessee's business within the meaning of s. 10(2)(xv). In the instant case, the assessee is a public limited company doing business in enamelling. THE assessment year in question is 1951-52 and the corresponding accounting year is the calendar year 1950. By a resolution dated 18th May, 1950, the board of directors of the assessee-company appointed one Dr. U. P. Ganguli in the post of technical adviser of the company w.e.f. 1st January, 1950, at a remuneration equal to 15 per cent. on the annual gross profits of the company before allowing depreciation. THE assessee- company claimed deduction of Dr. Ganguli's remuneration in the assessment year in question amounting to Rs. 52,947. But the ITO allowed only Rs. 42,000 and rejected the balance sum on the ground that it was not incurred wholly and necessarily for the purposes of the assessee's business. On appeal, the order of the ITO was confirmed by the AAC. THEreafter, the assessee appealed before the Tribunal but the said appeal was dismissed. On the above facts, the following question is referred to us : "Whether, on the facts and in the circumstances of the case, the disallowance of a part of the expenses incurred by the assessee for payment of remuneration to its technical adviser is permissible under the provisions of s. 10(2)(xv) of the Indian IT Act ?"
(2.) MR. Sankar Das Banerjee, learned counsel for the assessee, has submitted before us that, on the facts of this case, the ITO should have allowed the entire sum of Rs. 52,947 as an allowable expenditure under s. 10(2)(xv) inasmuch as there are no valid or legal grounds on the basis of which the Tribunal could come to the conclusion that extra commercial considerations were given importance in the fixing of the remuneration of Dr. Ganguli. In support of his contention that the remuneration paid to Dr. Ganguli was fair and reasonable, he has referred us to the following observation of the ITO in his said order : "It cannot be denied that Dr. Ganguli has excellent personality, thorough knowledge and overall influence in the field of his activities. It has also to be admitted that he renders valuable services which are not ordinarily expected from a mere technical expert. Even then, the remuneration allowed to Dr. Ganguli appears to be excessive." He has, in particular, relied on the following statements of the AAC's order : "So far as the knowledge and work done by Dr. Ganguli is concerned, there is no dispute and the ITO has accepted that Dr. Ganguli was well qualified and was giving all his attention to the appellant-company . . . The next argument of the appellant is that because of Dr. Ganguli being technical adviser the turnover of the appellant company rose from Rs. 10 lakhs to nearly Rs. 40 lakhs in the next 5 years and similarly the profits rose by about 5 times and, therefore, the payments made to Dr. Ganguli were justified by the results achieved." Relying on Newtone Studios Ltd. vs. CIT (1955) 28 ITR 378 (Mad), he has asked us to hold that the reasonableness of the expenditure should be considered from the point of view of the assessee and not from the point of view of the Revenue authorities. He has also cited Raman and Raman Ltd. vs. CIT (1962) 46 ITR 400 (Mad), where the Madras High Court has held that if the test of correlation of the business purpose with the expenditure is satisfied the Department should not be concerned with the question what in its opinion would have been the proper expenditure. He has particularly laid stress on that portion of the decision where it is stated that the mere fact that the person receiving the remuneration is related to the persons in the management of the company would not affect the question. Lastly, Mr. Banerjee cited Walchand and Co. Private Ltd. vs. CIT (1963) 48 ITR 638 (Bom), where the Bombay High Court set aside the order of the Tribunal and held that the successive increase of remuneration of the directors and the salary of the assessee's executive officers are allowable expenditure.
(3.) THE assessee has claimed the entire remuneration paid to Dr. Ganguli under s. 10(2)(xv) on the ground that the said expenditure was incurred in the interests of its business. It is now settled law that though the question whether an item of expenditure is wholly or exclusively laid out for the purpose of the assessee's business must be decided on the facts of each case, the final conclusion is one of law : vide CIT vs. Royal Calcutta Turf Club (1961) 41 ITR 414 (SC) ; Eastern Investments Co. vs. CIT (1951) 20 ITR 1 (SC). A mere ipse dixit on the part of the assessee to the effect that the employer alone is the sole judge to determine the reasonableness or fairness of its employee's remuneration cannot be good law. Similarly the Revenue authorities cannot arbitrarily disallow the whole or part of an employee's salary or honorarium without cogent reasons. The reasonableness of an expenditure cannot be determined by a subjective test ; if such a test is the correct yardstick, the assessee can escape tax liability and defeat the purpose of the Act by increasing the salary or remuneration of its employees disproportionately and at regular intervals. Similarly, in such a case the Department also may cause great disservice to the commercial would by rejecting the assessee's case without assigning any reason whatsoever although from a businessman's point of view such expenditure might be very necessary or expedient. Thus, in every case, there should be facts on the basis of which a legitimate inference can be drawn whether the expenditure is laid out wholly or exclusively for the purposes of the assessee's business. The sufficiency or insufficiency of evidence forming the basis of a legal inference often gives rise to the question on whom the burden of proof lies. In our opinion, the burden of proving the necessary facts in connection with a claim for exemption of an amount as expenditure under s. 10(2)(xv) is on the assessee : vide CIT vs. Calcutta Agency Ltd. (1951) 19 ITR 191 (SC) and J. K. Woollen Manufacturers Ltd. vs. CIT (1963) 48 ITR 346 (All). The burden being on the assessee, the necessary facts which would lead to the conclusion that the whole or part of the remuneration of an employee has been paid wholly and exclusively for the purpose of the assessee's business must be adduced before the Revenue authorities who should then examine them and find out whether such a conclusion can reasonably be inferred from the available materials. But the guiding principle in evaluation of the evidence is always commercial expediency ; or, in other words, the Revenue authorities should place themselves in the position of a businessman and find out whether, in view of the services rendered by the employee, expenditure is justifiable from a businessman's point of view. In Newtone Studios Ltd. vs. CIT (1955) 28 ITR 378 (Mad) the four persons whose remunerations were increased were technical hands and the net profits of the company were increased from Rs. 41,541 in 1945 to Rs. 1,05,871 in the accounting year. There was also a finding that those persons had done substantial work in the year of accounting. On these facts the Madras High Court held that the Tribunal should have come to the conclusion that the increased honorarium of the directors was an expenditure solely and exclusively for the business. Similarly in Raman and Raman Ltd. vs. CIT (1962) 46 ITR 400 (Mad), the decision was in favour of the assessee because there were materials on record which could not justify the Tribunal's finding that the director's remunerations were increased on arbitrary basis. In that case it was not disputed that the company's profits had been steadily increasing with the acquisition of the new bus routes. It was evident there that since its inception, roads were acquired for plying buses and more buses were out on the road. There was also a finding that this inevitably involved greater work on the part of the managing director and also of the technically qualified director, the increase of whose remunerations were challenged. The managing director, Narayana Iyer, before he started working in the assessee-firm was having a business in running buses and lorries as a proprietary concern and the business's goodwill and assets till then belonging to Narayana Iyer were transferred to the assessee-company. His son, Kashi Raman, was a qualified automobile engineer and the company was making rapid strides in its progress. On these facts the Madras High Court rightly concluded that the ITO's disallowance could not be sustained. In the only other case which had been cited by Mr. Banerjee, Walchand and Co. (P.) Ltd. vs. CIT (supra), the Bombay High Court decided against the Department because the ITO or the Tribunal ignored certain important facts. In that case the managed companies, namely, Hindustan Construction Committee, had undertaken the contract of Vaitarna Dam which involved a special type of work and was considered to be the biggest dam in India and the activities of the assessee- company therefore had been considerably enlarged and the work of the directors and the strain on them had also considerably increased. The Tribunal on the basis of those facts supported the rise in the directors' remuneration but with no sufficient ground has refused to allow the increase of salary in respect of the three executive officers of the assessee-company. Thus, all the reported cases show that whether the increase of salary or remuneration of an employee could be allowed as an expenditure under s. 10(2)(xv) would primarily depend on the facts and circumstances of each case. We would now examine the facts and circumstances in the present reference.;