M.C. Chagla, C.J.
1. The question that arises on this reference is', whether a certain amount paid by an employer to his employees is a valid deduction under Section 10(2)(xv) of the Indian Income-tax Act,' 1922, and in order to determine it we have got to consider whether it is an expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessee. The assessee employed two persons by the name of Jamnadas and Purshottamdas to attend to a branch business of his. Jamnadas was employed in samvat year 1993 on a salary of Rs. 125, and Purshottamdas was employed in samvat year 1995 on a salary of Rs. 111. On September 1, 1940, the assessee agreed to pay to each of these employees a commission of 20 per cent, on the net profits of the branch in addition to their respective salaries, and pursuant to this agreement each of the employees was paid Rs. 6,000 in the year of account. The Income-tax Officer considered the claim and allowed only a sum of Rs. 1,000 in all for both the employees and the balance of Rs. 11,000 was disallowed by him. The tribunal came to the conclusion that the sum of Rs. 11,000 was rightly disallowed by the Income-tax Officer, as according to the view of the Tribunal only one thousand rupees had been expended wholly and exclusively for the purpose of the assessee's business.
2. Now, Sir Jamshedji's contention is that it is for the employer to determine what remuneration he should pay to his employees for the services rendered by him. In this case it is not disputed that there was an agreement between the employer and the employees to pay 20 per cent, of the net profits of the business. Nor is it disputed that in fact the sum of Rs. 6,000 was paid to each of the employees. From these admitted facts Sir Jamshedji contends that the quantum of the payment should be left to be determined by the employer and should not be considered by the Income-tax Officer. Sir Jamshedji contends that an Income-tax Officer can never be in a position to judge as to how and in what manner employers should remunerate their employees. It is a matter of business and businessmen know these things better than the Department does. I agree with Sir Jamshedji's contention that 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 the section 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 purpose of his business. In my opinion, it is erroneous to contend that as soon as an assessee has 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 purposes 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 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 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.
3. These principles are in conformity, in my opinion, with what the Privy Council laid down in a similar case decided in Aspro Ltd. v. Commr. of Taxes (1932) 4 I.T.R. 264 In that case there were two shareholders of a company and they were also the sole directors of the company. At the end of each trading year the company fixed at a general meeting about two-thirds of the profit as directors' fees, and in the year 1931 as large a sum as 10,000 was debited in the accounts as directors' fees. The Commissioner of Income-tax disallowed this item to the extent of 8,000, and the question that fell to be considered by their Lordships of the Privy Council was whether this disallowance was justified and their Lordships point out at p. 269 in the judgment that the true issue that arises in cases like this is whether there was evidence before the Magistrate (who was playing the same part as the Income-tax Officer does here) on which he was entitled to refuse to hold it proved that the 10,000 had been exclusively incurred in the production of the assessable income and that the assessment was excessive. Therefore, in this case also what we have to consider is whether there was evidence before the Tribunal on which they were entitled to refuse to hold it proved that this sum of Rs. 6,000 had been exclusively incurred in the production of the income from the business, or, to use the language of our own section, wholly and exclusively for the purposes of the assessee's business, and in that particular case the Privy Council upheld the decision of the Commissioner because they took the view that the various factors which were present in that case clearly went to show that the 10,000 had not been exclusively incurred in the production of the income of the company.
4. Now, what are the facts here. The Tribunal has considered all the evidence and all the factors placed before it. It even gave an opportunity to the employees to file affidavits in order to satisfy it as to what was the extra work that these two employees performed in order to merit so large a sum as Rs. 6,000 each, because it is to be noted that within two years in one case and in the other case very soon after his employment, the remuneration of these two employees was raised from Rs. 125 and Rs. Ill each to as much as Rs. 6,000 a year over and above their respective salaries, and the Tribunal points out that there was nothing before them which went to show that for this additional remuneration the employees rendered any special services or did any particular business. According to the Tribunal, these two employees were doing the same business as they were doing when they were only drawing a salary of Rs. 125 and Rs. Ill a month respectively, and the Tribunal also states that this fact certainly raises a suspicion as to whether this payment could be considered to be wholly and exclusively for the purpose of the business. Therefore, according to the Tribunal this sum was not paid wholly and exclusively for the purpose of the business of the assessee. This sum would have only been so paid if they had been satisfied that in return for this payment the employees were rendering some special service to their masters. Sir Jamshedji says that in this case there is no evidence of any extraneous or extra commercial consideration having entered into the payment by the employer to the employee of this amount. In my opinion, it was open to the Tribunal to raise an inference that so large an amount could not have been paid purely for commercial considerations, and that inference the Tribunal has definitely raised by pointing out that these employees were not rendering any specific and important service to the employer to entitle them to earn this large commission. In my opinion, therefore, the Tribunal was right in disallowing the sum of Rs. 11,000 out of the sum of Rs. 12,000 paid by the employer to his employees as commission.
5. One more question also arises on this reference and that is with regard to whether the disallowance of this very sum for the purpose of excess profits tax is justifiable or not. The contention of the assessee was that the disallowance with regard to this sum was made under Rule 12 of Schedule I to the Excess Profits Tax Act, and before a disallowance can be made under that rule the consent of the Commissioner of Excess Profits Tax was necessary, and in this case it is not disputed that the Excess Profits Tax Officer did not obtain any such permission of the Commissioner of Excess Profits Tax. Rule 12 gives the Excess Profits Tax Officer power to refuse to allow any deduction which in his opinion is in excess of the amount which he considered reasonable and necessary having regard to the requirements of the business of the assessee. The basis of the Excess Profits Tax Act is that substantially the very income which is liable to tax for income-tax is also liable to tax for excess profits tax under the Excess Profits Tax Act, and, therefore, in order to arrive at the total income of the assessee for both purposes the question whether deductions are permissible under Section 10 or not have to be considered. The Excess Profits Tax Act gives wider powers to the Excess Profits Tax Officer and that is that although a deduction may be permissible under the Income-tax Act, he may still disallow it under the Excess Profits Tax Act. But in this case as the deduction was disallowed under the Income-tax Act itself, no question arose of disallowing it under Rule 12 of Schedule I of the Act, and, therefore, no question as to the necessity of the permission of the Commissioner of Excess Profits Tax arises.
6. Now, there is one rather important question as to procedure which arises on this reference. In this case the Income-tax Tribunal refused to state a case on the application of the assessee. Thereupon the assessee came to us under Section 66(3) and we asked the Tribunal to refer the case to us, and it is on that that the present reference comes before us. In asking the Tribunal to state a case we directed them to do so with reference to a set of questions formulated by the assessee and this was done after the Commissioner on the other side had been heard. The Tribunal has stated the case with regard to the questions formulated by us, but it has also submitted another set of questions which according to the Tribunal really arise out of their decision. Now, it is necessary that the proper procedure to be followed under Section 66(3) should be settled once and for all, and we agree with the Tribunal that there was obviously an error in calling upon the Tribunal to express their opinion on the case stated by them. The law as it stands today does not warrant the High Court asking the Tribunal for their opinion on the questions of law that arise or on the case that is stated by them. Such opinion as they have is to be found and to be gathered from their decision. But apart from that there can be no question of the Tribunal having to express any opinion. But with regard to the question as to v/ho should formulate the questions with regard to which the case has to be stated, the position seems to be this. Under Section 66(1), after the decision is given by the Tribunal under Section 33(4), it is open either to the assessee or to the Commissioner to require the Appellate Tribunal to refer to the High Court any question of law arising out of their order and the Appellate Tribunal shall draw up a statement of their case and refer it to the High Court. Therefore, in that case obviously the statement of the case would contain the question of law which according to the Tribunal would arise out of their order. But in case the Tribunal refused to state the case on the ground that no question of law arises, the assessee or the Commissioner has been given the right to come to the High Court under Section 66(2) and the High Court, if it is not satisfied that the decision of the Appellate Tribunal is correct, can require the Appellate Tribunal to state the case and to refer it, and when that is done the Appellate Tribunal is under an obligation to state the case and refer it to the High Court for their decision, and under Section 66(5) the High Court, after hearing the case referred, has to decide the questions of law raised by that case and to deliver its judgment. Obviously, once the Tribunal has come to the conclusion under Section 66(1) that no question of law arises which can be referred to the High Court, under Section 66(2) it is for the High Court to indicate to the Tribunal what are the question or questions of law which arise out of their decision and in respect of which it should state a case and refer it to the High Court. Therefore, in my opinion, when the assessee or the Commissioner comes to the High Court under Section 66(2), it would be for the High Court after hearing the other side to determine what are the question or questions of law which would arise out of the order made by the Tribunal, and when a requisition is made by the High Court to the Tribunal to state the case, that requisition should contain the question or questions of law which according to the High Court arise out of the Tribunal's order. That would be a clear indication to the Tribunal as to what case they should state and refer to the High Court. But I do not think it would be convenient for the High Court itself to formulate the questions which would arise for determination out of the questions of law in respect of which the Tribunal has to state the case. It would be much more convenient for the Tribunal itself to formulate the questions having in view what are the questions of law on which the High Court requires a case to be stated. But I wish to make it clear that it is for the High Court alone to indicate to the Tribunal what are the questions of law, and the only function of the Tribunal is, once a requisition is made upon it under Section 66(2), to formulate proper questions which arise out of those questions of law and to state a case which is germane to the questions of law indicated by the High Court. It would then be open to the High Court either to answer the questions as formulated by the Tribunal or, if the High Court feels that the questions are not properly raised, to reframe the questions or modify the questions, and answer those questions as reformulated or modified.
7. With regard to the questions raised, they do not seem to have been very happily worded. But we think that the only questions that really arise and which should be decided are questions Nos. 4 and 5. Question No. 4 we will answer in the negative, and question No. 5 also in the negative.
8. Assessee to pay the costs.
9. I agree.