Sabyasachi Mukharji, J. - (1.) The subject-matter of challenge in this application is the order dated 27th October, 1971, passed by the Income-tax Appellate Tribunal, 'D' Bench, Calcutta. In order to appreciate the questions involved in this application it would be relevant to refer to the facts in little detail. It appears that for the assessment year 1961-62 the assessee which is a limited company made a claim for allowance of certain remuneration and commission paid to two joint managing directors, Shri A. K. Das and Shrimati Sujata Saha. The Income-tax Officer in his assessment order observed that the joint managing directors were paid monthly salary of Rs. 1,500 per month and commission on sales in the case of A. K. Das at the rate of 10 per cent. and in the case of Shrimati Sujata Saha 1 1/2 per cent. on the sale. Dealing with the same the Income-tax Officer observed, inter alia, as follows : "The joint managing directors were paid the remuneration at the same rate in the immediately preceding year. The payment of such remuneration was found excessive and disallowances were made from the remuneration of both the directors. The assessee-company had contended that the payments are justified in view of the duties performed by the directors and also in view of the increase in the business of the company. In the assessment year 1960-61, the directors had performed similar services. The increase in business is in no way abnormal in this year but rather it is following the normal trend of a going concern. Besides, there is nothing on record to indicate that the increase in business can be attributed to some special effort put in by the two directors. On the contrary the same set of facts obtained in the cases of the two directors, Srimati Saha did not, as before, have any special qualification in this line of business and Sri A. K. Das continued to be the director of another company. Hence, the remuneration paid to the directors is considered to be excessive and unreasonable having regard to the legitimate business needs of the company and the benefit derived by it from the payment of such remuneration. Accordingly, I would allow only Rs. 750 p.m. as salary in the case of Sujata Saha as per remuneration and a sum of Rs. 750 p.m. as salary and commission on sales at 1% in the case of Sri A. K. Das. Thus the disallowance in the case of Srimati Sujata Saha would work out to Rs. 9,000 from salary and Rs. 38,887 on account of commission. The disallowance in the case of Sri A. K. Das's remuneration comes to Rs. 9,000. Hence the total disallowance under this head will come to Rs. 56,887."
(2.) Under section 10(2)(xv) of the Indian Income-tax Act, 1922, expenditure incurred wholly and exclusively for the purpose of carrying on the business is allowable as deduction. Therefore, in order to be entitled to deduction under Section 10(2)(xv) of the said Act, the expenditure must be shown to have been incurred wholly and exclusively for the purpose of the business. Under section 10(4A) of the said Act, however, in the case of a director or person who is substantially interested in the company within the meaning of Sub-clause (iii) of Clause (6C) of Section 2 of the Act such expenditure or allowance was not allowable if the Income-tax Officer was of the opinion that such allowance was excessive or unreasonable having regard to the legitimate business income and the benefit derived by the company from incurring the said expenditure. Therefore, even in a case where the expenditure has been incurred wholly and exclusively for the purpose of the business, if such expenditure was in the nature of allowance mentioned in Sub-section (4A) of Section 10 in respect of persons mentioned therein, such allowance, to be allowable, must not be excessive or unreasonable having regard to the legitimate business income and the benefit derived by the company from incurring of the said expenditure. From the order of the Income-tax Officer referred to hereinbefore, it is manifest that he proceeded on the basis of Section 10(4A) in disallowing the entirety of the expenditure claimed though he did not say that he was disallowing under Section 10(4A) of the Act. The assessee preferred an appeal from the said order of the Income-tax Officer. The Appellate Assistant Commissioner in considering this question referred to the decision in Income-tax Appeal No. 936 of 1964-65 and referred to the principles laid down in the case of Bengal Enamel Works Ltd. v. Commissioner of Income-tax [1966] 59 ITR 472 (Cal) and found that in the previous year it was directed that the remuneration of Rs. 1,250 per month should be allowed to the managing director, Srimati Saha. Thereafter, he observed, inter alia as follows : "It was stated that she was not even a matriculate. Nothing could be brought on record even at the appellate stage about her previous business experience although it was stated that she had acted as a director previously for some time during her husband's lifetime. It was argued that the sales position improved from year to year after her appointment as a joint managing director but the Tribunal has remarked in its decision referred to above that this was a normal increase in this type of business and may have been in part contributed by the efforts of the managing director. In the Calcutta High Court's decision referred to above it was held that in deciding the issue one should take an overall picture of all the facts and circumstances of the case and the cumulative effect of the surrounding circumstances should be given effect to. At page 475 of the same case it was also stated by the High Court that it is now settled law that the question whether an item of expenditure is wholly and exclusively laid out for the purpose of the assessee's business must be decided on the facts of each case. Smt. Saha was holding large number of shares in the company and she had also controlling interest in the company. The company was previously run by her husband. The extent of services rendered by these two managing directors has not been brought out in the- records. A/R, however, stated that the lady regularly attended office whole-time. Of course, there is no doubt that Sri Das was connected with the company since its inception and he is a qualified man. Under the circumstances, the remuneration of Rs. 750 p.m. allowed to him and a commission of 1% on sales are not adequate when a similar remuneration of Rs. 750 per month has been allowed to the lady. The fact that Sri Das was also working in another company during the year should not be a reason for curtailing his remuneration by half. He is a capable and qualified man and in accordance with the remuneration paid to the managing director in this company, in my opinion, he is entitled to a remuneration @ Rs. 1,000 p.m. against Rs. 750 allowed by the Income-tax Officer. Regarding Smt. Saha the remuneration of Rs. 750 p.m. allowed by the Income-tax Officer seems to be fair and reasonable. About the commission of 1 1/2% allowed to her it was argued that a commission of 2 1/2% on total sales had been allowed in past to the previous managing director."
(3.) The Appellate Assistant Commissioner also did not refer to either the provisions of Section 10(2)(xv) or Section 10(4A) of the Indian Income-tax Act, 1922. The cases referred to in the said portion of the order, however, were cases dealing with question under Section 10(2)(xv) of the Act. But it must be pointed out that the Appellate Assistant Commissioner took into consideration whether the sales were made as a result of the participation of the managing directors and whether they had business experience. It is not clear from the order of the Appellate Assistant Commissioner whether he proceeded solely on the consideration of Section 10(2)(xv) or Section 10(4A). It seems to me that he considered both the aspects and modified to a certain extent the order of the Income-tax Officer as indicated above having regard to the business income and the benefit derived by the company from the participation of the said two managing directors, after having come to the conclusion that the said expenditure had been incurred wholly and exclusively for the purposes of the business. From the aforesaid order of the Appellate Assistant Commissioner the assessee preferred an appeal before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal, after discussing the rival contentions, observed as follows : "We have given our careful consideration to the arguments which have been addressed to us. The decisions on which the learned counsel has relied are not, in our opinion, applicable to the facts and circumstances of the present case. In both those decisions the question before their Lordships was whether the remuneration/commission paid to employees/agents qualified for deduction under Section 10(2)(xv). The disallowance in the present case has been made under Section 10(4A). Under section 10(2)(xv), the requirement is that the payments should have been incurred wholly and exclusively for the purposes of the business. The stipulation in Section 10(4A) is that the allowances should not be excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. Therefore, the decisions which are rendered under Section 10(2)(xv) would not be applicable to cases falling under Section 10(4A). 5. As stated earlier, the Tribunal had occasion to consider the matter from the standpoint of Section 10(4A) in the assessment year 1959-60, when the late Shri Gour Gopal Saha was the sole managing director of the asscssee-company, The Tribunal held that it would be reasonable to allow a remuneration of Rs. 1,250 per month, plus commission at 2 1/2% on sales. Though there are now two managing directors, it is clear from what has been stated in the orders of the authorities below that the brunt of the responsibility would have fallen on the shoulders of Shri A. K. Das. The Appellate Assistant Commissioner has in para. 1 of his order, inter alia, observed that 'there is no doubt that Shri Das was connected with the company since its inception and he is a qualified man'. In regard to Smt. Sujatha Saha, he has, inter alia, observed that ' she was not even a matriculate and that nothing has been brought on record regarding her previous business experience, if any', It is no doubt true that the Tribunal fixed the reasonable remuneration for the late Shri Gour Gopal Saha at only Rs. 1,250 per month but then, it was coupled with commission of 2 1/2% on sales. The commission payable to Shri Das has been considerably curtailed whereas the late Shri Gour Gopal Saha was in receipt of 2 1/2% commission on sales, Shri A. K. Das's entitlement is only 1%. It, therefore, appears to us that the remuneration of Rs. 1,500 per month which has been claimed in respect of Shri A.K. Das is quite just and fair and cannot be considered to be either excessive or unreasonable, within the meaning of that expression in Section 10(4A). We would, therefore, direct that the remuneration paid to him be allowed in full. In so far as Smt. Sujatha Saha is concerned, the remuneration of Rs. 750 per month plus commission at 1 1/2% on sales, which has been allowed by the Appellate Assistant Commissioner is sufficiently liberal and no enhancement of the allowance is accordingly necessary. The ground relating to the remuneration paid to the joint managing directors is disposed of accordingly.";