1. In this reference, which is at the instance of the Commissioner, the following two questions stand referred to us :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the assessee to raise an additional ground that the capital loss should be allowed to be carried forward ?
(2) Whether, on the facts and in the circumstances of the case, the assessee was entitled to deduction of the entertainment allowance of Rs. 60,000 paid to Kudilal, a director of the company ?'
2. The assessee concerned is Govindram Bros. Private Ltd., and we are concerned in this reference with the assessment year 1957-58. At the relevant time the assessee-company carried on the business of managing agents of Seksaria Sugar Mills Ltd. It was also a partner of M/s. Agarwal and Co., which firm was the managing agent of United Mills Ltd., and supplied stores to all the Seksaria group of industries.
3. In the course of assessment one of the items for consideration before the ITO was a surplus of Rs. 3,37,396 on the sale of shares held by the assessee in India United Mills Ltd. The assessee had purchased 10,000 shares in 1950 and sold them in June, 1952. The assessee had transactions in the shares of India United Mills Ltd., in a big way only from the assessment year 1957-58. Even after M/s. Agarwal and Co. ceased to be managing agents of India United Mills Ltd., which was from August, 1950, the assessee had dealt in the shares of India United Mills Ltd.
4. The ITO at the time of assessment went into the entire history of the purchases and sales of the shares by the assessee of India United Mills Ltd., and came to the conclusion that these were not in the course of investment and that the nature of the transactions would suggest that the same was a trading activity. Accordingly he held that the two amounts of Rs. 2,79,478, being its profits in deferred shares, plus Rs. 34,353, being its profits in ordinary shares, should be included in its total income. The aggregate amount came to Rs. 3,14,202.
5. The assessee carried this matter to the AAC. He agreed with the conclusion of the ITO that the transaction in these shares were not by way of investment but on trading account of the assessee.
6. Before the Income-tax Appellate Tribunal, in the grounds of appeal the assessee disputed these findings of the ITO and the AAC, but while arguing the appeal it accepted the decision so far as the taxability of the said two amounts was concerned. The assessee, however, submitted that the balance amount, which was being treated as a capital loss, be directed to be carried forward to the subsequent years. The Tribunal in para. 2 of its order in appeal recorded that the Department had treated the balance amount as capital loss. It allowed the assessee to raise an additional ground praying for the aforesaid direction, and gave the necessary direction which was to the effect that the ITO was directed to allow to carry forward to the subsequent year in accordance with law.
7. It is this aspect of the matter which is sought to be raised in question No. 1.
8. We are of opinion that the Tribunal was in no error in allowing the additional ground to be raised or in giving the necessary direction thereafter. Indeed, up to that stage the assessee was contending that the gains in the two transactions were capital in nature, which contention was given up only before the Tribunal at the stage of arguments. Till that stage the question of seeking a direction that the capital loss should be carried forward had not arisen It is true that a more circumspect assessee could have sought for such direction in the alternative ; but even when this was not done, the assessee, when it conceded before the Tribunal that these gains should be added to the income and gave up its plea that they should be treated as capital gains, sought the necessary direction, and the Tribunal gave the same after permitting an additional ground to be urged. Indeed, we are surprised that the Department should question this direction which is justified on the grounds of both law and equity. Rules of the Income-tax Tribunal are wide enough to permit such additional grounds to be raised, and the Tribunal was entirely right in allowing the assessee to raise additional grounds and giving necessary directions. Accordingly, question No. 1 will be required to be answered in favour of the assessee.
9. As regards question No. 2, this is concerning the entertainment allowance paid to Kudilal, a director of the assessee-company. The ITO had dealt with the matter of disallowance of this amount in para. 12 of his order. He has referred to the resolution passed by the board of directors of the assessee-company on October 16, 1954, in terms whereof a sum of Rs. 5,000 per month was paid to Kudilal Seksaria from January, 1955, for entertainment and out-of-pocket expenses incurred by him in the discharge of his duties. Under the same resolution Kudilal Seksaria was also allowed the use of a motor car with driver, cleaner, etc., at the cost of the company. He was also given the use of rent-free quarters fully furnished. This is what the ITO has stated while disallowing the amount under s.10(4A) of the Indian I.T. Act, 1922 :
'... On going through the account of the company, it found that the assessee has already debited substantial amounts by way of entertainment expenses, etc., Shri Kudilal Seksaria, however, rakes the money in cash, and no account whatsoever is available as to how the money is spent. In view of the fact that the personal file of Shri Kudilal Seksaria does not show any withdrawal for his personal expenses, the amount might be presumed to have been spent for his personal domestic expenses. I do not consider that this amount is admissible under section 10(4A) of the I.T. Act.'
10. The matter was carried by the assessee before the AAC. The AAC has in his order commented that no details were furnished to support this expenditure. The AAC has referred to the views expressed by the ITO and confirmed the disallowance of Rs. 60,000.
11. When the matter came up in appeal before the Income-tax Appellate Tribunal, the Tribunal pointed out that both the ITO and the AAC had misapplied s. 10(4A) of the Indian I.T. Act, 1922. Before the Tribunal it had been pointed out that the assessee-company was at the relevant period the managing agents of Seksaria Sugar Mills Ltd., and was responsible for arranging finance and looking after the business of the managed company. Kudilal Seksaria used to stand guarantee for the loans obtained for the managed company, and for rendering such service no remuneration was paid to him. Before the Tribunal it was further contended that the assessee-company had divers business activities and several departments were required to be managed by the directors. Kudilal Seksaria had succeeded Govindram Seksaria as the chairman of the board of directors, and no remuneration was paid to him either as chairman of as director. The Tribunal also referred to the assessed figures of Kudilal Seksaria in respect of his income, and set aside the deletion made by the ITO.
12. It is from this decision of the Tribunal that a reference has been made by the Commissioner, which is reflected in question No. 2.
13. It had to be noted that the disallowance was made by the ITO under s. 10(4A) of the Indian I.T. Act, 1922. What is required to be considered by the said provision is whether the allowance or expenditure in the nature of remuneration or benefit to a director is excessive or unreasonable, having regard to the legitimate business needs of the company and he benefit derived by or accruing to it therefrom.
14. It would appeal to us that both the ITO and the AAC embarked upon the erroneous enquiry as to whether any entertainment was done by Kudilal Seksaria and whether in respect of the amount given to him by the company as entertainment allowance the details were furnished. The question was whether the amount was excessive or unreasonable, having regard to the legitimate business needs of the company, or was a benefit accruing to it therefrom. The Tribunal has set certain circumstances which justify the payment of this fairly substantial amount to Kudilal Seksaria. Whether it was designated as entertainment allowance or a bare allowance makes no difference. The ITO ought to be directed himself to make necessary enquiries as to whether Kudilal Seksaria performed any services for the assessee-company, and he could have made as disallowance under s. 10(4A) of the Indian I.T. Act, 1922, only after coming to the conclusion that the payment was excessive, having regard to the legitimate business needs of the company. Even this conclusion is not to be found squarely in the order of the ITO.
15. It is principally be reason of the failure of the ITO to make necessary enquiries and to apply his mind in the proper direction that the view of the Tribunal will be required to be upheld.
16. In the result, the questions referred to us are answered as follows :
Question No. 1 : In the affirmative and in favour of the assessee.
Question No. 2 : In the affirmative and in favour of the assessee.
17. The Commissioner will pay the costs of the reference to the assessee.