P L D 1969 Supreme Court 517 (PLP)

ABDUS SATTAR, J.‑‑This appeal by special leave raises a question of general importance as to the power of the Income‑tax officer to examine the reasonableness of any expenditure claimed to have been made "wholly and exclusively for the purpose" of, any business as contemplated by section 10(2)(xvi) of the Income‑tax Act. The assessee, in the present case, is a private Limited Com pany, Mr. Ata Hossain Khan is the Managing Director of the Company and holds 999 shares out of a total of 1000 shares. For the assessment year 1956‑57 the remuneration of the Managing Director was claimed at Rs. 12,000 and for the subsequent two years, and with them only we are concerned in this appeal, the remuneration of the Managing Director was claimed at Rs. 24,000 per annum. The resolution in this regard was passed on the 31st of March 1957, the last day of the accounting year 1957‑

58. It may be mentioned in this connection that for the assessment year 1955‑56, the Managing Director's remuneration was claimed at Rs. 8,400 and this was allowed by the Income‑tax Officer. For the assessment years 1956‑57, 1957‑58 and 1958‑59, the Income‑tax officer refused to allow remuneration of the Managing Director at the enhanced rate. The assessee being dissatisfied with the assessment orders of the Income‑tax Officer, filed appeals against those orders. The Appellate Assistant Commissioner allowed the Managing Director's remuneration as claimed by the assessee, namely, Rs. 12,000 for the year 1956‑

57. He also allowed Rs. 24,000 for the year 1957‑58 but only Rs. 12,000 for the assessment year 1958‑

59. Both the Department and the assessee went in appeal against this order before the Income‑tax Appellate Tribunal. The Tribunal dismissed the Department's appeal for the years 1956‑57 and 1958‑59 but allowed the appeal for the year 1957‑58 and fixed the remuneration of the Managing Director for that year at Rs. 12,

000. The result of this was that the remuneration of the Managing Director for the assessment years 1956‑57, 1957‑58 and 1958‑59 was fixed at Rs. 12,000 per annum. At the instance of the assessee the Tribunal thereafter referred, under section 66(1) of the Income‑tax Act, the following question to the High Court for its decision :‑ "Whether on the facts and the circumstances of the case the disallowance of a sum of Rs. 12,000 for each of the assessment years 1957‑58 and 1958‑59 out of the expenses incurred by the applicant (appellant) for payment of remuneration to the Managing Director was justified under the provisions of section 10(2) of the Income‑tax Act." A Division Bench of the High Court of East Pakistan answered the question in the affirmative on the finding, inter alia, "that the Income‑tax Authority was right in holding that the assessee had failed to prove that the said sum had been exclusively incurred in the production of the assessable income and that the Income‑tax authority had sufficient evidence before it to come to the finding to exclude the sum, the subject‑matter o]' the Reference". We have already noticed that the Appellate Assistant Commissioner allowed the appeal preferred by the assessee to the full extent for the year 1957‑58 but accepted the appeal in regard to the year 1958‑59 in part. In doing so it was observed :‑ "From the discussion made before me it seems to me that the appellant's industry is not of simple printing or container making but of photo‑off‑set printing on containers which requires a series of photographic process. The business needs a good deal of technical knowledge skill and experience. There is no technical hand or a highly paid employee. The entire work has been done under the guidance and management of the Managing Director. From the figure of sales effected during the last several years, it is evident that the industry has made great strides and is well on the road to progress with the march of time. In consideration of all the facts stated above I am of opinion that Managing Director's remuneration as claimed during assessment years 1956‑57 and 1957‑58 should be allowed in full and that during 1958‑59 assessment year the remunera tion should be allowed Rs. 1,000 per month or Rs. 12,000 per annum, and the balance of the claim may be disallowed." The Appellate Assistant Commissioner at the same time came to a finding that the facts that the Managing Director's remuneration was fixed by the Articles of Association and by resolutions in extraordinary meetings and payments were shown in the books of accounts were no bar and could not stop the Income‑tax Officer from investigating the claim. It has not been contended by the learned counsel for the appellant, nor could it be contended, that under no circumstances the Income‑tax Officer is permitted to challenge the remuneration paid by a Company, be it public or private, to its Managing Director. It has however, been urged that the reasonableness of the amount fixed and paid by the Company is to be decided by the assessee and it is not for the Income‑tax Department to determine that question. In the case of Eastern Investments Limited v. Commissioner of Income‑tax, (20 I T R 1), the Supreme Court of India applied certain principles in construing section 12(2) of the Income‑tax Act. The words that occur in that section are "any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains". It was said :‑ "(a) though the question must be decided on the facts of each case the final conclusion is one of law : Indian Radio and Cable Communication Ltd. v. The Commissioner of Income‑tax, Bombay (1937) 5 I T R 270 (P C) and Tata Hydro Electric Agencies Ltd. v. The Commissioner of Income‑tax, Bombay (1937)51 TR202(PC); (b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned : Moore v. Stewards and Lloyds (1906) 6 Tax Cas. 501 and Usher's case (1915)AC533; (c) it is enough to show that the money was expended "not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business" : British Insulated and Helsby Cables Ltd. v. Atherton (1926) A C 205 at pp. 221 and 235 ; (d) beyond that no hard and fast rule can be laid down to explain what is meant by the word "solely". We respectfully agree with the view taken in this case. It will, thus, be seen that the most important factor in determining whether an expenditure by way of payment of remuneration to the Managing Director is "wholly and exclusively for the purposed of the business of the Company, is whether the expenditure is voluntary and is incurred on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. The question is not whether the expenditure is reasonable but whether it is incurred bona fide on the ground of commercial expediency. It is not for the Income‑1 tax Department to say that the expenditure is not reasonable. Mr. Afzal‑ul‑Haque, the learned counsel for the respondent has argued, and in our view rightly, that the onus of proving that the expenditure was incurred wholly and exclusively for the purpose of the business was on the assessee. His further argument that the assessee has failed to discharge the onus in the facts and circumstances of this case, however, cannot be accepted. Article 27 of the Articles of Association of the Company provides that the remuneration of the Managing Director shall be Rs. 1,000 per month as well as 10 % of the annual net profit of the Company. The remuneration of the Managing Director was fixed at a general meeting of the Company and it is not disputed that he received the remuneration at the rate sanctioned therein. The only facts which weighed with the High Court in upholding the decision of the Tribunal are that (I) the increment in salary was not sanctioned by a resolution before the commencement of any accounting year but after the profits were declared and known ; and (2) that though it is a private limited Company it is in fact one man's show and is for all practical purposes a proprietary concern inasmuch as there is complete identity of persons interested as shareholders and Managing Director. The Tribunal came clearly to the finding that the time when remuneration was fixed was not of much consequence in the facts of this case. It is true that having regard to the fact that Mr. Ata Hossain Khan holds 999 shares out of a total of 1000 shares there is complete identity of persons as shareholders and Managing Director but rye do not think that by itself is sufficient to hold that the expenditure was not incurred wholly and exclusively for the purpose of the business. The increase in rate of remuneration was sought to be justified by the assessee before the Income‑tax Officer on the ground of increased volume of business and profits. That the volume of business increased considerably in the assessment years 1957‑58 and 1958‑59 cannot be questioned. The statement appearing on page 38 of the paper book which forms part of the judgment of the Tribunal clearly of shows that for these years the volume of business increased by more than 100 % as compared to the business for the year 1956‑

57. The Tribunal observed "Mr. A. H. Hossain being the only technician in the line in East Pakistan demands for his services are high and the Company's activities are all looked after by him without a Manager retained for the purpose. These factors must be taken into consideration in ascertaining whether the remuneration of Rs. 1,000 p.m. or Rs. 12,000 per year was reasonable". We do not find any reason why the Tribunal after having found in consideration of the above facts that the increase from Rs. 8,400 for the year 1955‑56 to Rs. 12,000 for the year 1956‑57 was justified though the same remuneration to be adequate for the subsequent years despite the increase in the volume of business. We, however, must not be understood to lay down that it was open to the Tribunal to enter into the question of reasonableness of the amount paid. The only thing that the Department is entitled to examine is whether the amount claimed was spent wholly and exclusively for the purpose of the business. It is open to the Department to ascertain whether the amount was spent on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business but nothing more. The onus of showing that the amount was spent for such a purpose is, no doubt, upon the assessee. This, however, does not mean that the Department by applying some subjective standard of reasonableness can disallow such an expenditure. If, however, it is found on evidence that the expenditure was not incurred on grounds of commercial expediency but for a consideration other than that it is open to the Income‑tax Officer to disallow such an expenditure. We have already noticed that the circumstance on which reliance was placed by the High Court and the Income‑tax Appellate Tribunal was that there was complete identity of the persons interested as shareholders and of the person to whom the remuneration was paid. This is bound to happen in most cases of private limited companies. This, however, will not be a ground for disallowing payment of remuneration to the Managing Director unless it is found that the Company has failed to establish that the expenditure was wholly or exclusively for the purpose of its business or in other words there was lack of proof that the expenditure was on the ground of business expediency. The High Court, in support of its decision placed reliance mainly on the case of Aspro Limited v. Commissioner of Income tax (1932 A C 683). The facts of this case are to a certain extent similar to the facts of the instant case. In that case the Privy Council laid down that the true issue in such a case is whether there is evidence to hold that the expenditure in question "had been exclusively incurred in the production of assessable income". It was further observed that if the only evidence produced is the Company's resolution fixing the Director's fees and vouchers for the payment so fixed, it is difficult to see how it could be said that the amount had been unreasonably disallowed. In the present case, however, the evidence clearly established that the expenditure had been incurred wholly and exclusively for the purpose of the business. This evidence has been accepted by the Appellate Assistant Commissioner and the Income‑tax Tribunal inasmuch as they held that Mr. A. H. Khan is the only technician in the line in East Pakistan and demands for his services are high and due to his efforts the Industry in question made great strides and was well on the road to progress with march of time. After these findings the disallowance of the increased remuneration only on the ground that there was identity of interest between 'the payer and the payee and the remuneration was fixed after ascertaining the profits was not, in our view, justified. We agree with, Mr. Afzal‑ul‑Haque that it is open to the Income‑tax Officer to examine whether any expenditure by way of payment of remuneration to the Managing Director is for an extra commercial consideration. The question that, however, falls for determination is whether it has been established that the expenditure was paid or shown to have been paid for such a purpose. In our view there is complete lack or evidence in this case in this regard. On the contrary on the finding arrived at by the Tribunal with regard to the contribution of the Managing Director in putting the Industry on the path of progress it should have accepted the entire amounts spent for the years 1957‑58 and 1958‑59 under section 10 (2)(xvi) of the Income‑tax Act. The facts that the remuneration was fixed on the last day of the year and after ascertainment of the profits and there was identity of interests of shareholders and the Managing Director were not enough to hold that the increase in remuneration was not wholly o exclusively for the purpose of the business of the Company. The shareholders might have been actuated by the best of intention in differing the decision with regard to the remuneration until the last day of the year and took such a decision only aft ascertainment of the profits and proportionate to the volume of business and the profits earned by the Company. This does not at any rate establish mala fide nor does it lead to the conclusion that the purpose was to pay less income‑tax. In our view, therefore, the disallowance of Rs. 1000 per month for the assessment years 1957‑58 and 1958‑59 was wholly unjustified. In the result the appeal is allowed. The judgment of the High Court is set aside and the question submitted for its opinion is answered in the negative. In view, however, of the facts of this case we leave the parties to bear their own costs. Appeal allowed. Present: .Hamoodur Rahman, C. J, Muhammad Yaqub Ali, ' ., Sajjad Ahmad; Abdus Sattar and M. R. Khan, JJ