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Petitioner: MESSRS. EASTERN SILK STORES VS Respondent: THE COMMISSIONER OF INCOME-TAX
P L D 1957 (W
P L D 1957 (W. P.) Karachi 130
Before Constantine and Wahiduddin, JJ
MESSRS. EASTERN SILK STORES-Applicants
versus
THE COMMISSIONER OF INCOME-TAX
Respondent
Civil Reference No. 56 of 1952, decided on 5th November, 1956.
(a) Income-tax Act (XI of 1922), S. 10 (xv)-Expense wholly and exclusively for purpose of business"-Onus of proof on assessee-tribunal's finding a question of fart provided there was evidence for such finding-Question not referable under S. 66 (2), Income-tax Act (XI of 1922).
Held, that the onus of establishing that a particular expense was wholly or exclusively for the purpose of the assessee's business, is on the assessee.
Further, that if there was evidence before the Tribunal that the expense was not motivated by commercial expediency, the finding of the Tribunal was a pure question of fact and not of law, and so was not referable under section 66 (2).
The mere fact that the High Court might have come to a different finding was immaterial.
Where the High Court is not inclined to hold that the conclusions of fact arrived at by the Tribunal were such that "no person acting judicially and properly instructed as to the relevant law" could have come to such conclusions, the High Court would not ask the Tribunal to refer the question under section 66 (2).
In the present case the father of the partners of the assessee firm helped the sons in their business. There was evidence that the father did not receive any remuneration for the first year ; in the second year he drew Rs. 21,000, and in subsequent two years he received respectively Rs. 72,355 and Rs. 50,0004 as remuneration. The Tribunal reduced the latter amounts each to Rs. 21,000 observing that the payment of such huge sums as remuneration to the father was a family affair, the result of family feeling and for the benefit of the family.
Held, that the finding didinot raise any question of law.
Eastern Investments Ltd., v. Commissioner of Income, Tax West Bengal A I R 1951 S C 278 ; The Newton Studios Ltd. v. The Commissioner of Income Tax Madras (1955) 28 I T R 378: A I R (1955) Mad. 646 ; Jethabhai Hiraji & Co. v. Commis sioner of Income Tax, Bombay A I R 1950 Bom. 29 ; Hotz Trust Simla v. Commissioner of Income Tax Punjab (1952) 21 I T R 149 ; Commissioner of Income Tax, West Bengal v. Calcutta Agency Ltd., A I R 1951 S C 108 ; Hansraj Gupta & Co. v. Commissioner of Income Tax, (1956) 29 1 T R 667 ; Aspro Ltd. v. The Commissioner of Income Tax (1936) 4 1 T R 264: (1932) A C 683 and Edwards v. Bairstow (1955) 3 All Eng. Reports 48 : (1955) 28 I T R 579 ref.
(b) Income-tax Act (XI of 1922), S. 10 (2) (iii) Allowance of interest on capital borrowed-Tribunal reducing interest from 12% to 9% on ground that it was paid for "non- commercial reasons"-Whether reduction justified on such ground -Question of law referable under S. 66 (2). Income-lax Act (XI of 1922).
Capital for the business of assessee firm was borrowed from the father of the partners and interest was agreed to be paid at 12010 per annum. For the purposes of section 10 (2) (iii). the Tribunal reduced the rate to 9010 observing that the interest though actually paid was paid for non-commercial reasons.
On an application under section 66 (2), it was contended before the High Court that section 10 (2) (iii) did not con template that allowance only of such interest is to be given as was paid for commercial reasons.
Held, that as the question required consideration, and as it was well settled that if the Tribunal had misunderstood the statutory language and had misdirected itself as to the meaning and import of the relevant provisions of law, then there was a question of law within the meaning of section 66 of the Income-tax Act, the Tribunal could be asked to refer the question for answer under section 66 (2), Income tax Act.
Dingomal N . for Applicants.
Aziz for Opponent.
JUDGMENT
WAHIDUDDIN. J.---This order will dispose of two Civil References, Nos, 56 and 57 of 1952 under section 66 (2) of the Pakistan Income-tax Act.
The facts leading to these applications are that the assessee-firm was originally carried on by T. Jiwatram and his brother Parmanand in partnership. The two brothers separated on 31st March 1942 and the Eastern Silk Stores fell to the share of T. Jiwatram. Under the terms of the agree ment T. Jiwatram could not employ any of the 3 principal employees Khillumal, Gulliram and Jiwatram.
In order to circumvent this condition, the father transferred the business as a going concern to his two sons who in their turn took the three employees as partners. Apparently the value of the business was treated as Rs. 1 lac and this amount was considered as a loan advanced by T. Jiwatram to his two sons on the security of the stock of the business carrying interest at 5010 per annum. T. Jiwatram also advanced a sum of Rs. 70,000 as a further loan without security carrying interest at 9010 per annum. The father also helped the sons in carrying on the business but charged no remuneration for the first year, namely, financial year 1942-43 for the second year 1943-44 T. Jiwatram charged remuneration of Rs. 11,000 and this was allowed in the firm's assessment. For the financial year 1944-45 and 1945-46, the three employees ceased to be partners, but continued to serve as employees getting a certain remuneration. In the financial year 1944-45 on the basis of a written agreement, T. Jiwatram was to get a commission calculated at 200 of the total turn-over and for the following year namely 1945-46, there was a fresh agreement according to which be was given o commission of 1 %.
On 1st April 1944, the sons executed a promissory note in favour of T. Jiwatram for Rs. 1,70,000 and agreed to pay interest at 1200 Der annum.
The matter was hotly contested and was finally disposed of by the order of the Tribunal, dated 31st August 1951 whereby the learned Tribunal reduced the commission of T. Jiwatram for the financial year 1944-45 and 1945-46 from Rs. 72,355 in the first year and Rs. 50,004 in the second year to Rs. 21,000 for each of the two years under review. The Tribunal on this question expressed itself in the following terms
" In our opinion the case of T. Jiwatram stands on a different footing. The partners being the only two sons of T. Jiwatram, it was in the interest of the sons to sanction any amount of commission because after all it was the family who was ultimately going to be benefited. In the second year the three principal assistants were also partners and it was not an easy job for the father to take as much as he liked. In the fitness of things, therefore, only so much was allowed in his case as was dictated by business consideration. The three working partners having retired as such during the years under consideration, the sons had a free hand in giving to their father as much as they wished irrespective of any business con sideration. In our opinion the increase in the remuneration paid to T. Jiwatram is not motivated by any commercial expediency. In his case, therefore, the remuneration should be limited to Rs. 21,000 for each of the two years under review."
The assessee-firm also contested the order of the Income Tax Authorities reducing the commission from 12010 to 6010 but the learned Tribunal allowed the assessee interest at 90/c on the entire amount, and made the following observa tion in this respect by their order, dated 31st August 1951
" In the case of T. Jiwatram, the Income-tax Officer himself had allowed in the next preceding year interest at the rate of 9% on the unsecured loan of Rs. 70,000 and this was done although in that year also the interest paid to other employees was, according to the appellate Assistant Commissioner 6% only. The next question is whether we should allow 12% or only 9% which was paid to T. Jiwatram on the unsecured loan in the previous year. No reason has been suggested why there should be a further increase by 3010. It is true that when the secured loan was converted into an unsecured loan there was fresh consideration for enhancing the rate of interest but, unless some special circumstances existed the debtor would not be expected ordinarily to concede an amount of interest higher than what the creditor had agreed to charge when the loan was first advanced. In our opinion, the rate of 9% is reasonable for an unsecured debt and since the Income Tax Officer had himself allowed this rate in the earlier years, we do not think we would be justified in cutting down the rate so as to make it less than 9%. The extra 3%, must be taken to have been paid for non- commercial reasons."
The assessee-firm made two applications under sections 66 (1) and called upon the Income Tax Tribunal to refer the following two questions of law to the High Court for decision
(1) Whether the order allowing Rs. 21,000 only as allowance or deduction on account of commission paid to Mr. T. Jiwatram out of Rs. 72,355 actually paid to him in accordance with the written agreement for services rendered by him is legal and in accordance with section 10 (2) (xv) of the Income Tax Act.
(2) Whether the order of the Tribunal making an allowance or reduction of interest paid to T. Jiwatram on his advance to Rs. 9 /o as against 12010 actually paid to him in accordance with the terms of the contract is legal and in accordance with section 10 (2)(iii).
The learned Tribunal dismissed these applications by their order, dated 18th January 1952 on the ground that in their opinion no question of law arose out of their order, dated 31st August 1951, and further observed that the matter is concluded by the finding of facts arrived at by them, and refused to refer the matter to the High Court.
The assessee-firm thereafter made two applications under section 66 (2) of the Pakistan Income Tax Act, and prayed that the above-mentioned questions are questions of law and have arisen from the order of the learned Tribunal, dated 31st August 1951 and further prayed that in the circumstances of the present case the Appellate Income-tax Tribunal should be called upon to state the facts of the case and refer the above-mentioned questions for decision to this Court.
The learned counsel for the applicants has taken us through the record of the case and has submitted that the finding on the question of commission is based primarily on the ground that the commission given to T. Jiwatram was not based on any commercial expediency. According to him, the question whether a particular remuneration should be given to a servant or not is a question for the businessman to decide and not to be decided by the Department. He further contended that the Income-tax Tribunal has made wrong inferences on the evidence recorded and, therefore, the question of law has arisen whether their conclusions are correct or not.
As regards the question of interest, the learned counsel has urged that under section 10 (2) (iii), Income Tax Act interest actually paid by the assessee to the creditor must be allowed as an allowance for purposes of computing the profit and gain in the relevant year.
In order to appreciate the arguments of the learned counsel for the assessee, it will be advantageous to refer to the relevant portion of section 10 (2) (xv) of the Income Tax Act. It reads as under:
"Section 10 (2) (xv), any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation."
This subsection contemplates that any expenditure not in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly or exclusively for such business, profession or vocation shall be given allowance by the Income Tax authorities.
The onus of establishing that a particular expense was wholly or exclusively for the purpose of such business, is clearly on the assessee. The learned counsel, however, urged that in this matter it was admitted that there was a written agreement between the assessee and T. Jiwatram. It was further not disputed that the amount of commission for both the years were in fact paid : it was also proved that the other employees particularly Khilumal was paid commission at W/o and the commission paid to him at this rate was allowed as allowance under the above-mentioned subsection. The reason why commission of 2 % to T. Jiwatram was not allowed, was that it was not motivated by commercial con siderations. According to him, there was no evidence on the record to arrive at this conclusion and, therefore a question of law has arisen and the Income-tax Appellate Tribunal should be called upon to make a statement of the case and to refer the question of law relating to commission to this Court. He placed reliance on Eastern Investments Ltd. v. Commissioner of Income Tax, West Bengal (A I R 1951 S C 278) and urged that in that case under section 12 (2) of the Income-tax Act the question under consideration was also whether the expenditure was incurred solely for the purpose of keeping or earning such income, profits or gain and their Lordships of the Supreme Court of India, laid down the following principles to decide whether the facts of the particular case raised any question of law:
(a) Though the question must be decided on the facts of each case, the final conclusion is one of law.
(b) It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned.
(c) It is enough to show that the money was expended not of necessity with a view to a direct and immediate benefit to the trade but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business.
(d) beyond that no hard and fast rule can be laid down to explain what is meant by the word (solely)."
The learned counsel further relied on a decision of the Madras High Court reported in The Newton Studios Ltd. v. The Commissioner of Income Tax Madras ((1955) 28 1 T R 378: A I R 1955 Mad. 646). The last mentioned case is his sheet anchor and strongly relied upon in support of the contention raised by the assessee company in the present applications. The learned judges of the Madras High Court applied the principles enunciated in the above-mentioned Supreme Court case and observed:
" In applying the test of commercial expediency to determine whether the expenditure is wholly and exclusively laid out for the purpose of the business, the reasonableness of the expenditure should be considered from the point of view of the businessman and not from the point of view of outsiders including the Income Tax Officer."
According to the facts of that case, the directors of the company were paid Rs. 59,100 as honorarium in addition to the other emoluments i.e. commission, car allowance and bonus in pursuance of the resolution of the company. There was no dispute about the payment of the amount in question, and the only reason why the whole of this amount was not allowed, was that there was no proof that either the Managing Director or other technical directors had in the year of account, acquired qualification which increased the market value of their services. The Income-tax Authorities considered that the quantum of honorarium claimed was too much and was not fair and reasonable and, therefore. dis allowed the same. The learned judges in this case held that it is not necessary for the assessee to shoe that the expenditure was a profitable one or in fact any profit was earned, and according to them there was no room for subjective standard in applying the test of commercial expediency. They further held that there was really no basis at all on the evidence placed before the Tribunal for the conclusions reached, and the whole of Rs. 59,100 expended as salaries during the year of account, could not be claimed as a legitimate deduction under section 10 (2) (xv). There is no doubt that the decision in this case was in favour of the assessee, but the following observations of the learned judges are sufficient to dispose of this case. The learned judges at p. 385 observed:
"There was certainly nothing to indicate that the increase in salaries the share-holders authorised was a colourable devise to divert a portion of the anticipated profits of the company to four of its share-holders."
The learned judges further observed:
"Under our taxing 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 conside ration other than the purpose of the business as accounting for any portion of the payment made. In such cases, of course, such portion of the amount claimed, which is either not held to have been paid or is held to have been paid for reasons other than business expediency, could and should be disallowed ; but the reason for the disallowance is because either the portion disallowed is not paid, or because the expenditure is not solely aced exclusively for the business, and not on the ground that in the opinion of the Income Tax Officer or other taxing authority the remuner ation is "unreasonably" high either because the employee does not, in the authority's opinion, deserve so much, or because the assessee could have secured other employees on more favourable terms."
It will thus be seen that even this case doe's not support the contention of the learned counsel for the assessee, because in the present case the Income Tax Appellate Tribunal came to a definite finding that the sons had a free hand in giving to the father as much as they wished irrespective of any business consideration, and in their opinion it was paid because after all the family was ultimately going to be benefited, and the remuneration paid to Jiwatram was not motivated by any commercial expediency.
It was submitted by the learned counsel for the Depart ment that in those cases where there is a definite finding of fact on a particular question, the Courts were not entitled to call upon the Income Tax Authorities to refer the matter to them under section 66 (2), notwithstanding that the conclusions of fact arrived by them were erroneous or that some other conclusion could be arrived at by another Tribunal. The only consideration in such cases should be whether the Income Tax Appellate Tribunal had any material before them to arrive at such conclusion. We think the contention raised by the learned counsel for the Department is not without force. He is supported in his contention by a number of authorities, particularly Jethabhai Hirji & Co. v. Commis sioner of Income Tax, Bombay (A I R 1950 Bom. 29), Hotz Trust Simla v. Commissioner of Income Tax, Punjab ((1952) 21 I T R 149), Commissioner of Income Tax, West Bengal v. Calcutta Agency Ltd. (A I R (1951) S C 108) and Hansraj Gupta & Co. v. Commissioner of Income Tax ((1956) 29 I T R 667).
In A I R 1950 Bom. 29, the learned judges of the Bombay High Court observed
"It must be left in every case to an employer to determine for himself, taking all circumstances into consideration, in what manner he should remunerate his employee who is rendering certain services to him. But section 10 (2) (xv) requires that whatever amount he pays to his employee must be paid wholly and exclusively for the purposes of his business, and it is for the Income Tax Officer to decide whether any remuneration paid by the employer to his employee was wholly and exclusively expended for the purposes of his business. It is erroneous to contend that as soon as an assessee bas established these two facts, viz., the existence of an agreement between the employer and the employee and the fact of actual payment, no discretion is left to the Income Tax Officer except to hold that the payment was made wholly and exclusively for the purpose of the business. Although the payment might have been made and although there might be an agreement in existence, it would be open to the Income Tax Officer to take into consideration various factors which would go to show whether the amount was paid as required 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 services rendered by the employee which called for a special remuneration at the handy 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, 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 actual payment and existence of the agreement there were no other factors which were taken into consideration by the Income Tax Officer, then perhaps the Court would say that the Income Tax Officer was not justified in coming to the conclusion that he did."
In (1952) 21 1 T R 149, the learned judges of the Punjab High Court observed as follows:
"If the claim of an assessee is a claim for exemption of an amount under section 10 (2) (xv) of the Indian Income Tax Act 1922, the burden of proving the necessary facts in that connection is on the assessee.
The assessee, a trust which owned some hotels, increased the salary of each of their three managers from Rs. 1,200 to Rs. 2,000 per mensem. The Appellate Tribunal held that the increment of Rs. 800 per mensem to two of the managers during the relevant years was not at all justified by business considerations and that the Income-tax authorities were perfectly justified in allowing only an increase of Rs. 400 per month in their case. In arriving at this decision the Tribunal gave, inter alia, the following reasons ; that no particular reason was given by the assessee for the increase ; that the two managers were not called upon to render any service in addition to what they had been rendering in the past ; that no demand was made by the managers for increase in the salaries. On a reference under section 66 (1). the assessee contended that it was for the assessee to determine what remuneration the assessee should pay to its employees for the services rendered by them and considering that it was not disputed that there was a agreement between the assessee 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 to its servants for their services on the ground of excess or over generosity in the amount.
Held, (1) that the contention of the assessee was not acceptable to the High Court ;
(2) that, the assessee had not discharged the burden of proving the necessary facts to claim the exemption of the amount under section 10 (2) (iii) and that there was material for the Tribunal in arriving at the finding that it did." In (1956) 29 I T R 667, the learned Judges of the Punjab High Court observed:
"A company which took over the business of a partner ship employed the general manager of the partnership for a remuneration of 10 per cent. of the annual profits and an agreement was entered into accordingly. The Income Tax Officer allowed only half of this commission as business expenditure taking into account the previous history of the case, the services rendered by him, what he was receiving before and the extent of the business. The Appellate Assistant Commissioner and the Appellate Tribunal confirmed the order of the Income Tax Officer. The Tribunal refused to state a case as it was of opinion that no question of law arose.
Held, that, assuming that the commission fell under section 10 (2) (xv) of the Income Tax Act as contended by the company, what was the amount which was laid out wholly and exclusively for the purposes of the company was a question of fact and it was for the Officer or the Tribunal, as…
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