1966 PLP 106 (PTD)

MUHAMMAD FAZLE GHANI, J.‑The Tribunal was called upon to refer the following question of law under section 66(2) of the Income‑tax Act, 1922:‑ "Whether on the facts and in the circumstances of the case, the disallowance of Rs. 18,000.00 (Mr. Yousuf Rs. 12,000.00 and Mrs. Brentford Rs. 6,000.00 out of the expenses incurred by the applicant company for payment of remunerations to the two Directors is permissible under the provisions of section 10 (2) (xvi) of the Act?"

2. The assessee, a private limited company, claimed under section 10 (2) (xvi) deduction of Rs. 36,000.00 and Rs. 12,000.00 paid to their Directors Mr. Yousuf and Mrs. Brentford respectively, for the assessment years 1954‑55 and 1955‑56 as remuneration. In the preceding assessment year 1953‑54 Mr. Yousuf was paid Rs. 12,000.00 ‑ and Mrs.. Brentford Rs. 3,000.00 only and this amount was allowed by the Income‑tax Officer. For the relevant charge year, the assessing authority rejected the claim on the ground of inordinate increase in the salaries of these two Directors although the income of the Company had proportionately increased in that year. The Appellate Tribunal found that the increase in the remunerations was motivated by extra‑commercial reasons and was not wholly and exclusively for the purposes of the business. Nevertheless by a subjective standard of reasonableness the increase of remuneration to Rs. 24,000.00 in case of Mr. Yusuf and Rs. 12,000.00 for Mrs. Brentford were considered to be adequate.

3. It was urged on behalf. of the assessee that Mr. Yusuf and .Mrs. Brentford were employees of another concern, namely, Bientford James & Company and in the relevant year the sum paid to Mr. Yousuf by Messrs Brentford James & Company amounted to Rs. 20,653.00 as salary and Rs. 6,000.00 as commission and Mrs. Brentford was paid Rs. 3,812.00. It was, therefore, clear that if the amount of salary and commission paid to these two Directors by Messrs Brentford James & Company and the assessee‑company be added up, the aggregate amount would be equal to or less than such total amounts as were received by them in the earlier years: The Tribunal repelled this contention with the observation that the "burden of one assessee cannot be allowed to fall on another".

4. It was contended that the assessing authority allowed Rs. 36,000 00 to Mr. Brentford on identical grounds and there was no justification to cut down the salaries of these two directors as all of them were previously working for Brentford James & Company, and subsequently each one of them devoted more time and attention to the assessee‑company in the relevant year as compared to their past activities. Their continued efforts resulted in the appreciation of business and profits of the assessee company. Mr. Yousuf had some foreign qualification and was influential and well‑connected. He was incharge of the office at Karachi from where he secured orders for supplies and looked after the affairs of the company.

5. The profit and loss accounts of various years are on record. The assessee‑company was constituted to gradually take over the business of Messrs Brentford James & Company and a comparsion of the statement reproduced in the statement of the case shows that year by year the volume of business transacted by the assessee increased and in. accordance with it the emoluments paid by the assessee also increased, for example, Mr. Yusuf received Rs. 2,750.00 per month plus 2J per cent commission from Messrs Brentford James & Company as share holder and Director in the assessing year 1953‑54. (In fact the assessee has taken over the business of the former company, and it is why Mr. Yusuf drew a salary of Rs. 33,000.00 plus commission of Rs. 18,545.00 in 1952-53 but was paid Rs. 12,.000.00 only as salary by the assessee‑company. In the next year the salary of Mr. Yusuf was reduced to Rs. 40,000.00 only by Messrs Brentford James & Company and correspondingly he claimed an increase of Rs. 24,000.00 from the assessee‑company. Although the assessment of both the companies was completed at the same time, no objection was taken to the salary of Rs. 33,000.00 plus a commission of Rs. 18,345.00 drawn by Mr. Yusuf in 1953‑54 from Messrs Brentford James & Co. The increase in the remunerations of Mr. Yusuf and Mrs. Brentford can thus be traced to the increase in the services rendered by them to the assessee and decrease in their services to Messrs Brentford James & Company.

6. The bona fides of the payments made to these Directors or the fact that actual payments were made to them is not in dispute. It was, therefore, urged that the assessee‑company had a right to decide what it should pay to its Directors on a proper appreciation of the services which *ere rendered by them and as such the company was within its rights to increase their salaries during the relevant assessment year. It was stated that unless there is some material from which it could be gathered that the increase in the salaries was for consideration other than for the purposes of business the Income‑tax Authorities would not be justified in disallowing the payment. The assessee had taken over the management of Messrs Brentford which was reducing its business in Pakistan and the work of the assessee company had been considerably increased in improving the business of the new enterprise; therefore, the work of the Directors had proportionately increased which resulted in appreciation of the profit of the company in the relevant years and as well as in the years thereafter.

7. There was no material in the case from which it could be gathered that the increase in the salary was made for extra commercial consideration or for considerations other than for the purposes of the business while on the other hand the increase of salary in the case of Mr. Brentford has been allowed to the full extent and no justification given for the dis‑allowance of Rs. 12,000.00 in case of Mr. Muhammad Yusuf and Rs. 6,000.00 of Mrs. Brentford.

8. All the Directors had shifted the venue of their activities from James Brentford & Company to the assessee‑company and devoted more time and attention in its affairs. The fact is established by the increase in the business of the company and the appreciation in its profits. It is for the assessee to conduct his business and to fix a reasonable remuneration for its Directors or other officials. The reasonableness of the amount fixed and ‑paid by the assessee is to be decided by the assessee itself in the absence of any evidence to the contrary that the remunerations so paid were for purposes other than business. The criterion for the deduction of remuneration may be different in the cases where the payment is challenged or is disputed, but in the present case the factum of payment has been admitted anti the taxing authorities applied their own standard of reasonableness. They have also given no reasons as to why a different treatment was meted out to Mr. Brentford who was allowed the total amount of Rs. 36,000.00 although he was amongst the Directors who had] shifted from Brentford James & Company to the assessee company. All the Directors had worked for the promotion of the business of assessee company in the year of account and the Tribunal negatived the claim of Mr: Yusuf anti Mrs. Brentford for the reasons that the burden of one assessee could not be shifted to another, which in law, is no ground fox adding back the amount in question.

9. In the circumstances our answer to the question is that the Tribunal had no evidence to disallow part of the increase in the remuneration to the two Directors during the assessment years 1954‑55 and 1955‑

56. The reference is answered accordingly. There will be no order as to costs. s. Q. Reference answered accordingly.