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TMI Blog1955 (4) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... tor and Banerjee and Tehrani were directors. Banerjee, Tehrani and Nagoor were employed respectively as Chief Cameraman, Chief Sound Engineer and Art Director in the studio. The managing director and the three technicians were remunerated by payments of what were called honoraria, which really meant salaries as pointed out by the Appellate Tribunal itself, and also by payments of commission on a fixed percentage basis. In addition each of them got a car allowance, and when the profits justified it, payment of a month's salary as bonus. In 1944 and 1945 what was paid as honoraria, that is, salary, to these four amounted to ₹ 18,000 a year. Their scale of salaries was revised for 1946 by a resolution passed by the shareholders on 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (not being in the nature of a capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of the business of the assessee. In Eastern Investments Ltd. v. Commissioner of Income-tax, West Bengal [1951] 20 I.T.R. 1, the Supreme Court referred to section 12(2) of the Act, which provides for the deduction of an expenditure incurred "solely for the purpose of making or earning such income, profits or gains" and summarised the principles to be kept in view: (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. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies, it seems to me that, if the present claim were upheld, it would amount to a precedent enabling the Revenue to revise every such bargain and to defeat what the parties had agreed on. The Revenue in a case under schedule D has no power to examine what they think was reasonable or to say what expenditure was necessary." It is with reference to these principles we have to decide whether the Appellate Tribunal was justified in disallowing the sum of ₹ 23,100 out of the total amount of ₹ 59,100 that was actually expended by the assessee company in the year of account 1946 as payment of salaries to four of its employees. That these employees were also shareholders of the assessee company and that three of them were also d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eipts." We agree that the gross receipts of the assessee firm would not be a relevant factor at all, though not for the reason given by the Appellate Tribunal. In the statement of the case, the Tribunal referred to the fact, that the net profits of the company increased from ₹ 41,541 in 1945 to ₹ 1,05,871 in the year of account. That again may not be a relevant factor, because as pointed out by the Supreme Court in Eastern Investments case [1951] 20 I.T.R. 1, it is not necessary for the assessee to show that the expenditure was a profitable one or that in fact any profit was earned. If the gross receipts, which the Income-tax Officer took into account, and the net profits, which the Appellate Tribunal did not take into acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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, suc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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