P L D 1965 Dacca 464 (PLP)

HASAN, J.‑

This is a Reference under section 66 (1) of the Income‑tax Act. The assessee claimed to have paid Mr. Ata Hussain Khan, their Managing Director at the rate of Rs. 1,000 per month for the assessment year 1956‑57 and at the rate of Rs. 2,000 per month for the assessment years 1957‑58 and 1958‑

59. The Income‑tax Officer observed that the assessee though a private limited company, Mr. Ata Hussain Khan, the Managing Director, was holding 999 shares out of total 1,000 shares and as such that was only one man's show. The Income‑tax Officer refused to allow remuneration of the Managing Director on an enhanced rate of Rs. 24,000 per year on the ground that the expenditure could not be taken as representing bona fide business expenses wholly and exclusively for the purpose of business and that the real purpose was to minimise the burden of taxation, and accordingly he allowed the Managing Director's remuneration at the rate of Rs. 4,800 per year for the assessment years 1956‑57, 1957‑58 and 1958‑59 as in the year immediately preceding before that. The assessee went in appeal before the Appellate Assistant Commissioner with regard to the assessment year 1956‑57, 1957‑58 and 1958‑

59. It was pointed out by the Appellate Assistant Commissioner that the Article 27 of the Association provided for remuneration of the Managing Director of the Company while Article 28 provided for further remuneration on the progress of the Company's business. It was observed by the Appellate Assistant Commissioner that the Company's activities up to 1955‑56 were absolutely of commercial nature but from the assessment year 1956‑57, the activities of the Company were diverted towards industry and the Company manufactured tin containers, photo‑off‑set, printing on containers, calendar printing of paper and tin plates, level printing and map printing etc.; that Mr. Ata Hussain Khan, the Managing Director of the Company had technical experience and managing abilities; that the whole show, so to speak, was run by him and was a proprietary concern for all intents and purposes although it was a private limited company in form and that there was complete identity of person interested as shareholder and as Managing Director. It was further observed that the Managing Director's remuneration at Rs. 1,000 and Rs. 2,000 per month was fixed at the end of the relevant period of the year when the assessment of the profits was available. In those circumstances, according to the opinion of the Appellate Assistant Commissioner, the Income‑tax Officer was competent to allow the Managing Director's remuneration at a reasonable amount according to the service rendered by him. In consideration of all the facts, the Appellate Assistant Commissioner was of opinion that the Managing Director's remuneration as claimed during the assess ment years 1956‑57 and 1957‑58 was to be allowed in full and that during the assessment year 1958‑59, the remuneration should be allowed at Rs. 1,000 per month or Rs. 12,000 per year and the balance of the claim was to be disallowed. As against that order, the Income‑tax Authority as well as the assessee preferred appeals before the Tribunal. The Tribunal observed "Mr. A. H. Khan being the only technician in the line in East Pakistan, the 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 per month or Rs. 12,000 per year was reasonable. In our opinion the above consideration amply justify the allowances of Rs. 1,000 per month to the Managing Director. The allowance of Rs. 2,000 per month by the Appellate Assistant Commissioner for the mid‑year 1957‑58 was a mistake, as he allowed Rs. 1,000 for the next year when the turnover and profit were higher." And accordingly the Tribunal allowed remuneration at the rate of Rs. 1,000 per month for all the years. As against that assessment by the Tribunal, the assessee prayed for a reference under section 66 (1) of the Income‑tax Act. The Tribunal after stating the facts referred the following question to the High Court. "(1) Whether on the facts and 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 for payment of remuneration to the Managing Director was justified under the provisions of section 10 (2)(xvi) of the Income‑tax Act?" It has been argued by Mr. Asrarul Hussain that it is enough for his client to show that the money was expended voluntarily on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. It has been further argued that if the assessee can prove that the expenses were made wholly and solely for the purpose of the business, the Department, cannot reject such a claim and that the expenses incurred do not appear to be too high, because of the nature of service obtained from the only technician in East Pakistan in the line. In support, reliance has been placed on the cases of The Newtone Studios Ltd. v. Commissioner of Income tax, Madras (28 I T R 378), Raman & Raman Ltd. v. Commissioner of Income‑tax, Madras (46 I T R 400), Walchand & Co. (Private) Ltd. v. Commissioner of Income‑tax, Bombay City 1 (48 I T R 638) and Notesan & Co. (Private) Ltd. v. Commissioner of Income‑tax, Madras (51 I T R 386). While on the other hand, Mr. Huda, the learned Deputy Attorney General, has argued that in view of the finding of fact that it is one man's show and also the fact that the remuneration was increased after the income was known, the increment in the salary was for the purpose of minimising the burden of taxation. In support he has relied on the cases of Hans Raj Gupta & Co. Ltd. v. Commissioner of Income‑tax (29 I T R 667); Aspro, Limited v. Commissioner of Taxes (1932 A C 683) and M/s Hotz Trust, Simla v. The Commissioner of Income‑tax, East Punjab (A I R 1952 Pb. 680). Of the cases placed before us by Mr. Asrar, the learned Advocate for the applicant specially relied on the case of The Newtone Studios Ltd. v. Commissioner of Income‑tax Madras. In that case the assessee claimed deduction of Rs. 59,100 as sums paid to four persons who rendered services to the Company as Managing Directors by a resolution dated 30th March 1946, in their assessment year 1947‑

48. Relying on the following principle enunciated in the case of: Eastern Investments Ltd. v. Commissioner of Income‑tax, West Bengal:‑ (1) Though the question must be decided on the facts of each case, the final conclusion is one of law. (2) It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned. (3) It is enough to show that the money was expended not of necessity and with a view to 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'. (4) Beyond that, no bard and fast rule can be laid down to explain what is meant by the word `solely'." The learned Judges held:‑ "That means there was really no basis at all on the evidence placed before the Tribunal for the conclusion it reached that the whole of Rs. 59,100 expended as salaries during the year of account could not be claimed as a legitimate deduction under section 10 (2)(xvi). The increase in salaries, it should be remembered, was in March 1946 long before the assessee‑company was even in a position to know whether there would in fact be a substantial increase in the gross receipts or net profits. We are stressing this only to show that it was an item of proof of good faith on the part of the assessee‑company in revising the salaries payable to the four persons, who between them virtually helped to earn the profits of the company. There was certainly nothing to indicate that the increase in salaries the shareholders authorised was a colourable devise to divert a portion of the anticipated profits of the company to four of its shareholders. In fact there was no occasion for taxing authorities or for the Tribunal even to consider such a possibility. Under our taxing system, it is for the assessee to conduct his business, and in his wisdom or otherwise to fix the remuneration to his staff. The Income‑tax Act does not clothe the taxing authority with any power or jurisdiction to determine the reasonableness of the amount so fixed and paid by the assessee. The only test for the deductibility of such remuneration is whether the expenditure has been incurred solely and exclusively for the purpose of the business. If the reality of the payment is challenged or is in dispute different considerations arise: So also in cases where the tax authorities are able to point to some consideration other than the purpose of the business as accounting for any portion of the payment made. In such cases, of course, such portion of the amount claimed, which is either not held to have been paid or is held to have been paid for reasons other than business expediency, could and should be disallowed; but the reason for the disallowance is because either the portion disallowed is not paid, or because the expenditure is not solely and exclusively for the business, and not on the ground that in the opinion of the Income‑tax Officer or other taxing authority the remuneration is `unreasonably' high‑either because the employee does not, in the authority's opinion, deserve so much, or because the assessee could have secured other employees on more favourable terms." The other cases relied on by Mr. Asrar are also in the similar tone. Now coming to the cases relied on by Mr. Huda, we find that in the case of Hans Raj Gupta & Co. Ltd. v. Commissioner of Income‑tax a company which took over the business of a partnership employed the General Manager of the partnership for a remuneration of 10 percent of the annual profits and an agreement was entered into accordingly. The Income‑tax Officer allowed only half of that commission as business expenditure taking into account the previous history of the case, the services rendered by him, what he was receiving before and the extent of the business. In those facts it was observed: "Assuming that the commission fell under section 10 (2) of the Income‑tax Act as contended by the company, what was the amount which was laid out wholly and exclusively for the purposes of the company was a question of fact and it was for the Officer or the Tribunal, as the case may be, to determine whether the payment was made wholly and exclusively for the purposes of the business of the assessee (i) . . . . . . . . . (sic) (ii) that the burden of proving the necessary facts in order to entitle the company to claim exemption under section 10 (2)(xvi) was on the company. (iii) that it could not be said that there was no material on which the Income‑tax Officer could come to the conclusion which he came to." In the case of Aspro Limited v. Commissioner of Taxes, 10,000 was fixed as the directors' remuneration for the year by a resolution passed in a general meeting of the company in accordance with the Articles of Association and had been paid to the directors equally. The assessees claimed that they were entitled to deduction from the company's profits the whole of that sum. The Commissioner of Taxes disallowed the deduction as to 8,000 being of opinion that to that extent it was not shown to have been an expenditure, `exclusively incurred in the production of the assessable income.' An appeal by applicants to the Supreme Court having been transferred to the Court of Appeal for hearing was dismissed. The learned Chief Justice, dissenting was of opinion that the fees having been fixed by resolution in accordance with the articles the deduction claimed could not be disputed. There was an appeal to the Privy Council but the same was dismissed with the following observations "In their Lordships' opinion, there is no material difference between these two aspects of the argument for present purposes, and the true issue is whether there was evidence before the Magistrate on which he was entitled to refuse to hold it proved that the 10,000 had been exclusively incurred in the production of the assessable income and that the assessment was excessive. If the only evidence before him had been the company's resolution fixing the directors' fees and vouchers for payment of the amounts so fixed, it is difficult to see how the Magistrate could reasonably have refused to hold that the assessment was excessive, and the question must be whether there was further evidence which reasonably entitled the Magistrate to decline to hold it proved that the assessment was excessive. Their Lordships are of opinion that the state of the evidence was not such as to compel the Magistrate to the conclusion that the 10,000 had been exclusively incurred in the production of the assessable income. There was complete identity of the persons interested as shareholders in fixing the amount of the fees to be paid to the directors and of the persons to whom the fees were to be paid, and, except in regard to its bearing on the liability of the company to tax, it made no difference to the destination of the money whether the amount of the fees represented fair remuneration for the directors' services or not. The Messrs Micholas, who, as sole shareholders and sole directors, alone knew how the fees came to be fixed, not only declined to allow the respondent to examine them on this matter, but did not come forward to give evidence before the Magistrate, although the burden of proof was upon them. Further, in this situation, it is not irrelevant to take also into account that in each year the fixing of these fees was made when a fair estimate of the trading results for the year was available and that in each year, of the balance available for directors' fees and for distribution among the shareholders, about two‑thirds was apportioned to directors' fees. In their Lordships' opinion, the Magistrate was entitled to hold that the appellants had failed to prove that the 10,000 had been exclusively incurred in the produc tion of the assessable income." After going through all the authorities cited and relied on by the learned Advocates, we find that there is no difference of opinion as to the proposition of law that in order to get an exemption, the expenditure must be incurred wholly and exclusively for the purpose of earning the profit, that it is sufficient if it was incurred voluntarily and on the ground of commercial expediency but it is also seen from some of the authorities that the initial onus lies on the assessee and thereafter the Income‑tax Authority must also have sufficient materials for rejecting the same. Now the question before us is whether Rs. 2,000 per month was spent wholly and exclusively for the purpose of the business. Mr. Asrar has argued that inasmuch as the assessee's accounts have not been disbelieved and in fact the money has been paid, the assessee has discharged his initial onus to prove that the expenditure was incurred wholly and exclusively for the purpose of earning profits; while on the other hand, it has been argued by Mr. Huda that the facts as disclosed conclusively go to show that the sum not allowed by the Income‑tax Department was not incurred wholly and exclusively for the purpose of earning the profits in the business, but to minimise the burden of taxation. The facts relied on by Mr. Huda are as follows: the increment in salary was not made 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 but in fact, it is one man's show as found by the Appellate. Assistant Commissioner and not reversed by the Tribunal. The relevant finding relied on is that the business beyond dispute is one man's show; practically it is a proprietary concern for all intents and purposes and although it is a private limited company in form, there is complete identity of persons interested as shareholders and Managing Director. By referring .to above facts it has been contended by Mr. Huda that barring the accounts produced by the assessee, the Income‑tax Department had other materials before it to come to the finding that the said sum was not spent wholly and exclusively for the purpose of earning the profits in the business but only to minimise the burden of taxes of the company. Much reliance has been placed on the observation by the Privy Council in the case of Aspro Limited v. Commissioner of Taxes. Though it has been found by the Tribunal that Mr. At Hussain Khan is the most experienced in the line of business, an is the only man in that line, still there remains the finding that is one man's show inasmuch as out of 1,000 shares, 999 shares belong to Mr. Ata Hussain Khan, the Managing Director. Barring some books of accounts no further evidence has been led by the assessee. To say, in the words of the Privy Council in the aforesaid case "If the only evidence before him had been the Company's resolution fixing the directors' fees and vouchers for payment of the amounts so fixed, it is difficult to see how the Income tax Authorities could reasonably have refused to hold that the assessment was excessive, and the question must be whether there was further evidence which reasonably entitled the Income‑tax Authorities to decline to hold it proved that the assessment was excessive." On the materials the Tribunal would have easily come to the finding that there were materials before the Income‑tax Officer to come to a different finding. Those materials are that the expenditure proposed and incurred was not at the beginning of the taxation year but after the profits were declared and that virtually Ata Hussain Khan was the sole proprietor as found b D the Appellate Assistant Commissioner. So we find 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 of the Reference. We accordingly answer the question in the affirmative. Having regard to the facts and circumstances of the case, we direct the parties to bear their respective costs of this Court. T. TALUKDAR, J.‑

I agree.