TMI Blog1961 (7) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... es paid to the managing director, Narayana Iyer, and the technical qualified director, Kasiraman, during the two years of account relevant to the assessment years 1953-54 and 1952-53. The assessee's year of account coincides with the financial year. Originally Narayana Iyer was having a business in running buses and lorries in Thanjavur district as a proprietary concern. On December 8, 1937, a private limited company known as Messrs. Raman and Raman Ltd. was formed and the business, goodwill and assets till then belonging to Narayana Iyer were transferred to the company, the present assessee. The company issued 500 shares of which Narayana Iyer as managing director owned 350 shares. His son, Kasiraman, owned 20 shares and most of the remaining shares were held by certain near relations of the aforesaid persons. Kasiraman who and qualified himself in automobile engineering become director from 1950. There was also another director by name Srinivasan. The managing director and the other directors were paid remuneration in accordance with resolutions passed by the directors and the general body from time to time. It is evident that since its inception the company had been ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal by the Appellate Assistant Commissioner and on further appeal by the Appellate Tribunal. The first part of the two questions referred to above refers to the propriety of the disallowance. As regards the remuneration for Kasiraman in regard to the portion disallowed for the assessment years 1949-50 to 1951-52 appeals are pending before the Tribunal. For the two years 1952-53 and 1953-54 which are the subjectmatter of reference the assessee claimed ₹ 11,400 and ₹ 17,500 respectively. The Income-tax Officer allowed as proper deduction only ₹ 6,000 for each year thus disallowing ₹ 5,400 and ₹ 11,500. These which have been confirmed on appeal and further appeal form the subject matter of the latter part of the two questions. The claim for deduction of the entire amounts paid over to the managing director and to Mr. Kasiraman is sought to be supported under the provisions of section 10(2)(xv) of the Income-tax Act as an expenditure wholly and exclusively devoted for the purpose of the business carried on by the assessee. As the years of assessment are prior to the enactment of the Finance Act of 1956, the provisions of section 10(4A) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e carrying on of the business. The question whether the expenditure could be justified on principles of commercial expediency should be judged not objectively by the Income-tax Officer, but he should on the other hand place himself in the position of the businessman and find out whether the expenditure was reasonable and proper in the circumstances of the case. In other words the test to find out whether a particular expenditure is wholly or partly justified is not to see whether it was necessary, nor to see whether the officer, if he were to do the business himself, would incur it to the extent to which it was incurred, but to find out whether the businessman when he expended the money was acting reasonable in the interests of his own business uninfluenced by any irrelevant or extraneous considerations. For example, if the assessee company resolves upon payment of sum of money to a director unrelated to services rendered by him, out of regard to the fact he is a relation of the controlling members of the company, it cannot be said that the expenditure is justifiable on the ground of commercial expediency. At the same time it must be noticed that the mere fact that a director happe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all such cases the department has necessarily to make an estimate and it would not be open to the court to adjudge whether such estimate falls short of the correct standard or not. In our opinion, that is an incorrect way of approaching the question. The case is not one of the department making an estimate or making an allowance. It has only to decide whether the expenditure is proper or not. For that purpose, it has got to see whether such expenditure was voluntarily incurred for the purpose of the business. Once that test is satisfied, namely, correlation of the business purpose with the expenditure, that department is not concerned with the question what in its opinion would have been the proper expenditure. The department as well as the Tribunal failed to correlate the services rendered by the directors with the amount of remuneration paid to them before making the disallowance. Reliance was placed on behalf of the department on Aspro, Limited v. Commissioner of Taxes [1936] 4 I.T.R. 264; [1932] A.C. 683 to show that in a private limited company the onus is very great on the assessee to justify the expenditure. In that case the directors who were also the sole shareholders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion claimed could be allowed or not but these materials have not even been considered by the Tribunal. Under the circumstances we have to answer the questions referred to us in the negative but at the same time it must be pointed out that it is not for us to determine what exactly is the amount allowable as deduction. That is a question that has got to be considered by the Tribunal afresh in the light of the observations we have already made. The assessee will be entitled to his costs. Counsel's fee ₹ 250. We have to adopt the course that we do, in view of the fact that the Tribunal has not yet disposed of the appeals in relation to the assessment for the years 1949-50 and 1951-52. It is not known when exactly the Tribunal will be able to dispose of the appeals. The propriety of the expenditure in regard to the salary of the directs for the year with which this reference in concerned will undoubtedly depend upon the adjudication as to whether the amounts claimed for the three years are to be allowed in their entirety or to limited extent. It may be that the Tribunal itself allowed what is claimed by the assessee in regard to those years and it may also be that subsequ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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