TMI Blog1979 (8) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... essee entered into an agreement dated September 27, 1958, with Sarvashri Pawan Kumar and Subodh Kumar, minors, through their guardians for the payment of commission on loans of Rs. 93,181 and Rs. 1,09,022, respectively, which amounts had already been lying in deposit with the assessee-firm and on which an interest at 7 1/2% per annum was being paid. In this account, the cost of the tissue paper came to Rs. 2,53,298. A sale of Rs. 4,56,934 yielded a profit of Rs. 1,29,300. This account was debited with Rs. 68,540, being the commission paid to Sarvashri Pawan Kumar and Subodh Kumar in equal shares. Sarvashri Pawan Kumar and Subodh Kumar are minor sons of two brothers, Sarvashri Devender Kumar and Lalit Kumar, who are two of the partners of the firm. The other two partners are Shri Kapoor Chand, another brother, and Shri Sidhoo Mal, father of the three brothers. It is this payment of commission which has been disallowed under s. 10(2)(xv) of the Indian I.T. Act, 1922, and which is the subject-matter of the present reference. The ITO noted the following facts : (a) The agreement dated September 27, 1958, was actually entered into. (b) The amount of commission was actually p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt already lying in deposit with the firm and that, therefore, the agreement of September 27, 1958, under which they were paid a commission of Rs. 68,540 amounting to a return of 40% on the amount of deposit already bearing interest at 7 1/2% " was not prompted by legitimate business considerations ". In the result, the appellate authority upheld the disallowance of this expense under s. 10(2)(xv) of Indian I.T. Act, 1922. The assessee appealed against this to the income-tax Appellate Tribunal and among other pleas the learned counsel for the assessee stressed that the assessee was in pressing need of funds and the agreement dated September 27, 1958, was arrived at to avoid the contingency of the withdrawal of funds by the minors. Having considered the facts and pleas, the Tribunal affirmed the concurrent findings of the ITO and the AAC that the payment of commission was not made for reasons of commercial expediency or legitimate business interest and, therefore, disallowed the same. Thereupon, a Bench of the Income-tax Appellate Tribunal, Delhi, allowed an application of the assessee under s. 66(1) of the Indian I.T. Act, 1922, and by order dated January 15, 1971, refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permit him to proceed to scrutinise the expenditure further, is not tenable or acceptable. Let us see how this provision has been interpreted. One of the early decisions on the subject is that of a Division Bench of the Punjab High Court in Holz Trust v. CIT [1952] 21 ITR 149. The court considered the amount paid as salaries by the Hotz Trust, Simla, to Mr. Robert Hotz, Miss Florence Hotz and Mr. Edwin Hotz who were also beneficiaries under the trust. The ITO had allowed Rs. 1,200 to Rs. 1,600 per month against the claim of Rs. 2,000 per month to each one of them. At page 159, the Division Bench of the court observed as under : " Mr. Indar Dev Dua's contention is that it was for the assessee-trust to determine what remuneration the assessee-trust should pay to its employees for the services rendered by them and considering that it was not disputed that there was an agreement between the assessee trust and the employees to pay Rs. 2,000 per mensem to each of them, the Tribunal was not entitled to challenge the amount paid by the assessee trust to its servants for their services on the ground of excess or over-generosity in the amount. In my judgment, the contention raised is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness. Although the payment might have been made and although there might be an agreement in existence, it would still be open to the Income-tax Officer to take into consideration all the relevant factors which will go to show whether the amount was paid as required by section 10(2)(xv). The question as to whether an amount claimed as expenditure was laid out or expanded wholly and exclusively for the purpose of such business, profession or vocation has to be decided on the facts and in the light of the circumstances of each case. But, as observed by this court in Eastern Investments Ltd. v. Commissioner of Income-tax [1951] 20 ITR 1 (SC), the final conclusion on the admissibility of an allowance claimed is one of law. It is for example open to the assessee to contend that the decision arrived at by the income-tax authorities was based on no evidence at all. If the assessee satisfies the court that the decision of the income-tax authorities is based on no evidence then the question at issue becomes one of law and the court would be entitled to say that the decision of the Income-tax Officer is defective in law. But, as we have already stated, it is not open to the assessee to con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might be such an agreement in existence and the payments might have been made, it is still open to the Income-tax Officer to consider the relevant factors and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under section 37 of the Act. For the reasons mentioned above, we are of opinion that the Tribunal was justified in not stating a case for the opinion of the High Court under section 256(1) of the Act and the High Court was justified in not calling for a statement of case under sub-section (2) of section 256. " In Bengal Enamel Works Ltd. v. CIT [1970] 77 ITR 119, the Supreme Court considered remuneration paid by the assessee to a technical adviser and taking into consideration that the taxing authorities had uniformly found that the remuneration agreed to be paid was influenced by " extra commercial considerations ", it being much in excess of what was normally payable, rejected the criticism ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ather than to its form. A party cannot escape the consequence of law merely by describing an agreement in a particular form though in essence and in substance it may be a different transaction." On page 76, the court held : " Even so whatever be the commercial considerations it is difficult to hold that the commercial expediency dictated the assessee-compnay allow itself to be completely overshadowed by, its selling agents so as to pay them not only for the services rendered but also allow them to share profits, control the manufacture of the goods and the programme thereof and also to share the losses. The test of commercial expediency cannot be reduced in the shape of a ritualistic formula, nor can it be put in a watertight compartment so as to be confined in a strait-jacket. The test merely means that the court will place itself in the position of a businessman and find out whether the expenses incurred could be said to have been laid out for the purpose of the business or the transaction was merely a subterfuge for the purpose of sharing or dividing the profits ascertained in a particular manner. It seems to us that on ultimate analysis the matter would depend on the intent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s : " On a full review of the facts it is clear that this transaction was voluntarily entered into in order indirectly to facilitate the carrying on of the business of the company and was made on the ground of commercial expediency. It, therefore, falls within the purview of section 12(2) of the Income-tax Act, 1922, before its amendment in 1939. " In our view, the judgment does not apply to the facts of this case as here, even though the ITO has not used the word " fraud " he has come to a finding of excessiveness and collusiveness in respect of the payment of commission made to the minors. The learned counsel for the assessee has then relied upon the judgment of the Supreme Court in Jugal Kishore Baldeo Sahai v. CIT [1967] 63 ITR 238 (SC). The court considered a claim for deduction for a payment made by an HUF to the karta and, at page 243, held : " In our view, if a remuneration is paid to the karta of the family under a valid agreement which is bona fide and in the interest of, and expedient for, the business of the family and the payment is genuine and not excessive, such remuneration must be held to be an expenditure laid out wholly and exclusively for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... host of other related circumstances. The rule that increased remuneration can only be justified if there be corresponding increase in the profits of the employer is, in our judgment, erroneous. " Even though the expenditure was allowed, we do not see how this judgment, the true ratio of which is affirmation of the observations of the Tribunal, quoted above, is of any assistance to the contentions of the assessee because so long as the ITO has the jurisdiction to go into the reasonableness of an increased expenditure, the assessee cannot contend such scrutiny as illegal or unwarranted interference with his judgment in the matter. Undoubtedly, in doing so, the ITO cannot employ an arbitrary index and a rule that increased remuneration can only be justified if there be corresponding increase in the profits, is bad for such arbitrariness. The learned counsel for the assessee has next relied upon the judgment of the Supreme Court in Shahzada Nand and Sons v. CIT [1977] 108 ITR 358 (SC), on the judgment of the propriety of a payment, i.e., consideration of commercial expediency, being left to be decided by the assessee and not by the subjective standard of the assessing authority. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been said, the courts and authorities are not to wear blinkers to overlook or condone the passing off of public revenue to one's own kith and kin by subterfuge or clandestine or clever devices clothed in legalistic jargon. Instead it is their duty to lift the veil of apparent legality and get to the truth or substance of a transaction to deal with it in accordance with law. It is only appropriate, indeed normal, that dealings involving transfer of funds to near and dear ones need to be looked into with care and caution and necessary inferences drawn if there are abnormalities attaching to such transactions. We do not read the one line quotation from the aforesaid judgment as laying down any contrary principle. In fact, the learned judges have in the same judgment recalled the judgment of the Supreme Court in CIT v. Chari and Chari Ltd. [1965] 57 ITR 400 (SC), where it was held : " In considering whether the expenditure to remunerate a person for services rendered is allowable under section 10(2)(xv), the Income-tax Officer must have regard to all the circumstances, such as, the nature and special character of the service, the practice, if any, in the trade for payment of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of an assessee. A payment of salary as such could not be a permissible deduction unless the payment can be said to have been incurred wholly and exclusively for the purpose of the business. The assessee must satisfy the department that it was necessary to have incurred the salary expenses to carry on the business and to earn the income therefrom. He must also establish that the payment of salary was essential for the purpose of business and was not motivated by non-commercial considerations such as piety, benefaction or mere love and affection. There must be correlation of the work done by the employee to the remuneration received by him. Any amount which the assessee may pay alleging it to be remuneration or salary over and above the requirements of the business for the purpose of its being carried on efficiently would be excessive remuneration from the point of view of the departmental authorities who owe a duty to estimate and apportion that amount of payment as would fall within the language of section 10(2)(xv) of the Act. Payment of salary in excess of the needs of the business cannot be justified as a proper revenue charge on the income. The taxing authorities have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the section. For instance, the Income-tax Officer may take into consideration whether the moneys were paid to a near relation of the employer. He may take into consideration the extent of the business and the particular service rendered by the employee which called for a special remuneration at the hands of his employer. He may take into consideration the quantum of the payment made with a view to decide whether the payment was or was not grossly out of proportion to the work done by the employee. If after taking these factors into consideration he comes to the conclusion that the payment was not made wholly and exclusively for the purpose of the business of the assessee, it would be open to him either to disallow the whole sum or a part of the sum paid. The question whether a particular sum was expended wholly and exclusively for the purposes of such business must essentially be a question of fact to be determined by the Income-tax Officer. But it would be open to the assessee to contend, as it has been contended in this case, that the decision arrived at by the Income-tax Officer was based on no evidence at all. If the assessee satisfies the court that apart from the actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction under s. 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. " In summing up, the court followed and affirmed the dictum in CIT v. Chandulal Keshavlal Co. [1960] 38 ITR 601 (SC). This decision does very explicitly bring out that necessity of incurring an expenditure is not a consideration relevant to s. 10(2)(xv) of the 1922 Act or s. 37 of the 1961 Act. It also stresses that decisions for incurring an expenditure be left to the assessee but it does say in no uncertain terms that where an expenditure is traceable to an improper or oblique purpose, outside the course of business, then it is not deductible and it is only this which we wish to emphasise in not agreeing with the pleas, as put forward by the learned counsel for the assessee. Having held that the ITO had jurisdiction to go into the circumstances attaching to the transaction in order to satisfy himself whether the expenditure in question qualified the test spelt out in s. 10(2)(xv) and having held that even after a finding in favour of the assessee about the existence of the agreement, the receipt of the loan and its utilisation in business, this jurisdiction is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclusion it being for them to find the evidence and to give the finding then it will become an admissible deduction. The decision of such questions is for the Income-tax Appellate Tribunal and the decision must be sustained if there is evidence upon which the Tribunal could have arrived at such a conclusion. " The dictum was applied to the finding of facts noted above and noting that there was enough material to sustain the finding, the appeal of the revenue was dismissed. In Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 57 (SC), the Appellate Tribunal had found that the payment of commission was made to the directors for extra-commercial reasons and was not wholly and exclusively made for the purpose of business. The High Court had also come to the same view. The appeal of the assessee was dismissed holding that the appellant was unable to show that this finding was, in any way, vitiated in law. We have already quoted from Haji K. Assainar v. CIT [1968] 69 ITR 154 (Ker), where it was held that whether a particular sum was spent wholly or exclusively for the purpose of such business must essentially be a question of fact to be determined by the ITO. In CIT v. Raman ..... X X X X Extracts X X X X X X X X Extracts X X X X
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