(Delivered by Veeraswami, J.)
This reference under S. 66(2) of the Indian Incomtax Act 1922, relate to the assessment years 1949-50 to 1953-54. A portion of the remuneration paid to the Managing Director having been disallowed for the years, the assessee eventually came up to this court on a referance at his instance in which certain directions were given, with the result the Tribunal went into the question over again and held that the assessee was entitled to allowance of the entire remuneration paid to the Directors in each of the years. The propriety of this view is the subject matter of the first question under reference which is:—
“Whether on the facts and in the circumstances of the case the Tribunal's order allowing the remuneration of the Managing Director and Director in full for the assessment years 1949-50 to 1953-54 as a proper claim under S. 10 (2) (xv) of the Incometax Act, is based on any material?”
There is also another question which raises the admissibility for en allowance of the initial and extra depreciation under S. 10 (2) (vi-a) of the Income-tax Act. But this is confined to the year 1950-51. The question referred to us reads:
“Whether on the facts and in the circum-Stances of the case, the initial and extra depreciation is admissible under the provisions of S. 10(2) (vi-a) of the Incometax Act ia respect of diesel engines and bodies fitted to old Chassis?”
So far as this qaestion is concerned, we may immediately dispose it of, as it is covered by two decisions of this court. As regards the allowance in respect of diesel engines, Commissioner of Income-tax v. Mir Mohamad Ali S.C 53 I.T.R 165 settles it which is in favour of the assessee. As for bodies fitted to hold chassis, though T.C 29 of 1964 related to current repairs, the principle of that decision with even better force applies to it whieh is again in favour of the assessee. We therefore, answer the second question in favour of the assessee.
On the first question, we consider that the point posed by it has aot been appositely phrased. It has been so phrased, perhaps in order that it may appear it involves a pure question of law. As a matter of fact, this is not a case where one can possibly say that there is no material to make the allowance. The factum of payment of the full remuneration to the directors has never been in dispute. What has been in controversy in but the quantum of remuneration which the assessee is entitled to allowence under S. 10(2)(xv). That question of course has been approached from different angles. So far as the Revanue is concerned, the point of view urged before the Tribunal was that though the Managing Director had contributed very largely to the business of the assessee, the increase in the grass collections in the transport business of the assessee could be attributed to natural causes as for instance the increase in seating capacity, travels habits of the public and the economy in the working cost which came out of experience. Certain other consideration also were urged which basically did not differ from that appoach of the Revenue to the question of admissibility of the allowance. The Tribunal, however, was a opinion that the entire remuneration paid to the directors in each of the years was expenditure laid out wholly and exclusively for the purpose of business and the assessee was, therefore, entitled as a matter of right to the allowance claimed.
We see that the assessee was a private limited company in the relevant assessment years running a fleet of busts and lorries. Since 1942—43 it appears to have made considerable progress in its business and its gross receipts had steadily increased from year to year upto 1953—54. Narayana Iyer who was the Managing Director owned 350 shares, his son Kasiraman owned 20 shares and most of the remaining shares were held by other close relatives of the Managing Director. In March 1949 the Board of Directors passed a resolutioa fixing the salary payable to Narayana Iyer at Rs. 32,500 per annum and to Kasiram as Director Rs. 17,500 per annum. This swart, while disposing of the previous reference in Raman and Raman Ltd. v. Commissioner of Income-tax observed that the question was 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. The Tribunal applied this observation in granting allowance of the full remuneration paid to the two directors. In our opinion the tribunal is right.
But in taking that the view, we would approach the question from a different stand point. With accept the principle that for eligibility of an allowance under S. 10 (2) (xv), there should be a nexus between the expenditure and the purpose of the business and the expenditure should have been wholly and exclusively laid out for that purpose. The first part of this proposition may not raise any problem of complexity, for, its determination will be on a factual basis. From the given facts, it should be easy to say whether there is any connection between the expenditure and the purpose of the business. But the expression ‘ wholly and exclusively laid out is capable of raising fine questions. But we do not propose in this case to embark on that aspect, for it has not been suggested at any stage of the assessment proceedings that factually the payment as remuneration has not been made and that character. It is also obvious that the remuneration was paid to the directors in that capacity. Once those facts are found, seldom can the Revenue or Court justifiably claim to put itself in the arm chair of a businessman or in the position of the Board of directors and assume the role of ascertaining how much is a reasonable remuneration, having regard to all the circumstances. That is a matter of business expediency and should be wisely left to the businessman concerned or the Board of Revenue. But that is not to say that the Revenue or the Court should simply take it for granted that once the payment has been as a fact made as remuneration, it is necessarily wholly and exclusively laid out for the purpose of the business. There may be cases where the quantum of remuneration claimed to have been paid is so patently excessive that it may threw doubt at the honesty and purpose of the outgoing. But as we observed, no such question arises on the facts of this case. We noticed above the point put forward before the Tribunal for the revenue. We do not think that it is a correct approach for the purpose of applying S. 10 (2) (xv) to determine so much of remuneration has to be allowed as may be justified by so much of services. We are satisfied that on the facts of this case the Tribunal was right in its view that the assessee is entitled to the full allowance of the entire payment made as remuneration to the directors in the years in question.
Mr. Balasubramaniam for the Revenue tried a line of argument based on S. 10 (4) (A) and suggested that this provision is but clarificatory of S. 10 (2) (xv). He said that though S. 10 (4) (A)was inserted on 1st April, 1956, and the present case concerns with years prior thereto, neventheless on application of the principle of this new provision, we should probe into the circumstances of the payment of remuneration to the Board of directors and rule that the assessee being a closed company as it is, the Revenae was justified in allowing only a part of the allowance claimed. In our opinion, the Revenue is not entitled to take up this stand. That was not the point of view of the Revenue at any stage below. Further, we are not satisfied that Sub-S. 4 (A) was merely clarificatery of S. 10 (2) (xv). This is because Sub-S. 4 (A) will come into play even where there is an expenditure wholly and exclusively laid out for the purpose of the business. Where it is a case of a closed company, discretion of course, is given to the Revenue to see whether the allowance is excessive or unreasonable. But that discretion it not given to the Revenue under S. 10 (2) (av). Under that provision, once it is shown that a certain amount is expended wholly and exclusively for the purpose of the business, there is no option for the department but to make the allowance.
We answer the first question too in favour of the assessee, with costs Rs. 250.
V.C.S