1. In this reference the following three questions are referred to us at the instance of the Income-tax Appellate Tribunal, Bombay Bench 'A' :
'(1) Whether, on the facts and in the circumstances of the case, the assessee was entitled to deduction of entertainment allowance of Rs. 20,000 paid to Kudilal, a director of the assessee-company ?
(2) Whether, on the facts and in the circumstances of the cases the assessee was entitled to the bad debt of Rs. 1,78,255 due from Famous Pictures Ltd. ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal erred in relying on the earlier order of the Commissioner of Income-tax for the earlier year 1956-57, and of the Income-tax Officer for the earlier year in allowing the salary of Rs. 41,928 to Shams-under ?'
2. As far as question No. 1 is concerned, we have dealt with a similar item in Income-tax Reference No. 115 of 1972 CIT v. Govindram Bros. P. Ltd. - see p. 626 supra. Which was for an earlier assessment year, and we do not, therefore, propose to enter into any elaborate discussion of facts in the present reference. The circumstance under which the amount was payable are identical. Our answer to the said question shall be identical to the answer we have given to question No. 2 in the aforesaid reference, and that answer will be in favour of the assessee.
3. We will now set out a few facts pertaining to questions Nos. 2 and 3. The assessee is Govindram Brothers Pvt. Ltd., who, at the relevant time, carried on diverse business activities. One of the departments of the assessee during the accounting year relevant to the assessment year under consideration, which is 1957-58, was Famous Cine Laboratory department. The case had proceeded before the tax authorities on the basis that this department has shown for the accounting year, relevant to the assessment year under consideration, a net loss of Rs. 4,72,754 which was transferred to the head office account. There were four departments shown in the Famous Cine Laboratory department account, namely 910 Famous Cine Laboratory (2) Raw Stock Department,(3) Universal Metal rolling Mill and (4) Modern Studios. The first three departments had shown a nominal profit of Rs. 11,332. The maximum loss was in the Famous Cine Laboratory account, which was in the amount of Rs. 4,42,042, in which the amount of aggregate bad debt written off was to the extent of Rs. 2,24,492. One of the principal amounts of the bad debt was Rs. 1,7,455 at the foot of Famous Pictures Ltd. Loan Account. As far as this loan account is concerned, it appears to have been created on October 31, 1951, by transfer of balance of Rs. 3,12,079 from Hindustan Film Syndicate account. The account of the said Hindustan Film Syndicate account. The account of the said Hindustan Film Syndicate is extracted by the Tribunal in para. 4 of the statement of case. The assessee was thereafter called upon to explain by the ITO as to why this transfer entry thereafter called upon to explain by the ITO as to why this transfer entry was made, resulting in a subsequent bad debt, and write-off. By its letter dated March 14, 1963, the assessee informed the ITO as under :
'........ We had got an account of Famous Pictures Ltd., with us, as also the account of Hindustan Film Syndicate Ltd., as both were our customers. Famous pictures Ltd., who were owing to the Hindustan Film Syndicate Rs. 3,12,079-03-11 in October 1951, had approached along with a request to transfer the said debit to Famous Pictures Ltd., as per the arrangement arrived at between themselves, and we agreed to their arrangement arrived at between themselves, and we agreed to their arrangement in the course of our money-lending business by crediting Hindustan Film Syndicate with the said Rs. 3,12,079-3-11, debiting the same to the account of Famous Pictures Ltd., as loan a/c. It is immaterial in our money-lending business whether we make the payment in cash or make payment by crediting it to others' account. Famous Pictures Ltd., took the debit of the claim of Hindustan Film Syndicate of Rs. 3,12,079-3-11, and this was taken over by us by crediting to the account of Hindustan Film Syndicate Ltd., and debiting the same to the account Famous Pictures Ltd., and it is quite in order according to the commercial practice in the business trade.... Since Famous Pictures Ltd., went into liquidation in the year in question and as there was no hope of recovering out of that debit and looking to the liability of the said company and having no hope of recovering anything it was written off as bad debt in the course of money-lending business during the year in question and rightly claimed as deduction under the Income-tax Act.'
4. The three partners in the firm of M/s.Hindustan Film Syndicate were (1) Gajadhar Chandiprasad (brother-in-law of Prahladrai, a director of the assessee-company), (2) D. K. Parkar, and (3) Baburao Pai. The first one had an eight annas share, while the remaining two had a four annas share each. The cash credits appearing in the name of Gajadhar Chandiprasad of Rs. 1,00,000 on August 17, 1949, in the books of Prahladrai Seksaria had been assessed as Prahladrai's undisclosed income for the assessment year 1950-51. The firm had come in to existence in 1945-46 and had closed its affairs by the year ending August 31, 1948. In November, 1945, it had entered into a joint venture with Famous Pictures Ltd., for producing films and building studios. A sum of Rs. 4,55,000 was advanced by the firm in this joint venture. The agreement of joint production was cancelled in November, 1946.
5. The ITO took into consideration the above facts and came to the conclusion that the origin of the debit balance of Famous Pictures Ltd., in to books of Hindustan Film Syndicate had arisen out of this advance of Rs. 4,55,000. According to the ITO this was a capital loss in the case of Hindustan Film Syndicate, by the tripartite adjustment this capital loss was sought to be converted into a trading loss of the assessee by transferring it to its account. Accordingly, he disallowed the claim made by the assessee to treat the amount as a bad debt.
6. In appeal, the AAC agreed with the approach and the conclusion of the ITO. The ITO had also rejected the claim as being premature. This conclusion, however, was not accepted by the AAC.
7. When the matter was carried in appeal to the Income-tax Appellate Tribunal, the Tribunal held that the assessee had made advances and rejected the contention of the Department that the assessee was not carrying on money-lending business. It found that the amount in question had been lent by way of transfer had not been impeached. Subsequently, according to the Tribunal, the interest on the debit balance in the accounts was charged and assessed in to income-tax assessment proceeding According to the Tribunal, therefore, it was too late for the Revenue to go back on its own findings and dispute the legal validity of the transfer. It, therefore, upheld the claim of the assessee. It is from this decision of the Tribunal that question No. 2 emanate.
8. As far as this question is concerned, we are of the opinion that the approach of the Tribunal represents a possible approach to the problem and the conclusion reached by the Tribunal, therefore, must be regarded as a possible one. The two circumstances refereed to by the Tribunal, namely, that the transfer entries were made as far back as 1951 and that subsequently interest on the debit balance in the accounts has been charged and assessed, are pertinent facts, and the Tribunal cannot be said be in error in attaching weight to these circumstances. Once we come to the conclusion that the view taken by the Tribunal is possible view, the question will have be answered in favour of the a assessee. The position would have been different if the findings of the Tribunal taking the overall view were totally unsustainable. In that case the conclusion reached by the Tribunal would have been a perverse conclusion. Indeed, in the present case, it is not possible to say that the view taken by the Tribunal is perverse.
9. This brings us to questing No. 3. It would appear that in the assessment year under considerations as well as in the earlier assessment years the assessee company was paying tax-free salary at the rate of Rs. 2,500 per month to one Shyamsunder Seksaria. It would appear that Shyamsunder Seksaria is the son of Prahladrai Seksaria, a director of the assessee-company. However, subsequently he seems to have been given in adoption to Badridas Seksaria. During 1957, salary payment at the rate of Rs. 2,500 per month free of tax to Shyamsunder was shown by the assessee-company, which came to Rs. 41,928 after taking into account the tax paid. The ITO in this assessment year asked the assessee-company to furnish details of specific nature of the work done by Shyamsunder and other particulars such as his age, qualifications and past experience in this line of work and other details. The ITO also examined Shyamsunder Seksaria on March 8, 1963. The ITO has observed that Shyamsunder Seksaria was drawing this remuneration from September, 1954, to August, 1958, that is, for nearly four years. He was 19 to 23 years old during this period. His deposition before the ITO has been extracted by the ITO in his order. The ITO observes thereafter as under :
'A careful perusal of this deposition shows that in his eagerness to justify his salary earnings, he overshot the mark and destroyed his case by trying to say too much. Regarding his academic career, on making a reference to his school, I, however, found that he took the S.S.C. Examination in March, 1954 (not in 1953) and he adult completed the same and had failed in almost all the subjects securing only 28% marks on the average. His date of birth is 10-10-1935 as per school records, and so when he joined the assessee-company on 1-9-1954 he was only 19 years old. He sought to appear for the S.S.C. Examination again in October, 1954, 1955 and October, 1955, and deposited fees on all the above three occasions buy never turned up to sit for the examination. I am aware that the assessee will readily come forward with the argument that business acumen and academic brilliance do not go hand in hand and would cite several instances to establish the theory. But in the present case there is no evident of his business acumen as well. The said that he was the general manager of the Raw Stock Dept., whereas the general managers of Modern Studio and Famous Cine Laboratory were Girdharilal and Gaurishankar, respectively. It will be noted from the balance sheet that during these four years' period of his service there was hardly much business done in the raw stock department which could require the employment of such a highly salaried general manager (in this year the total receipt in the raw stock department from interest, commission, etc., is Rs. 9,520 only). According to his evidence, right from the inception of Famous Cine Laboratory, that is, 1948, he was helping his natural father, Shri Prahladrain in his business whenever he got time (incidentally in 1948 he was hardly 13 years old). But when I asked him to mention the names of film producers whom he had contacted and whose processing work the company received through his efforts, he could only remember one name of J.O, Prakash, and when I asked him to give a few names of pictures that had business with the assessee-company during the four years of service, he could only mention two pictures, namely, 'Ek Do Tin' and 'Lootera'. This does not speak highly about the active interest that this young director was taking in the activities of the company.
The reasons for his removal is given as the financial stringency of the company. It will, however, be seen that during this entire four years' period of his service in the Famous Cine Lab. or in the Raw Stock Dept. where he was the general manager, Govindram Bros. P. Ltd., had not made any profit as will be evident from the following figures :
_______________________________________________________________________C.Y. Asst. Raw Stock All the Dept. GovindramYear. Dept. Famous Cine Bros. P. Ltd.Laboratory.-----------------------------------------------------------------------Rs. Rs. Rs.1955 1956-57 33,988(loss) 4,84,258(loss) 2,70,507(loss)1956 1957-58 41,590(loss) 4,78,897(loss) 12,69,680(loss)1957 1958-59 15,330(loss) 4,72,753(loss) 11,01,027(loss)1958 1959-60 - 1,25,429(loss) 9,51,666(loss)Another interesting aspect of his deposition is that he was so much over zealous in establishing the theory of his taking active part in the business of the assessee-company that he had completely forgotten everything else, namely, his other business activities, namely, his interest in the partnership of Madhya Bharat Textile Agents, selling agents of Indore Malwa United Mills Ltd., another Seksaria controlled concern. In the course of the deposition he said that after resigning from Govindram Bros. Ltd., in Sept. 1958, he was looking after his own business which consisted of speculation and director of Select Films. After the deposition was over, as it was read out to his by Shri Sarkari of M/s. Kalyaniwalla & Ministry before he signed it, he pointed out that he was also a partner in Madhya Bharat Textile Agents. In fact, he has been a partner there right from the inception of the firm in 1955, up to date and has also claimed in that file to be actively interested in the carrying on of the firm's business, although, according to his present evidence he devoted whole time to Famous Cine Laboratory during the period of his service with the company. Besides, up to 1955, he must have retained a pious intention of taking the S.S.C. Examination, as evident from the records available from the school. In view of what has been said above, it becomes clear that the only qualification he had to earn this high salary is that he was the natural son of Prahladrai Brijlal Seksaria who along with Kufilal was controlling the affairs of the assessee-company and it cannot certainly be allowed as a deduction under section 10(2) (xv) and/or/ u/s. 10(4A).'
10. In appeal, the AAC concurred with the ITO. This is found in para. 9 of the appellate order. The AAC concluded that the amount was not paid for business considerations and the payment was apparently made because he was the son of one of the directors. The AAC thus justified the disallowance made by the ITO.
11. When the matter was carried to the Income-tax Appellate Tribunal, the Tribunal upheld the contentions of the assessee in the following terms :
'The next contention relates to disallowance of Rs. 41,928 paid as salary to Shri Shyamsunder Badridas on the ground that the employee did not render any services to the company and the amount in question was paid for extra-commercial considerations. At the relevant time the employee was about 19 years would be able to enter into service. This very point came up before the Commissioner of Income-tax in respect of assessment year 1956-57 for consideration and the Commissioner of Income-tax was satisfied that the employee rendered service and allowed the amount in toto. The Income-tax Officer has also in the earlier year accepted the claim of the assessee and allowed the claim. We do not find any reason to deviate from the finding arrived at by the Commissioner of Income-tax and the Income-tax Officer in the earlier year, and we, therefore, delete the addition made in this respect.'
12. With respect to the Tribunal, the only consideration to be found in the above paragraph accepting the contention of the assessee and setting aside the disallowance is that in the assessment year 1956-57, the Commissioner of Income-tax 'was satisfied that the employee rendered service and allowed the amount in toto'. The order of Commissioner for the said year has been annexed to the statement of the case as annex. C-1 If that order is properly perused, then it is found that the Commissioner has observed that no reasons were given by the ITO for the disallowance. This is the only reason why the Commissioner reversed the order of the ITO and allowed the claim for salary paid, and we do not have any finding by the Commissioner that he was satisfied that the employee had rendered service. With respect, the Tribunal has completely misread the order of the Commissioner and has failed to apply its mind to the conclusions of the ITO in this order, which are justified by the detailed observations made by him in his order earlier adverted to and extracted.
13. It is true that in the earlier years the amount paid as salary to Shyamsunder Seksaria has been allowed. Does this necessarily mead than it is required to be allowed in this year It is possible that in the earlier years the ITO may not have, negligently, gone into this aspect of the matter and allowed the expenditure without any enquiry, or it may be, as was the case found by the Commissioner, that the ITO had disallowed the item without furnished any reasons which required the Commissioner to allow the claim in revision.
14. When the matter was before the Tribunal for the assessment years 1958-59 the Tribunal was required to go into the reasons given by the ITO in his order for disallowing this amount. The Tribunal has clearly failed in its duty. In our opinion, the ITO has given content and convincing reasons for the view he took. We are in agreement with the approach as well as the final decision of the ITO. In our opinion, the Tribunal was entirely in error in allowing this claim, and question No. 3 will have to be answered accordingly.
15. 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.
Question No. 3 : In our opinion, the Tribunal erred in allowing the salary of Rs. 41,928 to Shyamsunder Seksaria. In our further opinion the ITO had taken the correct view of the matter and was accordingly right in holding that it could not be allowed as a deduction either under s. 10(2)(xv) or s. 10(4A) of the Indian I.T. Act, 1922.
16. In the circumstances of the case, the parties will bear their own costs of the reference.