1. This is an application under Section 66(2) of the Income-tax Act and it arises in the following circumstances. The petitioners who are a public limited company took over in November 1947 the business of hiring 'kohlus' and pans from a partnership, trading under the name and style of Hansraj Gupta and Co.
One Pt. Mela Ram who was the General Manager of the partnership was employed by the Company because he was greatly experienced, and well versed in the 'kohlu' hiring business having looked after the business of the firm and its predecessors for the last 30 to 40 years.
The Company entered into an agreement with Pt. Mela Ram by which the remuneration of the Pandit was 'to consist of 10 per cent of the yearly profits of the Company after allowing the usual working expenses, interest on loans and advances, repairs and outgoings, depreciation etc., but without any deduction for taxes, appropriation to reserves and payment of Managing Agent's commission, subject to a minimum of Rs. 12,000/-'.
Mela Ram was also a shareholder in the Company, but he held shares of the value of Rs. 10,000/- only, and it is stated that he is no relative of Hans Raj Gupta or any other shareholder. In their petition filed in this Court it is stated that Mela Ram was paid by the partnership sometimes a fixed salary and at another time commission.
In their application made under Section 66(1) tothe Appellate Tribunal the petitioners havegiven the amounts of commissions paid in theprevious years and what was disallowed by theIncome-tax authorities then, and they are:
Assessment Commission AmountYear Paid Disallowed.1942/43 26,441 14,4411943/44 10,989 5,4901944/45 25,322 12,6611945/46 50,303 25,1521946/47 52,872 26,4361947/48 58,381 29,1901948/49 84,487 42,243
2. On 18-2-1949 an agreement was entered into between the Company and Pt. Mela Ram which was in pursuance of a resolution passed at an extraordinary general meeting of the Company held on that day. At that meeting were present the following: (1) Pt. Mela Ram, (2) Shmt. Bhagwati Devi, (3) Shmt. Angira Devi, (4) Sh. Shiv Raj Gupta, (5) Sh. R. C. Sharma, (6) Sh. Sita Ram.
The amount to be paid by way of remuneration to Pt. Mela Ram is contained in Clause 2 of this agreement which runs as follows:
'2. That this remuneration shall be a sum equal to 10% of the yearly profits of the Company after allowing the usual working expenses, interest on loans and advances, repairs and outgoings, depreciations etc. but without any deduction in respect of income-tax, super tax or any other tax or duty on income or revenue or allowance for Managing Agents' commission or for expenditure by way of interest on debentures or otherwise or capital account or on account of any sums which may be set aside in each year out of the profits for reserve or any other special fund, subject to minimum of Rs. 12,000/-in case of absence of inadequacy of profits'.
3. For the year under assessment the total income of the Company was Rs. 6,34,277/- and according to Clause 2 of the agreement the amount payable by way of commission to Pt. Mela Ram came to Rs, 81,961/-, and the Company claims this as a deduction under Section 10 (2) of the Income-tax Act.
4. In paragraph 10 of their petition the petitioners claim that this amount has been erroneously held to be covered by the provisions of Section 10 (2) (x) of the Income-tax Act and that it should have been considered to be under Section 10 (2) (xv) of the Act. and all that had to be considered was whether the commission paid was an expenditure exclusively and wholly laid out or expended for the purposes of the business of the Company.
5. The Income-tax Officer by his order dated the 13-12-1949 allowed only 50 per cent out of this commission, i.e., Rs. 40,980/-. In coming to this conclusion, he took into account the services rendered by Mela Ram, the previous history of the case and what he was receiving before and the extent of the business and then said 'looking to the past history I am not inclined to admit in full the claim of the assessee Company.
I allow only 50 per cent of the total commission of Rs. 81,961/- credited to the account of Mr. Mela Ram', and ended up that portion of his order in the following words:
'It is somewhat strange that all along he has allowed to accumulate his income with the predecessor firm and now with the Company. The withdrawals in the past also do not clearly justify that Mr. Mela Ram had free and full control over all his income, as he never withdrew in excess of his remuneration'.
6. An appeal was taken to the Appellate Assistant Commissioner who upheld the order of the Income-tax Officer and after referring to some decided cases he said:
'It may be pointed out that Shri Mela Ram was not a technical man and there was no reason why he should be granted such huge commission year after year. It also does not appear that this gentleman was called upon to render any service in addition to what he had been rendering in the past. The conditions which governed the payments in the preceding years substantially obtained in the year under appeal also'.
An appeal was then taken to the Appellate Tribunal who upheld the order of the Appellate Assistant Commissioner on the ground that the amount had been paid 'for reasons other than commercial ones'. The petitioners then applied for a reference to be made under Section 66(1) of the Income-tax Act and the Tribunal refused to make the reference holding that it was a question of fact and not one of law.
8. The contention raised by Mr. Grover before us was that the matter fell within Section 10 (2) (xv) and not under Section 10 (2) (x) and he submitted that the whole of the income paid to Mela Ram was expenditure laid out or expended wholly and exclusively for the purposes of such business, i.e., the business of the Company.
In the present case the question is not whether it was laid out for the business of the Company or not. The real question for determination is whether the finding of the Tribunal gives rise to a question of law or is a question of fact. Assuming that commission falls under Section 10 (2) (xv), can it be said that the finding given by the Tribunal is not one of fact.
As to what is the amount which is laid out wholly or exclusively for the purposes of the business of the Company is in my opinion a question of fact and it is for the Income-tax Officer or the Appellate Tribunal as the case may be to determine whether the payment was made wholly and inclusively for the purposes of the business of the assessee.
9. In 'Jethabhai Hirji and Co. v. Commr. of Income-tax, Bombay' : AIR1950Bom29 A, it was held that in every case it is for the employer to determine in what manner he would remunerate his employee, but it is for the Income-tax Officer to decide whether any remuneration paid by the employer to his employee is wholly and exclusively expended for the purpose of his business and that it is erroneous to contend that as soon as an assessee has established two facts, viz. the existence of an agreement between an employer and an employee and the fact of actual payment, no discretion is left to the Income-tax Officer except to come to the conclusion that the payment falls within Sub-section (xv) and is made wholly and exclusively for the purposes of the business of the assessee.
The Income-tax Officer is entitled to take into consideration the extent of the business, the nature of the services rendered which called for a special remuneration and he can also take into consideration the quantum of the payment made to decide whether the payment was not grossly out of proportion to the work done by the employee. At page 31 Chagla C. J. observed:
'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'.
Reliance was placed on the decision of the Privy Council in 'Aspro, Ltd. v. Commr. of Taxes,' (1936) 4 ITR 264 B. Their Lordships held in that case that if the only evidence before the Court had been the Company's resolution fixing the directors' fees and vouchers of payment, it could not have reasonably refused to hold that the assessment was excessive, but taking other facts into consideration the Court would be entitled to come to the conclusion that the amount paid had not been proved to be exclusively incurred in the production of the assessable income.
This case was followed by a Division Bench of this Court in -- 'Hotz Trust, Simla v. Commr. of Income-tax' C, where it was contended for the assessee that it was for the employer to determine what remuneration should be paid to his employees for the services rendered by them -- a contention which was negatived by the learned Judges.
10. Quite recently in -- 'Lakshmi Ammal v. Commr. of Income-Tax', (S) AIR 1955 Mad 200 (D), where the Appellate Tribunal had found that the remuneration paid to an employee was not a sum expended wholly and exclusively for the purposes of the business of the assessee within the meaning of Section 10 (2) (xv) of the Income-tax Act and disallowed portion of it and also refused to state a case, it was held that as to how much should be allowed as reasonable expenditure within the meaning of Section 10 (2) (xv) was a pure question of fact and did not involve any question of law and therefore the Appellate Tribunal could not be directed to state a case.
In that case the Department determined that the amount paid to the employee was not expended wholly and exclusively for the purposes of the business, and having found that they also determined as to how much would properly fall within the class of deduction covered by Clause (xv), and the determination of this was held not to be a question of law. I respectfully agree with the opinion given in these cases and in my opinion the question is wholly one of fact and not of law.
11. It was then contended that in this particular case there was no material on which the Income-tax Officer could come to the conclusion. I am unable to accept this contention either because the order of the Income-tax Officer or of the Assistant Commissioner which was accepted by the Appellate Tribunal referred to and quoted from above shows what material there was from which they were coming to the conclusion as to what was wholly and exclusively for the purposes of the business of the assessee.
It cannot be said that there was no material before the Taxing Officers. As a matter of fact, in the 'Commr. of Income-tax, West Bengal v. Calcutta Agency Ltd. : 19ITR191(SC) (E), the Supreme Court has held that the burden of proving the necessary facts in order to entitle the assessee to claim exemption under Section 10 (2) (xv) is on the assessee, and if he does not establish these facts he is not entitled to the deduction claimed.
12. I would, therefore, dismiss this petition and discharge the rule with costs. Counsel's fee Rs. 100/-.
13. I agree.