Ramachandra Iyer, O.C.J:— The following questions have been referred to us for our opinion:

“Whether, on the facts and in the circumstances of the case, there was material on which the Tribunal could disallow the sums of Rs. 6,500 and Rs. 11,500 paid to the managing director and the directors respectively, as claims not allowable under section 10(2)(xv) of the Income-tax Act”, and “whether, on the facts and in the circumstances of the case, there was material on which the Tribunal could disallow the sums of Rs. 7,500 and Rs. 5,400 paid to the managing director and the director respectively as claims not allowable under section 10(2)(xv) of the Income-tax Act?”

2. The two questions set out above respectively concern the propriety of the deductions claimed by the assessee in respect of salaries paid to the managing director, Narayana Iyer, and the technically qualified director, Kasiraman, during the two years of account relevant to the assessment years 1953–54 and 1952–53. The assessee's year of account coincides with the financial year.

3. 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 had qualified himself in automobile engineering became a director from 1950. There was also another director by name Srinivasan. The managing director and the other directors were paid remuneration in accordance with resolutions passed by the directors and the general body from time to time. It is evident that since its inception the company had been making rapid strides in its progress. More routes were acquired for plying buses and more buses were put on the road. This inevitably involved greater work on the part of the managing director and also of the technically qualified director.

4. On March 30, 1949, the board of directors passed a resolution fixing the remuneration of the managing director at Rs. 32,500 per year and of the technically qualified director, Kasiraman, at Rs. 17,500 per year who was previously getting only Rs. 11,400 per year. Taking the case of the managing director first, the following table will show the amount of fees paid to him for the relevant years of account corresponding to the assessment years set out below:

Assessment year Paid Allowed Rs. Rs. 1942–43 6,800 6,800 1943–44 9,600 9,600 1944–45 13,000 13,000 1945–46 13,000 13.000 1946–47 13,000 13,000 1947–48 19,500 19,500 1948–49 19,500 19,500 1949–50 32,500 22,500* 1950–51 32,500 22,500 1951–52 32,500 22,500 1952–53 32,500 25,000 1953–54 32,500 26,000

5. For the assessment years 1949–50 to 1951–52 the department allowed only Rs. 22,500. The assessee has claimed that the entire amount should be allowed in appeals to the Tribunal which have not yet been disposed of.

6. For the assessment years 1952–53 and 1953–64, the subject-matter of this reference, the Income-tax Officer allowed the sums of Rs. 25,000 and Rs. 26,000 respectively for the two years thus disallowing the sums of Rs. 7,500 and Rs. 6,500 respectively in regard to the managing director's remuneration. The disallowance was affirmed on appeal by the Appellate Assistant Commissioner and on further appeal by the Appellate Tribunal. The first part of the two questions referred to above refers to the propriety of the disallowance.

7. As regards the remuneration for Kasiraman in regard to the portion disallowed for the assessment years 1949–50 to 1951–52, appeals are pending before the Tribunal.

8. For the two years 1952–53 and 1953–54 which are the subject-matter of reference the assessee claimed Rs. 11,400 and Rs. 17,500 respectively. The Income-tax Officer allowed as proper deduction only Rs. 6,000 for each year thus disallowing Rs. 5,400 and Rs. 11,500. These which have been confirmed on appeal and further appeal form the subject-matter of the latter part of the two questions.

9. The claim for deduction of the entire amounts paid over to the managing director and to Mr. Kasiraman is sought to be supported under the provisions of section 10(2)(xv) of the Income-tax Act as an expenditure wholly and exclusively devoted for the purpose of the business carried on by the assessee. As the years of assessment are prior to the enactment of the Finance Act of 1956, the provisions of section 10(4A) of the Act will not apply and the only question is whether the expenditure can be regarded as one wholly devoted for the purpose of the business. There is no dispute about the facts. Narayana Iyer, the managing director, had acquired great experience in the business of plying motor buses and has been guiding the entire concern since its inception. During the course of a number of years the company was granted permits for a number of routes. The Income-tax Officer himself has realised this. The expansion of the assessee's business would undoubtedly require greater effort and efficiency on the part of persons in management and would necessarily involve greater work on their part. This was recognised by the department when it progressively increased the allowances paid towards the directors' remuneration. So far as Kasiraman is concerned, we have already stated that he is a technically qualified director. With the expansion of the bus service his work on the technical side, namely, in the matter of maintenance and upkeep of the buses would necessarily increase. This would be in addition to his duties as a director. It is not disputed that the company's profits have been steadily increasing with the acquisition of the new routes. The company thought that the directors who are actively engaged in attending to the business of the company should be paid a larger remuneration. The question is whether in so doing they were actuated purely by business considerations. Whether the remuneration decided upon by the directors should be regarded as one wholly and exclusively paid out for the purpose of the business has to be decided from the point of view of the businessman and not objectively by the Income-tax Officer, namely, whether, in his opinion, the amount of salary paid to the directors is justifiable or not. In Newtone Studios Ltd. v. Commissioner of Income-tax [1955] 28 I.T.R 378., this court has laid down the principles which should guide the Income-tax Officer in allowing deductions claimed under section 10(2)(xv). It was held that for the purpose of approving an expenditure incurred by an assessee as wholly and exclusively for the purpose of earning profits, it was not necessary to show that it was incurred as of “necessity” but that it would be sufficient to show that it was incurred voluntarily on grounds of commercial expediency and in order to facilitate the carrying on of the business. The question whether the expenditure could be justified on principles of commercial expediency should be judged not objectively by the Income-tax Officer, but he should on the other hand place himself in the position of the businessman and find out whether the expenditure was reasonable and proper in the circumstances of the case. In other words the test to find out whether a particular expenditure is wholly or partly justified is not to see whether it was necessary, nor to see whether the officer, if he were to do the business himself, would incur it to the extent to which it was incurred, but to find out whether the businessman when he expended the money was acting reasonably in the interests of his own business uninfluenced by any irrelevant or extraneous considerations. For example, if the assessee company resolves upon payment of a sum of money to a director unrelated to the services rendered by him, out of regard to the fact that he is a relation of the controlling members of the company, it cannot be said that the expenditure is justifiable on the ground of commercial expediency. At the same time it must be noticed that the mere fact that a director happens to be a relation of the persons in control of the company does not mean that he ought not to be paid his legitimate remuneration for his services. Where the amount expended or paid by way of salary to a director is correlated to the services rendered by him, the mere fact that the person receiving the money is a relation of the majority of the members of the company would not affect the question. The Tribunal has stated: “Considering that large amounts have been allowed without any regard to the working profits, in our opinion, the treatment accorded by the department should not be interferred with. No case has, in our opinion, been made out for any larger allowance.”

10. We are constrained to observe that the Tribunal has not viewed the matter in its correct perspective. The question is not so much whether the amounts that were paid over to the directors were large or not, but whether having regard to the value of the 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 question took into account the additional responsibility undertaken, and the work done by the managing director and the 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, the 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.

11. Reliance was placed on behalf of the department on Aspro, Limited v. Commissioner of Taxes to show that in a private limited company the onus is very great on the assessee to justify the expenditure. In that case the directors who were also the sole shareholders were allowing themselves fees for a number of years as two-thirds of the net profits after ascertaining the trade results of each year. In one year they arbitrarily fixed a sum far in excess of their usual remuneration. The Privy Council held that having regard to the circumstances of the case, namely, that the directors of the company were identical with the shareholders and that they were not very particular as to what amounts were paid to them or retained by the company, the court was entitled to hold that the company had failed to prove that the amount paid out had been exclusively incurred in the production of assessable income. We cannot see how that case which was concerned with its peculiar facts can afford any guidance to one where business considerations presumably required enhanced salary to the directors. The decision in Hotz Trust, Simla v. Commissioner Of Income-Tax, East Punjab, Simla [1952] 21 I.T.R 149 was the next case relied upon. In that case the assessee increased the salaries of three of its managers by about 66 per cent. It was found that no particular reason was given by the assessee for the increase; the managers to whom the increased salaries were given were not called upon to render any service in addition to what they had been rendering in the past; no demand even was made by them for an increase in their salaries; the assessee himself did not come forward to give evidence as to the expediency for the increase of salaries. It was held that the assessee had failed to discharge the burden of proof which lay on him by placing the necessary facts in order to support his case. That case is no authority for the contention that in every case where there is an increase in the directors' remuneration over the previous year's, the increase should be viewed as not wholly expedient for the purposes of the business.

12. The Income-tax Officer, in the instant case, though he referred to the circumstance that more and more routes had been operated upon by the assessee company, disallowed various amounts on no ascertainable basis. The amounts fixed by him as proper directors' remuneration were more or less on an arbitrary basis. The appellate authority merely confirmed them. The Tribunal does not appear to have considered the matter independently on any evidence in the case. There were materials on record which had to be considered to find out whether the deduction claimed could be allowed or not but these materials have not even been considered by the Tribunal. Under the circumstances we have to answer the questions referred to us in the negative but at the same time it must be pointed out that it is not for us to determine what exactly is the amount allowable as deduction. That is a question that has got to be considered by the Tribunal afresh in the light of the observations we have already made. The assessee will be entitled to his costs. Counsel's fee Rs. 250. We have to adopt the course that we do, in view of the fact that the Tribunal has not yet disposed of the appeals in relation to the assessment for the years 1949–50 and 1951–52. It is not known when exactly the Tribunal will be able to dispose of the appeals. The propriety of the expenditure in regard to the salary of the directors for the years with which this reference is concerned will undoubtedly depend upon the adjudication as to whether the amounts claimed for the three years are to be allowed in their entirety or to a limited extent. It may be that the Tribunal itself allowed what is claimed by the assessee in regard to those years and it may also be that subsequently the assessee might have secured more routes entailing more expenditure in regard to the work of the management of the company: In such a case, the question as to what is the extent of the expenditure that could be taken as coming within the purview of section 10(2)(xv) of the Act will have to be decided after deciding the previous year's case. Under the circumstances, we consider that it is not necessary to call upon the Tribunal to submit a fresh statement of the case in regard to the years now in question.

13. Questions answered in the negative.