The Judgment of the Court was delivered by

Masud, J.:— As directed by the High Court under section 66(2) of the Indian Income-tax Act, 1922, the following common question of law has been referred to in these two references:

“Whether, on the facts and in the circumstances of this case, the Tribunal was right in law in allowing the entire remuneration to the directors as an admissible deduction for the purpose of assessment under the Income-tax Act,”

2. The assessee is an Indian company and its main business is to act as managing agents to certain public shipping companies. The assessment orders concerned are of 1952-53 and 1953-54 and the corresponding accounting years are calendar years 1951 and 1952. Out of the six directors during the accounting years three persons, although designated as directors, were in fact high officers of the company being called “full directors” or “local directors” according to their executive grade. They do not hold any shares in the company. On the contrary each one of them had been promoted from lower ranks and their remuneration and service conditions were governed by the agreement they had with the company. The said directors were not related to the company's shareholders who happened to be members of the “Turner family” of England. In these references, we are concerned with the agreement between the directors and the company dated January 1, 1957. Prior to this agreement they were governed by an agreement executed in 1947. Before 1947, the said directors, in addition to a fixed salary, received commission based on the profits of the company which used to be enormous sums of money. Under the agreement of 1947, however, the said directors agreed to receive a reduced salary but they were not entitled to any commission. The assessee-company's explanation was that this was agreed upon by the directors because of an apprehension of lesser profits owing to unstable political conditions which the company thought might prevail after the independence of India. But, the said directors, under the agreement of 1947, were allowed certain benefits and perquisites, i.e, free accommodation and services, superannuation fund, use of car, entertainment allowances and in certain cases additional facilities to the directors' children by way of scholarships provided by the company. In 1951 the company realised that their apprehensions were unfounded and accordingly the portion in the cut in their remuneration was substantially restored under the said agreement dated January 1, 1551. According to this agreement the salary of the directors was increased, although the benefits and the perquisites granted under the agreement of 1947 remained. During the course of assessment for the years 1952-53 and 1953-54, the Income-tax Officer noticed a rise in the remuneration paid to the directors in comparison with such remuneration paid in earlier years. The comparative position of the remuneration paid to the directors was as follows:

Assessment year Remuneration payable in 1947 Remuneration paid in the assessment years Amount of increase Rs. Rs. Rs. 1952-53 4,40,000 9,70,000 5,30,000 1953-54 4,40,000 9,24,500 4,84,500

3. The Income-tax Officer by the assessment order rejected the said increased remuneration as an allowable deduction under section 10(2)(xv) of the Act, and held that the total remuneration paid to the directors under 1947 agreement, i.e, Rs. 4,40,000, was adequate and that the additional remuneration of Rs. 5,30,000 was not paid out of any commercial expediency for the purpose of the business (vide assessment order being annexures “A-1”and “A-2” of the statement of case). The assessee preferred appeal to the Income-tax Appellate Assistant Commissioner and the Appellate Assistant Commissioner upheld the disallowances and dismissed the assessee's appeals (vide the orders of the Appellate Assistant Commissioner being annexures “B-1” and “B-2” to the statement of case). On a further appeal by the assessee to the Tribunal, the Tribunal held that the Income-tax Officer and the Appellate Assistant Commissioner were not justified in coming to the conclusion that payment of remuneration in excess of the amount payable under the 1947 agreement was not allowable as the assessee's business had not prospered proportionately or that no added responsibilities were put on the directors. The Tribunal, therefore, held that the payment made to the directors in respect of their increased remuneration was commercially expedient and was solely and wholly for the benefit of the company itself. The Tribunal further in its order dated December 12, 1962 (“annexure “C”) held:

“There is no finding by the income-tax authorities of the presence of any extra-commercial consideration in the payment of the increased remuneration to the directors and there being no material on the record to lead to that conclusion we are of the opinion that the entire remuneration, even though increased enormously during these assessment years, have got to be allowed as expenditures incurred wholly and exclusively for the purpose of the assessee's business.”

4. Thereafter, the present reference has come to us for our decision.

5. Mr. Balai Pal, on behalf of the revenue, has contended that the Tribunal's order should be set aside inasmuch as two essential facts which are required to be evaluated by it in coming to its conclusion have not been considered and, as such, its order is erroneous in law. Reliance has been placed by him on Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax [1967] 63 I.T.R 57 S.C. and Commissioner Of Income Tax, Punjab v. Indian Woollen Textiles Mills [1964] 51 I.T.R 291; [1964] 5 S.C.R 427 S.C. in support of his contention that non-consideration of material facts by the Tribunal amounts to a misdirection in law and, as such, the Tribunal's order should be set aside.

6. It should be remembered that the question whether the payments made by the assessee to some of its employees by way of increased remuneration are expenses wholly and exclusively for the purpose of such business within the meaning of section 10(2)(xv) is a mixed question of law and fact. In all such cases the court will have to find out the scope and meaning of the terms “mixed question of law and fact”. There is no doubt that the conclusion arrived at by the Tribunal to the effect that a particular expenditure is a revenue expenditure on the grounds that such expenditure has been laid out wholly and exclusively for the purpose of business or that the expenditure is not allowable inasmuch as there is an extra-commercial consideration for such increased remuneration is a question of law. The Tribunal's inference from the finding of fact is a matter which the High Court is entitled to examine, but the Tribunal being the final arbiter of the finding of facts, the High Court in its jurisdiction under section 66(1) cannot question or disturb the findings of fact although in a proper case specific questions of law may be raised to the effect that the Tribunal has come to its conclusion without any evidence or that such conclusion is perverse. Very often, the Tribunal's conclusion is challenged on the ground that its conclusion having been arrived at on the consideration of non-essential or extraneous facts or on consideration of only some of the many essential facts, the Tribunal's final conclusion is erroneous in law inasmuch as a wrong conclusion of law is arrived at from proved facts or surmises. In such cases the Tribunal's order is challenged as a matter of wrong inference of law sometimes by the assessee and sometimes by the revenue, as the case may be. It is quite possible that the Tribunal's conclusion is inextricably connected or directly flows from the findings of facts. In such a case the High Court can certainly examine the Tribunal's order in its special jurisdiction but will not disturb the Tribunal's order. Where, however, the Tribunal has come to a finding of fact but the final conclusion arrived at by it is not justified inasmuch as the principle underlying the commercial expediency has not been properly applied or that the inference is perverse or is not based on any material on record, the High Court should set aside the Tribunal's order.

7. Another confusion arises when it is argued that before an expenditure is disallowed the Tribunal must hold that the expenditure incurred is due to a particular extra-commercial consideration. In our view this contention is only partially correct. Extra-commercial consideration is often described as a fact, but, in my opinion, it is really an inference or conclusion from facts. It is quite possible to come to a finding of fact that there are extra-commercial considerations like collusion, mala fide transaction, relationship, but the final conclusion that the expenditure is not commercially expedient is a question of law. It is not necessary that the revenue must prove a particular fact as an extra-commercial consideration for such payment. Ordinarily, the Income-tax Officer is justified in putting himself on enquiry as to the reasons for such increase. The assessee is given opportunity to explain the reasons for such increase. If on examination of the evidence adduced and the reasonings given the Income-tax Officer is satisfied that the expenditure has been made not wholly and exclusively for the purpose of the business or that there is an extra-commercial consideration for such an increase the expenditure must be disallowed. Thus the onus is on the assessee to state the necessary facts or to explain the reasons. If, however, the onus is discharged by the assessee the expenditure must be allowed. It is quite possible that the conclusion of the Income-tax Officer may not be justified in particular cases. The Income-tax. Officer might find that the increased remuneration is purely arbitrary or that there are extraneous grounds. Proof of a particular extra-commercial ground either on the admission by the assessee or on evidence adduced by the department would certainly justify the Income-tax Officer to disallow such payments but it is quite possible that, although no particular extra-commercial consideration has been proved, yet the conclusion of the income-tax authorities that the additional remuneration was not paid out of any commercial expediency for the purpose of the business may be justified in law in the facts and circumstances of a case. The latter conclusion is as good as to hold that the payments have been made for extra-commercial consideration. In this context the conclusion that a particular expenditure has been incurred by way of extra-commercial consideration is a pure inference on the materials adduced before the authorities and on the reasonings submitted by the party.

8. In the present case the Income-tax Officer has come to the conclusion that the additional remuneration of Rs. 5,30,000 for the assessment year 1952-53 and Rs. 4,84,500 for 1953-54 were paid not out of any commercial expediency for the purpose of the assessee's business. The Income-tax Officer came to the said conclusion on the basis of three facts:

(a) that the agreement between the directors and the assessee-company in 1947 were made for 8 years under which the remuneration payable for the said two assessment years would be Rs. 4,40,000 each year and, as such, there is no justification for another agreement in 1951;

(b) there is no addition to the duties and responsibilities of the directors during the accounting periods; and

(c) the directors themselves did not make any specific demand for increased remuneration.

9. The Appellate Assistant Commissioner in dismissing the assessee's appeal has supported the conclusion of the Income-tax Officer but also added another fact that, compared to 1947, the profits of the assessee-company declined to some extent during the relevant accounting years. The Tribunal after considering the arguments of the parties set aside the orders of the Appellate Assistant Commissioner and have held that both the Income-tax Officer and the Appellate Assistant Commissioner failed to prove that the payment of increased remuneration was made on the ground of extra-commercial consideration. It is argued that in paragraph 9 of its order (page 44) the Tribunal has not given due consideration to two facts which have been considered by the income-tax authorities:

(a) the currency of the agreement of 1947;

(b) there is no specific demand on the part of the directors for the increase in their remuneration.

10. Mr. Balai Pal, relying upon Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax, has submitted that the Tribunal's order is vitiated in law inasmuch as the Tribunal has not considered all the four essential facts which have been examined by the Appellate Assistant Commissioner. In my view the Supreme Court case is clearly distinguishable inasmuch as there the disallowance was not disturbed because the Tribunal found on the facts of that case that the additional payment to the directors was for extra-commercial reasons. In that case the assessee-company was managed by managing agents whose remuneration was ordinarily an office allowance of Rs. 5,000 per month and a commission of 10% of the net profits of the company. Under the articles of association of the company its directors were entitled to a remuneration of Rs. 100 per month. By an extraordinary general meeting the relevant article was amended to provide for payment to the directors a commission of 1% of the net profits of the company in addition to their monthly remuneration. In consequence of such amendments five directors of the company became entitled to a sum of Rs. 28,218 each for the accounting year. The Tribunal found that the payment of the commission to the directors was for extra-commercial reasons on the grounds:

(i) that the directors did not render any special service in that year;

(ii) the management of the company was done by the managing agents and very little was done by the directors;

(iii) remuneration of Rs. 100 per month was not considered inadequate in early years; and

(iv) the increase in the company's profits by about Rs. 30 lakhs was due to the lifting of the control of cloth and not for any special exertion of the directors.

11. According to Mr. Pal, the fact that the directors did not render any special service has been considered to be essential which was dealt with by the Tribunal in that case. It is also argued by him that the Tribunal has failed to consider another essential fact that there was no specific demand of remuneration on the part of the persons concerned and, as such, it has erred in arriving at the conclusion that the expenditure was laid out wholly and exclusively for the business. He has further criticised the emphasis of the Tribunal in its order on a non-essential fact, that is, there is no additional profits of the business in the relevant years compared to the previous years. Reliance has been placed by him on Commissioner of Income-tax v. Walchand and Co. (P.) Ltd., where the Supreme Court has stated at page 385:

“The rule that increased remuneration can only be justified if there be corresponding increase in the profits of the employer is, in our judgment, erroneous.”

12. He has also added that a subjective standard of reasonableness should not be applied by taxing authorities in determining whether the expenditure is permissible under section 10(2)(xv).

13. In my view the contention of the counsel on behalf of the revenue cannot be accepted. The reasons why I say so are as follows:

It is well-settled that the Tribunal is the forum which decides the finding of fact and the High Court in its jurisdiction under section 66(1) cannot question the correctness or incorrectness of those findings of facts. It is not only the duty of the Tribunal to examine the material facts but also to come to a legal conclusion that the facts do not justify the allowance or disallowance of an expenditure. This final conclusion on the admissibility of an allowance or non-allowance of an expenditure is a question of law (vide Swadeshi Cotton Mills v. Commissioner of Income-tax). Meticulously speaking, every finding of fact involves an inference and every inference also is a fact in the sense of something which has happened. But, apart from the logical sophistry, the test of determining the admissibility or non-admissibility of an expenditure must be an objective test. The objective tests have been laid down in several decisions. In Commissioner of Income-tax v. Walchand and Co. (P.) Ltd., the Supreme Court has stated at page 384:

“It is open to the Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or that it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee.”

14. The same principle was enunciated in/. J.K Woollen Manufacturers v. Commissioner Of Income Tax U.P [1969] 72 I.T.R 612, 616; [1969] 1 S.C.R 525 S.C.. In both the cases emphasis has been laid upon the fact that the reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the income-tax department. The said principle has also been reiterated in Bengal Enamel Works Ltd. v. Commissioner of Income-tax. Thus, it is the duty of the High Court in its advisory jurisdiction to find out if the Tribunal has correctly applied the said principles in coming to its conclusion in law. I am satisfied that the Tribunal on the facts and circumstances of this case has not committed any error in law. The materials on record clearly show that the additional remuneration paid to the directors cannot be said to have been made for any extra-commercial consideration. There is nothing to show that the assessee has taken into consideration extraneous circumstances, i.e, circumstances which are not connected with the management or interest of business. On the contrary, there are good reasons to conclude that those payments were made to the directors on grounds of commercial expediency. Mr. Pal's contention that the Tribunal has failed to consider and examine the essential facts pn the basis of which the Income-tax Officer and the Appellate Assistant Commissioner came to the conclusion is not correct. In the context of the form in which the question of law has been referred, it cannot be Mr. Pal's case that the conclusion arrived at by the Tribunal is not based upon any evidence nor has he argued that such conclusion is perverse. His, main grievance is that the Tribunal has not considered some “essential facts” which the income-tax authorities considered earlier in coming to the conclusion that the expenditure was not incurred for commercial expediency. The Tribunal's order itself shows that the conclusions arrived at by it are substantiated by material basic facts and also good reasonings which may be stated as follows:

(a) the persons whose remuneration have been increased, although designated as directors, are in fact only high officers of the company. They are called full directors or local directors according to their executive grade;

(b) these persons hold no shares of the company and have no hand in the policy and the decision of the company itself;

(c) these directors have been promoted from the lower ranks;

(d) the remuneration and service conditions were not fixed arbitrarily but governed by an agreement they have with the company;

(e) there is no such extra-commercial consideration inasmuch as they are not in any way related to the company's shareholders who happen to be the members of a wealthy family of England called “Turner family”;

(f) prior to the 1947, agreement there was another agreement between the directors and the company under which they were entitled to a fixed salary plus a commission on the profits of the company;

(g) if the 19.47 agreement would have been in force the directors' remuneration under the agreement prior to 1947 would have exceeded even the amount paid under the agreement in 1951, during the assessment period. Thus in that sense there is not really any increase of remuneration but only partial restoration or reintroduction of the original remuneration;

(h) These directors are the persons on whom the shareholders of the company depend wholly and solely for the proper management and running of the business;

(i) the responsibility and loyalty of the directors to the company are established by the fact that they realised that on account of the partition of India there might be dwindling profits and that on account of consequential political instability of the country they agreed to a voluntary cut of their own salary and remuneration although under the agreement prior to 1947, they could have enjoyed higher remuneration. It was only in 1951, when they found that their apprehensions were unjustified they entered into an agreement with the company in 1951, under which they were allowed remuneration more or less in the same scale as they were enjoying prior to 1947;

(j) there is nothing to show that there was a collusion on the part of the assessee-company with the directors inasmuch as the directors who accepted the increased remuneration would actually be paying a higher rate of tax almost equal to 92% if the same would have been taxed in the hands of the company;

(k) the grant of the increased remuneration to the directors was actually made as an impetus and an inducement to its directors in consideration of their good and faithful service. Their faithful service is further indicated by the fact of their having forgone a big slice of their remuneration in 1947, when they could have insisted that the company should continue to pay remuneration in accordance with the agreement prior to 1947; and

(1) these directors were all advanced in the ranks and position in the hierarchy of the directors.

15. All the aforesaid findings of facts and reasonings are sufficient materials, in my opinion, for coming to the conclusion that the payments made to the directors as additional remuneration were made wholly and exclusively for the purpose of the business of the assessee-company. The criticism of Mr. Pal that the Tribunal has not considered two essential facts in coming to its conclusion is not correct. The Tribunal has faithfully recorded all the aforesaid facts and the reasonings of the Income-tax Officer and the Appellate Assistant Commissioner; and in doing so the agreement of 1947 and the fact that there was no specific demand for increased remuneration from the directors have been mentioned and noted. In the penultimate paragraph 9 (page 44) he has decided against the assessee after mentioning the words “having heard the parties at length and having considered the arguments”. In this connection reference may be made to the observations of the Supreme Court in Hooghly Trust (P) Ltd. v. Cit, West Bengal, Etc:

“The Tribunal does not appear to have discussed the entire evidence on which the findings were based, but the order of the Appellate Assistant Commissioner and his findings as also the entire record were before it and there is nothing to suggest that all the material facts were not present to its mind except that they are not mentioned in detail.”

16. In view of these words it is difficult to accept that the Tribunal overlooked the said two important facts which according to Mr. Pal have not been considered by the Tribunal. It is quite possible that the learned counsel appearing before the Tribunal might have laid emphasis to the two important facts only, i.e:

(a) the business has not prospered proportionately;

(b) that there were no added responsibilities to the directors' job for the increased payment of remuneration.

17. But be that as it may, the Tribunal has come to a final conclusion after consideration of not only the said two facts but also added other grounds in the same, paragraph:

(a) the said directors are the persons on whom the shareholders of the company depend wholly and solely for proper management and running of the business;

(b) the directors had forgone a very big slice of their remuneration during the year 1947, and thus have shown a commendable responsibility and faithfullness in discharging their duties in respect of the affairs of the business:

(c) by allowing the restoration of their original remuneration the company was actually giving an inducement to the directors in return for their good services to the company;

(d) these officers had advanced in ranks and position in the seniority of directors.

18. Further, the reasonableness of any increased remuneration has got to be considered from the point of view of the business as the law was in force before the introduction of section 10(4A). As stated earlier, there were sufficient materials before the Tribunal to come to the conclusion that the increased remuneration was for the benefit of the business. The Tribunal did not find any particular fact which would lead it to the conclusion that there was extra-commercial consideration in payment of the increased remuneration. I agree with the argument of Mr. Pal that the Tribunal should have discussed the legal effects of the four facts on the basis of which the Appellate Assistant Commissioner disallowed the increased remuneration. But the Tribunal is the final authority in coming to the conclusion in respect of finding of facts. The High Court would only examine if the conclusion arrived at by the Tribunal has not been legitimately arrived.

19. Even assuming Mr. Pal's contention that the Tribunal by noting and recording only the history of the case cannot be said to have considered the said two facts to be correct, it may be said that the Tribunal did not consider the importance of the fact that there was no demand of increased remuneration from the directors. The Tribunal in coming to its conclusion can legitimately lay emphasis on certain facts and may not give importance to other facts which are not essential. It is quite possible to comment that in distinguishing essential facts from the totality of facts the test of such distinction is not subjective. But at the same time in the present case there are many facts which justify the conclusion of the Tribunal that it has applied the objective test. In a proper case a demand from the employees in respect of their increased remuneration may be a relevant fact. But the criticism that absence of any demand by the employees concerned has not been considered by the Tribunal cannot be fatal. It is absurd to suggest that the high executives of a company must demand for their increased remuneration before the increment of their salary could at all be considered by the employer. A contrary proposition would compel these officers to make representations for their increased remuneration although, in the opinion of the employer, the increase is justifiable on other legitimate grounds. Further, the question in this particular case has been framed on the basis that the facts are accepted by the revenue. The department is only challenging the decision reached by the Tribunal on the basis of those findings. The question as framed should be read as, “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the entire remuneration to the directors as on admissible deduction for the purpose of assessment under the Income-tax Act?” Reliance may be plased on Karam Chand Thapar and Bros. P. Ltd. v. Commissioner of Income-tax where the learned judges have made the following observation at page 171:

“In our opinion, it was wholly impermissible for the High Court to disturb the findings of fact reached by the Tribunal. The Tribunal was the final fact-finding authority. The facts found by it could have been challenged only on certain recognised grounds. Neither the High Court nor this court has jurisdiction to reappreciate the material on record to find out whether the facts found by the Tribunal are correct or not.”

20. For all the reasons stated above there has been no wrong application of law or legal approach to the conclusion of the Tribunal and in my view the conclusion arrived at by the Tribunal is the only legal inference from facts proved in this case. In the premises the question referred to the High Court is answered in the affirmative and against the department. The revenue shall pay costs of this reference to the assessee.

A.N Sen, J.:— I agree.

21. I, however, wish to state my reasons.

22. The facts of the case have been set out in the statement of the case and in the judgment of My Lord.

23. The question for determination is “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the entire remuneration to the directors as an admissible deduction for the purpose of assessment under the Income-tax Act?”

24. The principles which govern such cases of allowance of remuneration of directors under section 10(2)(xv) appear to be well-settled. The onus rests on the assessee who claims deduction in respect of any such expenditure incurred on payment of remuneration to directors to prove that the expenditure was wholly and exclusively laid for the purpose of the business of the assessee. It is undoubtedly open to the Income-tax Officer, and indeed his duty, to scrutinise each and every item of claim for deduction made by the assessee. The Income-tax Officer has to consider the question of remuneration from the point of view of a prudent businessman. It is no part of the Income-tax Officer's function to try to lay down what should be the reasonable remuneration of a director. The duty of the Income-tax Officer is to ascertain on a consideration of all relevant materials whether the amount paid to the director by way of remuneration was paid wholly and exclusively for the purpose of the business of the company or for any extra-commercial consideration. If in any particular case the Income-tax Officer cannot justifiably find any extra-commercial reason for payment of the remuneration, it is not open to the Income-tax Officer to disallow the claim for deduction of any portion of the said remuneration under section 10(2)(xv) merely on the ground that in the opinion of the Income-tax Officer the remuneration paid to the director was excessive. In such a case, whatever may be the subjective view of the Income-tax Officer, the expenditure which cannot be said to have been incurred for any extra-commercial purpose, must necessarily be held to have been laid wholly and exclusively for the purpose of the business of the company. If, however, in any particular case, the facts and circumstances justifiably establish that the remuneration or any portion thereof was paid to a director for extra-commercial consideration, the remuneration of the director or such portion thereof as was paid for any such extra-commercial purpose must necessarily be disallowed, as the same would in such a case be not incurred wholly and exclusively for the purpose of the company's business. Generally, whenever a company pays any remuneration to directors, officers or employees who work for the company, for works done by them in the course of their employment, the expenditure incurred by the company is for commercial purposes of the company. It is essentially for the company to determine what remuneration the company will pay to them for their work as, in deciding the question of remuneration, the company may have to consider very many factors. Whenever it is established that whatever remuneration has been paid by the company has been paid only for commercial purpose for services rendered by them to the company in the course of their employment, the Income-tax Officer in considering such expenditure under section 10(2)(xv) has to allow the same, as such expenditure is wholly and exclusively for the purpose of the business of the company, irrespective of the question of the largeness or smallness of the amount of remuneration paid. If, however, the remuneration or any portion thereof be legitimately found in the facts and circumstances of a given case, to have been incurred not for commercial purposes of the company but for any extra-commercial consideration, a claim for an allowance in respect of the same will have to be disallowed. The question whether the expenditure incurred by any company for payment of remuneration to directors, other officers and employees was laid out or expended wholly and exclusively for the purpose of the business of the company or was for some extra-commercial consideration must necessarily depend on the facts and circumstances of each particular case.

25. As these principles governing the question of allowance of remuneration of directors under section 10(2)(xv) appear, to my mind, to be firmly established, I have not considered it necessary to refer to the various cases cited from the Bar.

26. In the instant case the facts and circumstances referred to by the Tribunal may be noted.

27. The main business of the assessee is to act as managing agents of certain public shipping companies. The number of directors in the assessment years 1952-53 and 1953-54 was 5 and these persons, although designated as “directors”, were in fact only high executives of the company, being called “full director” or “local director” according to their executive grade. They held no shares in the company and had no hand in the policy thereof. Each one of them had risen by promotion from the lower ranks and their remuneration and service conditions are governed by the agreement they have with the company. They were not in any way related to the company's shareholders who happen to be the members of the wealthy “Turner family” of England. Prior to 1947 there was an agreement between the company and the directors, and on the basis of the said agreement remuneration of the directors consisted of fixed salary plus commission on profits of the company. On the basis of the said agreement the directors had been enjoying a very fabulous income. These directors are persons on whom the shareholders of the company depend wholly and solely for the proper management and running of the business. These directors had agreed to forgo a very large portion of the remuneration during the year 1947, when, as a matter of fact, if the directors had struck to their agreement under which they were working, they could not have been deprived of any portion of the same. Notwithstanding the fact that the pre-1947 agreement on the basis of which the directors were enjoying a huge remuneration was in operation, the directors, in view of change in the political condition of this country, had consented to a substantial reduction in their remuneration, apprehending that profits of the company might dwindle down as a result of political changes and unstable political conditions. Because of the apprehension of dwindling profits the directors out of their sense of responsibility had volunteered to forgo the remuneration to which they would have been entitled on the basis of the agreement then in force and had entered into an agreement in 1947 on the basis of which they had agreed to work at a much lower remuneration. The apprehension of the company proved baseless and there was no appreciable fall in the company's profits. As the apprehensions of evil days for the company were unfounded and the company's business had not suffered as a result of the political changes, the company in 1951 revised the agreement which had been entered into in 1947 and was to continue for 8 years and by the agreement of 1951 the company increased the remuneration of the directors, restoring to them a portion of the cut voluntarily undergone by them. The increased amount of remuneration paid to the directors on the basis of the revised agreement of 1951 was much less than what the directors would have been entitled to, if the directors had not voluntarily agreed to give up their rights under the agreement which prevailed before 1947.

28. In the light of these facts and circumstances the Tribunal came to the conclusion that the entire amount of remuneration paid to the directors was laid wholly and exclusively for the purpose of the business of the company and was not paid for any extra-commercial consideration. The Tribunal has found that there was no collusion between the directors and the company and the Tribunal further held:

“We further find that by granting the increased remuneration the company was actually giving an impetus and an inducement to its directors to keep up their tradition of good and faithful service to it. The increment was also partly because of the fact that all these directors had advanced in the rank and position of hierarchy of the directors. Such an expenditure, in our opinion, is commercially expedient and wholly for the benefit of the company itself.”

29. Mr. B.L Pal, learned counsel for the department, has criticised the finding of the Tribunal on the ground that the Tribunal has not considered two main facts, namely:

(i) that the agreement of 1947 was to continue for a period of 8 years; and

(ii) that no demands were made by the directors for any increment in their remuneration.

30. In the facts of the instant case, this criticism of Mr. Pal, to my mind, does not appear to be justified and in any event this criticism is of no material consequence. It appears from the order of the Tribunal that the Tribunal has recorded all the contentions advanced on behalf of the department. The Tribunal in its order has referred to all the agreements including the agreement which was in force before 1947. The Tribunal has carefully considered the nature of relationship between the directors and the company and the circumstances under which the agreement of 1947 had come into existence. The Tribunal has referred to the very great sense of responsibility of the directors which had prompted them not to insist on their rights under the agreement which prevailed before 1947 and to enter into the agreement of 1947, giving up a large portion of the remuneration in the interest of the company. The fact that the directors were prepared not to insist on their legal rights under the agreement and to give up a large amount which would have come to them by way of their remuneration on the basis of the agreement in force and to enter into an agreement in 1947 at a reduced remuneration clearly indicates that the parties were not at all concerned with the provisions of any agreement and their legal rights and obligations arising from such agreements and they were more concerned with the welfare of the company. In view of the nature of relationship between the parties and the trust and confidence reposed in the directors and the sense of responsibility with which the directors were managing the affairs of the company, agreements or the provisions thereof were not considered to be of any particular importance or any real impediment, as by consent of the parties, the agreements could always be modified or altered and a new agreement could always be arrived at. The consideration by the Tribunal of the nature of relationship between the directors and the company and of all the agreements and the circumstances under which the directors agreed to enter into the agreement of 1947, forgoing a good part of their remuneration under the agreement prevailing before that date, indicates, to my mind, that the Tribunal had undoubtedly applied its mind to the aspect of the duration of the agreement of 1947 and the question of demands by the directors and the Tribunal had appreciated that those were not material considerations. In the instant case the increment allowed to the directors is really no increment but only restoration of a portion of the remuneration to which they would normally have been legitimately entitled. In any event, in the facts and circumstances of this case there is or can be no finding that the increment was granted for any extra-commercial consideration. As the facts and circumstances of this case do not suggest that there was or could be any extra-commercial consideration for the increment in the remuneration of the directors, the entire remuneration paid to the directors must be considered to have been laid and expended wholly and exclusively for the business of the company.

31. I, therefore, agree with my Lord in answering the question in the affirmative, in favour of the assessee and against the department and with his order as to costs.