JAGDISH SAHAI J. - This reference has been made by the Income-tax Appellate Tribunal, Allahabad Bench (hereinafter referred to as the Tribunal), under section 66(2) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act). The following question of law has been referred to us, as directed by this court by means of its orders dated August 31, 1962, and April 4, 1962 :
'Whether, on the facts and in the circumstances of the case and in view of the provisions of sections 10(4A) of the Income-tax Act, 1922, the remuneration of Rs. 500 per month allowed by the Tribunal to Sarvsri C. M. Gupta and M. C. Gupta is allowable business expenditure under section 10(2) (xv) of the said Act ?'
The assessee is private limited company which was incorporated on March 26, 1955. It commenced business on May 26, 1955, at Lucknow, as distributors of Tata Mercedes Benz trucks and motor chassis a in the eastern districts of Uttar Pradesh. The shareholders of the company at the time of its start were Sarvsri C. M. Gupta, M. C. Gupta and R. P. Gupta. The first two are cousin brother while the third one is an outsider. All these three persons are also directors of the company. In the meeting dated May 28, 1965, the directors passed a resolution to the effect that they would be entitled to receive a remuneration of Rs. 2,000 per month each. Another resolution that was passed is to the effect that manager, Iswar Chandra, would receive Rs. 1,000 per month as salary and a certain percentage as commission cover the profits of the company.
The assessment years involved are 1956-57, 1957-58 and 1958-59.
Sarvsri C. M. Gupta and M. C. Gupta are students of the D. A. V. College, Dehra Dun, and reside in that city. The Income-tax Officer allowed in full the remuneration paid to Sri R. P. Gupta as business expenditure but not the amounts paid to Sarvsri C. M. Gupta and M. C. Gupta.
On appeal, the appellate Assistant Commissioner after examining the account books of the company held that the resolution fixing the remuneration of the directors was not passed in the meeting held on May 28, 1955, but on a subsequent date. He further held that the resolution was irregular and sham and what was really intended by the belated resolution was to distribute the expected profits of the company to the director-shareholders and thus avoid income-tax, and not to fix the remuneration for any services rendered. He, therefore, affirmed the disallowance as business expenditure of the remuneration paid to Sarivsri C. M. Gupta and M. C. Gupta. He, however, allowed as business expenditure a sum of Rs. 2,000 out of the remuneration paid to Sri M. C. Gupta as fees payable to him for having attended five meetings of the board of directors (at the rate of Rs. 400 per meeting).
The assessee-company appealed to the Tribunal. The Tribunal held that even though it was true that Sarvsri C. M. Gupta and M. C. Gupta had no background which should justify this remuneration paid to them they having purchased shares in this limited concern of equal value as the shares purchased by Sri R. P. Gupta, were entitled to some amounts by way of return for financing the enterprise. It therefore, allowed a sum of Rs. 500 per month each to the aforesaid two directors as allowable expenditure and held that the balance of the remuneration paid to them must be considered to be a payment for extra commercial reason.
For the year 1957-58 and 1958-59, the Income-tax Officer disallowed the remuneration to the two directors but the Appellate Assistant Commissioner, on appeal, allowed them a sum of Rs. 500 each per month as allowed by the tribunal for the year 1956-57. The department appealed to the tribunal for both the years but the two appeals were dismissed.
We have heard Sri Brijal Gupta for the assessee-company and Sri Gulati for the income-tax department.
It is clear that there were only three shareholders of the company, i.e., Sarvsri C. M. Gupta, M. C. Gupta and R. P. Gupta, and they were also the directors. They held shares to the tune of Rs. 34,000 each. Admittedly sarvsri C. M. Gupta and M. C. Gupta were college students residing at Dehra Dun and not at Lucknow where the business of the company was being transacted. They had no background which could justify the remuneration. They did not carry on the management of the company and did no work for the company beyond attending some meetings. The sole ground on which the Tribunal allowed Rs. 500 to each of these two directors for the year 1956-57, and the Appellate Assistant Commissioner for the years 1957-58 and 1958-59 was that they were financiers and had to be compensated for financing the enterprise. Section 10(2) (xv) of the Act reads :
'10. (2) Such profits or gains shall be computed after making the following allowances, namely :.....
(xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or person expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.'
Allowance could, therefore, be made of an expenditure incurred exclusively for the purpose of the business of the company. Section 10(4A) of the Act, so far as relevant for our purposes, reads :
10. (4A) Nothing in sub-section (2) shall, in the computation of the profits and gains of a company, be deemed to authorize the making of :-
(a) any allowance in respect of any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or a person who has a substantial interest in the company within the meaning of sub-clause (iii) of clause (6C) of section 2, or....
if in the opinion of the Income-tax Officer any such allowance is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom.'
On the basis of the facts stated by the Tribunal in the reference order it is clear that Sarvsri C. M. Gupta and M. C. Gupta only lent their names and the remuneration paid to them was not warranted by business consideration. The view of the Tribunal that they were entitled to Rs. 500 per month each for having financed the business cannot be accepted because section 10(2) (xv) of the Act permits the allowance of only business expenditure and not of a return for the investment made. Besides, a remuneration of Rs. 24,000 on an investment of Rs. 34,000 only cannot but be treated as a device to distribute the expected profits of the company to the director-shareholders. Before any allowance could be made, the case has to fall under the provisions of section 10(2) (xv) of the Act. That is not so in the present case.
We, therefore, answer the question referred to us against the assessee-company and in favour of the department by saying that a sum of Rs. 500 each as remuneration to Sarvsri C. M. Gupta and M. C. Gupta is not an allowable business expenditure. The assessee shall pay to the department its costs which we assess at the figure of Rs. 300.
Question answered against the assessee-company.