RAMAN AND RAMAN LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE following questions have been referred to us for our opinion :

(2.) ORIGINALLY Narayana Iyer was having a business in running buses and lorries in Thanjavur district as a proprietary concern. On December 8, 1937, a private limited company known as Messrs. Raman and Raman Ltd. was formed and the business, goodwill and assets till then belonging to Narayana Iyer were transferred to the company, the present assessee. The company issued 500 shares of which Narayana Iyer as managing director owned 350 shares. His son, Kasiraman, owned 20 shares and most of the remaining shares were held by certain near relations of the aforesaid persons. Kasiraman who and qualified himself in automobile engineering become director from 1950. There and the other directors were paid remuneration in accordance with resolutions passed by the directors and the general body from time to time.

(3.) WE are constrained to observe that the Tribunal has not viewed the matter in its correct perspective. The question is not much whether the amounts that were paid over the directors were large or not but whether having regard to the value of services rendered by the individuals concerned the payments made to them can be said to be influenced by considerations of commercial expediency and not by other extraneous considerations. It does not appear that the Tribunal while considering this questions took into account the additional responsibility undertaken and the work done by the managing director and there other director compared with what they did during the previous years; nor do they appear to have taken into account what salaries were paid to the directors or persons similarly situated in other concerns. The fact that the Income-tax Officer himself allowed Rs. 25,000 and Rs. 26,000 for the years in question would show that there was increase in the work done by the directors. The propriety of the amount paid cannot be decided solely on the basis of the profits earned. A director may devote his entire time but the financial results may be poor. As pointed out earlier, the question has to be viewed not objectively from the point of view of the department; it is not they that should make the allowance; their duty is purely to decide how much of the expenditure could be correlated to business expediency. In this case it has not been found by the Tribunal that in enhancing the remuneration payable to the directors, the assessee company was actuated by considerations other than those relevant from a purely business point of view. Mr. Ranganathan who appears for the department contended that in all such cases the department has necessarily to make an estimate and it would not be open to the court to adjudge whether such estimate falls short of the correct standard or not. In our opinion, that is an incorrect way of approaching the question. The case is not one of the department making an estimate or making an allowance. It has only to decide whether the expenditure is proper or not. For that purpose, it has got to see whether such expenditure was voluntarily incurred for the purpose of the business. Once that test is satisfied, namely, correlation of the business purpose with the expenditure, that department is not concerned with the question what in its opinion would have been the proper expenditure. The department as well as the Tribunal failed to correlate the services rendered by the directors with the amount of remuneration paid to them before making the disallowance.