TMI Blog1996 (3) TMI 559X X X X Extracts X X X X X X X X Extracts X X X X ..... that in the accounts of the Company a sum of ₹ 7,200 per annum, that is to say, ₹ 600 per month was debited as remuneration paid to each of the three persons whose names I have mentioned and the Income-tax Officer added back that sum to the taxable profits of the Company on the ground that these persons were the sole shareholders of the Company, that the Company maintained a regular establishment including a manager and that the drawings, therefore, represented a distribution of profits and would have been distributed as dividends, had they not been debited and paid out in the guise of remuneration to the same three persons in their capacity as directors of the Company for services which it is alleged they had rendered to the Company. When the matter came before the Assistant Commissioner on appeal, he directed the Income-tax Officer to enquire what would be the market value of services identical with or similar to those alleged to have been performed by the directors of the Company if such services had been rendered by a stranger and on receipt of the Income-tax Officer's report the Assistant Commissioner fixed the remuneration of the directors for the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o operation with a view to testing whether the principles laid down in cls. (i) to (ix) of subsection (2) had or had not been violated. The Commissioner of Income-tax put the matter thus : The assessee argues that the allowances paid to the shareholder-directors are admissible deductions and though they may not fall under any specific sub-section of sub-section (2) of section 10, yet they are inherently admissible on a correct construction of Section 10, sub-section (1) . With regard to the first question the Commissioner came to this finding :- The payments made in this case are not bona fide payments for services rendered and the payments in question are merely a device for enabling the company to escape super-tax, when its profits reach a figure higher than the lowest figure on which company's super tax is chargeable. The learned Commissioner was of opinion-and, in any view, rightly of opinion-that the matter was really a question of fact; but be said this: as I do not want to deny the assessee any right to which he may possibly be entitled, I think it best to submit the case to the Court. I am clearly of opinion tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriation of the profits of the firm, the Commissioner found, that the alleged salaries were not bona fide payments at all to bona fide employees of the business but merely a device to escape income-tax, the High Court returned the reference as not raising any question of law and hence incompetent. The judgment that was given on that occasion was short and is as follows (at page 25):- Having regard to the findings of fact arrived at by the Commissioner of Income-tax and which findings are summarized in paragraph 11 of the letter of reference by the Commissioner, we are not prepared to say that any question of law arises for our decision in this matter. In our opinion, the Reference, having regard to the said findings of fact, is clearly incompetent. The matter, therefore, will go back to the Commissioner with an expression of our views in manner indicated above. The principle followed-if there is any principle underlying this case in 7 I.T.C. 20-is very much as that which should govern the present case. The learned Commissioner seems to have sent the matter to us rather out of sympathy with the assessee and not because he himself was in any do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Electric Dental Stores v. Commissioner of Income-tax AIR 1931 Lah. 341. The head-note is as follows :- A decision by the Commissioner of Income-tax allowing partner's salary as a business deduction in the assessment of the firm's profits in a particular year does not operate as res judicata and cannot bind his successor in a subsequent year. Salary charged by working partners in a firm would be admissible as a deduction in the computation of the profits of the firm under Section 10 (2) (ix) of the Income-tax Act, if those partners were true employees and the payment of salary to them was bona fide and not a device to escape income-tax. As I have already indicated, the question whether payments are bona fide and not a device must always be a question of fact. It follows, therefore, that we are of opinion that the view taken by the Assistant Commissioner and affirmed by the Commissioner of Income-tax as regards the admissibility of the deduction is the correct view. It has been conceded in the course of the argument before us that if we agree with the Commissioner of Income tax as regards the answer to the first question, the second question sc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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