Masud, J.:— The short point to be decided in this reference under section 66(2) of the Income-tax 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 section 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 with effect from 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 Income-tax Officer 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 Income-tax Officer was confirmed by the Appellate Assistant Commissioner. Thereafter, the assessee appealed before the Appellate 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 section 10(2)(xv) of the Indian Income-tax Act?”

2. Mr. Sankar Das Banerjee, learned counsel for the assessee, has submitted before us that, on the facts of this case, the Income-tax Officer should have allowed the entire sum of Rs. 52,947 as an allowable expenditure under section 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.

3. In support of his contention that the remuneration paid to Dr. Ganguli was fair and reasonable, he has referred us to the following observations of the Income-tax Officer 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.”

4. He has, in particular, relied on the following statements of the Appellate Assistant Commissioner's order:

“So far as the knowledge and work done by Dr. Ganguli is concerned, there is no dispute and the Income-tax Officer 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.”

5. Relying on Newtone Studios Ltd. v. Commissioner of Income-tax [1955] 28 I.T.R 378., 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 & Raman Ltd. v. Commissioner of Income-tax [1962] 46 I.T.R 400., 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 & Co. Private Ltd. v. Commissioner of Income-tax [1963] 48 I.T.R 638., 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.

6. The assessee has claimed the entire remuneration paid to Dr. Ganguli under section 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 Commissioner of Income-tax v. Royal Calcutta Turf Club [1961] 41 I.T.R 414; Eastern Investments Ltd v. Commissioner Of Income Tax, West Bengal [1951] 20 I.T.R 1.

7. 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 of exclusively for the purposes of the assessee's business. The sufficiency or insufficiency of evidence forming the basis of a legal inference often given 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 section 10(2)(xv) is on the assessee: vide Commissioner of Income-tax v. Calcutta Agency Ltd. and J.K Woollen Manufacturers Ltd. v. Commissioner of Income-tax. 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. v. Commissioner of Income-tax 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. v. Commissioner of Income-tax, 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 Income-tax Officer's disallowance could not be sustained. In the only other case which had been cited by Mr. Banerjee. Walchand & Co. (P.) Ltd. v. Commissioner of Income-tax, the Bombay High Court decided against the department because the Income-tax Officer 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 section 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.

8. The assessee-company, a manufacturing concern in enamel goods, employed a foreign technician on a salary of Rs. 500 per month till 1941, in which year the company had earned an income of about Rs. 60,000 which was the maximum amount earned in 20 years of the company's existence. In June, 1941, the services of the said foreign technical adviser were dispensed with and Lt. Col. D.N Bhattacharyya who was the director of the company was appointed in his place with effect from 1st January, 1942, at a remuneration of 15% on the gross profits of the company. Col. Bhattacharyya's resignation from the said post was, however, accepted on grounds of ill health with effect from 31st December, 1949. Dr. U.P Ganguli, son-in-law of Col. Bhattacharyya, was, thereafter, appointed in the place of his father-in-law by a resolution passed by the board of directors on the 18th May, 1950. It is not disputed that Lt. Col. Bhattacharyya and Dr. U.P Ganguli, two of the directors of the company, held either directly or indirectly about 49% of the shares of the company as on 1st January, 1950, which happened to be the date from which Dr. Ganguli's appointment became operative. The circumstances under which Dr. Ganguli was selected from other candidates to the post were not very clear. It is further admitted that the appointment did not take place after necessary advertisements of the vacancy in the newspapers. The two other applicants to the said post happended to be foreigners but their qualifications or the terms or even their applications could not be placed. Prior to Dr. Ganguli's appointment he was a medical practitioner with an yearly income of about Rs. 20,000 and he had no special or technical or academic qualification or knowledge on enamel goods. Apart from the fact that Dr. Ganguli was an important shareholder and a director of the assessee-company, he happened to be also a nominee of the managing agents on the board of directors. It is also not denied that he drew a remuneration of Rs. 1,000 per month as secretary of the managing agents of the assessee-company. The Income-tax Officer, however, found Dr. Ganguli to be an excellent officer who had rendered valuable services to the company by his personality and efficiency and accordingly he considered a monthly sum of Rs. 3,500 besides his remuneration of Rs. 1,000 per month as secretary of the managing agents of the assessee-company would be sufficiently remunerative from the business point of view. In our opinion, on the facts and circumstances of the case, we should confirm the disallowance of the balance sum claimed by the assessee. At this stage we may refer to J.K Woollen Manufacturers Ltd. v. Commissioner of Income-tax cited by Mr. Gouri Mitter, learned counsel for the department, where the Allahabad High Court, following the decision in Jethabhai Hirji and Co. v. Commissioner of Income-tax, has made some useful observations at page 364:

“There the Bombay High Court has pointed out various kinds of materials or circumstances which the Income-tax Officer or the Tribunal might take into consideration in deciding the question of allowability or otherwise of an expenditure under section 10(2)(xv). Naturally the enumeration of these circumstances neither is nor can be exhaustive. It can only be illustrative. The circumstances cited there are: (1) whether the payment was made to a near relation, (2) the extent of the business, (3) the particulars of service rendered, (4) whether the service was such as to require special remuneration, (5) what was the quantum of payment, (6) whether the payment was or was not grossly out of proportion to the work done by the employee. To this list of circumstances might be added other circumstances, e.g, (7) what was the practice in the trade for payment to an employee in similar circumstances, (8) what were the qualifications of the employee, (9) what was the amount paid to a predecessor or a successor rendering the same service, (10) whether the allowance of a certain percentage was a normal allowance or was extraordinary having regard to the profits and the practice in the trade, (11) whether the method of working out profits for calculating the percentage of commission was the normal method or an abnormal method, and (12) if there was any extraordinariness or abnormality in the arrangement, was there any special reason or circumstances for such extraordinariness or abnormality.”

9. It is true that all these circumstances may not be present or natural in the facts of a particular case. It is also true that some of these circum stances by themselves may not serve as a correct index to proof or disproof of commercial expediency. Mr. Banerjee was correct when he said that mere relationship of the employee concerned to the previous incumbent and the employee's special status among the shareholders should not be considered as a criterion for holding that the payment was made for extra-commercial considerations. It seems to us 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. In the instant case, we find there are sufficient reasons for disallowing the balance remuneration of Dr. Ganguli. In addition to the finding of facts as stated above, we may also add that accounts of the assessee-company show a profit of Rs. 25,600 in the relevant accounting year. This profit was shown in the profit and loss by claiming a smaller amount of depreciation than it was really entitled to. The book profit of the company would be converted into a loss if the proper amount of depreciation was debited to the profit and loss account. In this connection it may be mentioned that the employee's remuneration was fixed at the rate of 15% on the annual gross profit of the company before allowing depreciation. Further it was stated that the assessee's turnover rose from 10 lakhs to nearly 40 lakhs in the next five years and the profits also rose by about five times. But it seems to us that apart from the employment of Dr. Ganguli there are other good reasons for the company's progress, for instance the increase in turnover, and the profits of the business, in the instant case, took place because the appellant-company had gradually increased its capital from 5.87 lakhs in 1950 to 8.6 lakhs in 1955. It is common knowledge that very often the increase of capital enables a company to raise its production and to earn higher profits. Moreover there is another special reason why such improvement took place. At the relevant time there were restrictions on import of enamelware. As a result there was greater demand of the enamel goods in the market and consequential increase of profit. Considering all these circumstances we find no reason to disturb the order of the Tribunal. For the reasons stated above, the answer to the question should be in the affirmative and against the assessee who will pay the costs of this reference.

Mitter, J.:— I agree.

10. Question answered in the affirmative.