1. In compliance with the order of this court under Section 66(2) of the Income-tax Act, the Income-tax Appellate Tribunal, Allahabad, has submitted a statement of the case and has referred the following three questions for our opinion :
' 1. Whether, on the facts and in the circumstances of this case, any part of the sum of Rs. 2,000 paid as remuneration to Sri Satyandrajit Singh was liable to be disallowed under Section 10(4A) of the Act ?
2. Whether, on the facts and in the circumstances of the case, a part of the expenditure of Rs. 11,700 incurred on the purchase of crockery and linen was liable to be disallowed as capital expenditure ?
3. Whether, on the facts and in the circumstances of the case, the deduction claimed by the assessee-company of the sum of Rs. 1,500 on account of the medical expenses incurred on the treatment of its chairman was allowable '
2. The assessee is a private limited company and runs a hotel known as ' Carlton Hotel' at Lucknow. The assessment year involved is 1960-61; Prior to the previous year, the assessee-company was managed by its Chairman, Sri Ranjit Siugh, and his two sons as joint managing directors. During the previous year, the assessee also appointed Sri Satyandrajit Spngh, the third son of Sri Ranjit Singh, as a joint managing director on a salary of Rs. 200 per month from June, 1959. From November, 1959, the salary was raised to Rs. 500 per month. The total salary claimed to have been paid to Sri Satyandrajit Singh thus comes to Rs. 2,000. This amount was claimed by the assessee-company as a deduction in the computation of its net income from the hotel business. The Income-tax Appellate Tribunal has disallowed a sum of Rs. 600 and has allowed the balance as a permissible deduction.
3. The Income-tax Officer had disallowed the entire salary on the ground that the same was not justified having regard to the legitimate business needs of the assessee-company. The Appellate Assistant Commissionerconcurred with this view. The Income-tax Appellate Tribunal, however, found that having regard to all the circumstances, it was legitimate for the assessee-company to have appointed another joint managing director. The Tribunal has also found that after the appointment of the third director, the business of the company improved. The remuneration of this additional director was fixed by the company at Rs. 200 to begin with, but later on it was raised to Rs. 500 per month to bring it at par with the salaries drawn by other joint managing directors. On this finding it cannot be said that the appointment of the third director or the salary paid to him was unjustified.
4. Section 10(4A) no doubt gives a power to the Income-tax Officer as also to the Income-tax Appellate Tribunal to disallow an expenditure, if it has not been incurred for the legitimate business needs of the assessee. The legitimate need having been found a part of the salary could not be disallowed, particularly when the salary paid to the third joint managing director was the same as was being drawn by the other directors. There was thus no material for the Tribunal to hold that the remuneration paid to the additional director was excessive. We, accordingly, answer question No. 1 in the negative in favour of the assessee and against the department.
5. The next question relates to the expenditure incurred on the purchase of crockery and linen for the purpose of the assessee's hotel business. The assessee claimed an expenditure of Rs. 11,700 on this count on the ground that the expenditure represented replacement of crockeries and linen, etc. The Income-tax Officer and the Appellate Assistant Commissioner of Income-tax allowed a sum of Rs. 4,300 and disallowed the balance of Rs. 8,400. The Tribunal also concurred with this finding, but finding that there was a mistake in calculation, disallowed a sum of Rs. 7,490.
6. Now, it is not the case of the department that the sum of Rs. 11,700 was not spent on the purchase of the items like crockery and linen, etc. The contention is that only Rs. 4,300 should be deemed to be the expenditure for replacement and the balance should be considered to be a capital expenditure. This approach, in our opinion, is erroneous. In a hotel business no depreciation is allowed on crockery and linen. But the expenditure incurred on such items is allowed as a deduction by way of replacement, It is, therefore, not expected that an assessee engaged in a hotel business would purchase crockery and linen in excess of its needs. The replacement need not be exactly the same every year. From the nature of things it is bound to vary depending on the actual loss by way of breakage and pilferage, etc. The claim does not appear to be excessive particularly having regard to the fact that a similar claim in respect of the succeeding year has been allowed by the Tribunal to the extent of Rs. 11,000. In the circumstances, we are satisfied that there was nomaterial whatsoever before the Tribunal for disallowing a portion of the claim on this count. Accordingly, question No. 2 is answered in the negative, in favour of the assessee and against the department.
7. The third item relates to a sum of Rs. 1,500 which was incurred by the company on the medical treatment of its chairman. The expenditure was authorised by a resolution of the company dated February 26, 1958. The chairman was only drawing an honorarium of Rs. 100 per month, whereas the joint directors were drawing a remuneration of Rs. 500 per month. In the circumstances it cannot be said that the resolution passed by the company was not bona fide. The Tribunal has disallowed the claim on the ground that there were no rules or regulations of the company regarding the payment of the medical expenses to its staff. The chairman is not a member of the staff, but is a director of the company. The resolution clearly mentions that the medical expenses of the staff and the directors may be borne by the company. The fact that the actual disbursement of the medical expenses had been left to the management of the hotel does not make any difference. This power had been given to the management in order to scrutinise the claims for reimbursement and to pass only such claims as were bona fide and genuine. In the circumstances, we do not think that the Tribunal was justified in disallowing the sum of Ra. 1,500 claimed by the assessee as an expenditure. We, accordingly, answer the third question in the affirmative, in favour of the assessee and against the department.
8. As all the questions have been answered in favour of the assessee, it is entitled to the costs of this reference which we assess at Rs. 200.
9. In the connected case the three questions are identical arising out of identical facts except that figures are slightly different. For the reasons stated above, we answer the three questions in this reference as under :
1. Question No. 1, in the negative.
2. Question No. 2, in the negative.
3. Question No. 3, in the affirmative.
10. The assessee is entitled to the costs of this reference also which we assess at Rs. 200.