Bengal Enamel Works Ltd. Vs.
Commissioner of Income-Tax, West Bengal  INSC 336 (9 December 1969)
09/12/1969 SHAH, J.C. (CJ) SHAH, J.C. (CJ)
CITATION: 1970 AIR 1076 1970 SCR (3) 314 1970
SCC (1) 112
Income-tax Act (11 of 1922), s. 10(2)(xv)-Payment
of remuneration by, employer to employee-Jurisdiction of tax officers to hold
that expenditure was not laid wholly and exclusively for the purpose of
business-Whether question of Law.
The appellant, who was doing the business of
manufacturing enamelled ware, appointed a technical adviser and the Board of
Directors resolved to pay him 15% of the gross annual profits as his
remuneration. .For the assessment years, 1951-52, 1952-53 and 1953-54, the
appellant claimed the amounts paid to the technical adviser as admissible
allowances under s. 10(2)(xv) of the Income-tax Act, 1922.
The Income-tax Officer found, that the
technical adviser was a doctor of medicine without any special qualification
for the post, that he was not trained in the technique of enamelled ware, that
he and his father-in law, by the number of shares they held, were able to
control the voting before the Board of Directors, that good technical experts
in enamelling could have been secured for a smaller remuneration, that the
remuneration agreed to be paid to the technical adviser was influenced by
extra-commercial considerations and therefore, disallowed a part of the amount,
holding that it was expenditure not incurred wholly and exclusively for the
purpose of the business. The order was confirmed by the Appellant Assistant
Commissioner, the Tribunal and the High Court.
In appeal to this Court.
HELD : The question whether an amount claimed
as expenditure was laid out or expended wholly and exclusively for the purpose
of the business must be decided on the facts and circumstances of each case,
and the inference drawn from the facts found is one of law. Ordinarily, an
employer, in fixing the remuneration of his employee, is entitled to take into
consideration the extent of his business, the nature of duties to be performed,
the special aptitude of the employee, the future prospects of the business and
other related circumstances, and the taxing authorities cannot substitute their
own view as to the reasonable remuneration which should have, been agreed to be
paid to the employee.
But, the taxing authority may disallow an
expenditure claimed, on the ground that the payment is not real or is not
incured by the assessee in the course of his business or that it is not laid
out wholly and exclusively for the purpose of the business. In doing so, the
authority does not substitute its own view of how the assessee's business
affairs should be managed, but proceeds to disallow the expenditure, because,
the condition of its admissibility is absent. [316 B, D; 317 F-H', 318 A, D]
Swadeshi Cotton Mills Co. Ltd. v. C.I.T., U.P. 63 I.T.R. 57 (S.C.), followed.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 2143 to 2145 of 1968.
315 Appeals from the judgments and orders
dated March 18, 1965 of the Calcutta High Court in Income-tax References Nos.
154, 155. and 156 of 1961.
M.C. Chagla, P. C. Bhartari, and 0. C.
Mathur, for the appellant (in C.As. Nos. 2143 and 2144 of 1968).
S.Mitra, P. C. Bhartari and 0. C. Mathur, for
the appellant (in C.A. No. 2145 of 1968).
S.T. Desai, S. K. Aiyar and B. D. Sharma, for
the respondent (in all the appeals).
The Judgment of the Court delivered by Shah,
Actng C.J. These appeals relate to the assessment to tax of M/s. Bengal Enamel
Works Ltd.-a public limited company-for the assessment years 1951-52, 1952-53
The Company is doing business of
manufacturing "enamelledware. It had originally employed a
"technician' at a monthly salary of Rs. 5001-. In June 1941 the technician
was relieved, and one Col. Bhattacharya who was a director of the Company was
appointed its "Technical Adviser." He was to receive as remuneration
15% of the gross annual profits of the Company. Col. Bhattacharya resigned his
office and Dr. Ganguly (son-in-law of Col. Bhattacharya) was appointed to that
office. The Board of Directors resolved on May 18, 1950 to pay to Dr. Ganguly
15% of the gross annual profits (without deducting depreciation) as his
In the assessment years 1951-52, 1952-53 and1953-54
the Company claimed under s. 10(2) (xv) of the Income-tax Act, 1922, as
admissible allowance, in computing its taxable income, Rs. 52,947/-, Rs.
64,356/and Rs. 79,227/respectively, paid as remuneration to Dr. Ganguly under
the terms of the resolution dated May 48, 1950. The Income-tax Officer,
Companies District III, Calcutta, allowed for each of the years remuneration at
the rate of Rs. 42,000/only as a permissible deduction. The order was confirmed
in appeal to the Appellate Assistant Commissioner and by the Tribunal.
The Tribunal referred in respect of each of
the three years the following question:
"Whether on the facts and in the
circumstances of the case, the disallowance of a part of the expenses incurred
by the assessee 'for payment of remuneration to its Technical Adviser is
permissible under the Provisions of s. 10(2) (xv) of the Indian Income-tax
Act)" 216 The High Court answered the question in the affirmative, and
-disallowed the claim of the Company. With certificate of fitness, these
appeals are preferred against the order of the High Court.
In computing the taxable income of an
assessee, whether an amount claimed as expenditure was laid out or expended
wholly and exclusively for the purpose of the, business, profession or vocation
of the assessee must be decided on the facts and in the light, of the
circumstances of each case : Swadeshi Cotton Mills Co. Ltd. vs. Commissioner of
Income-tax, U.P.(1). Resolution of the assessee fixing the remuneration to be
paid to an employee and production of vouchers for payment together with proof
of rendering service do not exclude an enquiry whether the expenditure was laid
out wholly and exclusively for the purpose of the assessee's business. It is
open to the Tax Officers to hold agreement to pay and payment
notwithstanding-that the expenditure was not laid out wholly and exclusively
for the purpose of the business: Swadeshi Cotton Mills Co.Ltd.'s case('). But
an inference from the facts found that the expenditure was, wholly and
exclusively laid out for the purpose of the business is one of law and not of
fact, and the High Court in a reference under s. 66 of the Income-tax Act is
competent to decide that the inference raised by the Tribunal is erroneous in
In the present case, the facts found are
these : Col.
Bhattacharya and his son-in-law Dr. Ganguly
were two of the directors of the Company who between them held on January 1,
1950 49% of the total number of shares of the Company and the other directors
of the Company held only I % of the shares. Dr. Ganguly had received no
training in the technique of enamelling : he was a medical practitioner earning
Rs. 20,000/per annum by the exercise of his profession. Apparently no
applications were invited for the appointment of a Technical Adviser when Col.
Bhattacharya resigned his office. In the resolution passed by the Directors it
was recorded that many "personal enquiries" regarding the post were
made, but no candidate was found suitable The Board, it was recorded,
considered the applications of S. Urbeneck and J. Schulser but the
qualifications of these two candidates did not impress the directors: moreover
the terms of service offered by J.
Schulser were not acceptable to the Board and
therefore the only applicant Dr. Ganguly who was working on Probation in the
post for some time past and had worked without remuneration up to December 31,
1949 was considered the applications of S. urbeneck and J. Schulser though
called for by the Incometax Officer were not produced by the Company. At the
relevant time "a good technical expert in enamelling" (1) 63 I.T . R.
317 could be secured for a monthly
remuneration of Rs. 1,000/or Rs. 1,200/provided that appointment was not for a
In the view of the Income-tax Officer, Dr. Ganguly
came to be appointed to the post of Technical Adviser of the Company as soon
as, his father-in-law vacated the post and "the generous remuneration
offered to him was influenced by factors other than commercial considerations,
and considering that Dr. Ganguly was giving up his professional practice in
allopathic medicine which yielded him an annual income of Rs. 20,000/to engage
himself as a whole-time Adviser attending to the development of the industry a
gross remuneration of Rs. 3,500/per month, beside the .remuneration of Rs.
1,000/per month that he obtained as Secretary of the Managing Agents of the
Company, would be adequate." With that view the Applicate Assistant
Commissioner and the Income-tax Appellate Tribunal have substantially agreed.
The Tribunal observed that they were inclined to conclude that
"extra-commercial considerations" had influenced the fixation of
remuneration of Dr. Ganguly and that partial disallowance of the remuneration
"so influenced seems quite fair".
Counsel for the Company urged, relying upon
the judgments of this Court in J. K. Woollen Manufacturers v. Commissioner of
Income-tax, U.P.(1) and Commissioner of Income-tax, Bombay v. Walchand &
Co. Private Ltd.(') that in determining the admissibility of an allowance as
expenditure laid out and expended wholly and exclusively for thee purpose of
the business has to be adjudged from the point of view of the employer and not
of the revenue, the Taxing authorities had no power to disallow the
remuneration paid to its Technical Adviser, merely because they think that the
Company may probably have secured the services of another Adviser for a smaller
remuneration. But these cases, in our judgment, have no bearing here. The
departmental authorities have not attempted to reduce the allowance on the
ground that the remuneration paid to Dr. Ganguli was in their view excessive.
Indisputably an employer in fixing the remuneration of his employee is entitled
to take into consideration the extent of his business, the nature of duties to
be performed, the special aptitude of the employee, the future prospects of the
business and other related circumstances and the taxing authorities cannot
substitute their own view as to the reasonable remuneration which should have
been agreed to be paid to the employee.
But the taxing authority may disallow an
expenditure claimed on the ground that the payment is not real or is not
incurred by the assessee in the course of his business, or that it is not laid
out wholly and exclusively for the purpose of the business (1) A.I.R. 1969.
(2) 65 I.T.R. 381.
318 of the assessee. Thereby the authority
does not substitute its own view of how, the assessee's business affairs should
be managed, but proceeds to disallow the expenditure because the condition of
its admissibility is absent.
It, has been uniformly found by all the
authorities that the remuneration agreed to be paid to Dr. Ganguly was
influenced by "extra-commercial considerations". Dr. . Ganguly and
Col. Bhattacharya were able to control the voting before the Board of
Directors. Dr. Ganguly was not trained in the technique of .
enamelled-ware," and had no special qualifications for the post. The
remuneration agreed to be paid was much in excess of what was normally payable,
and also of what Dr. Ganguly was earning by practising his profession as a
doctor of medicine. The criticism that the Tribunal's finding was based on no
evidence or was based on irrelevant considerations cannot therefore be
Where an amount paid to an-employee pursuant
to an agreement is excessive because of "extra-commercial
considerations," the taxing authority has jurisdiction to disallow a part
of the amount as expenditure not incurred wholly and "elusively for the
purpose of the business : Swadeshi Cotton Mills Co. Ltd.
The appeals fail and are dismissed with
costs. One hearing fee.
V.P.S. Appeals dismissed.
(1) 63 I.T.R. 57.