ANSARI C.J. - This reference comes to us under section 66(1) of the Indian Income-tax Act, with the following question :
'Whether there are materials for the Tribunal to hold that the whole of the claim of salary paid to Lakshmana Reddiar does not represent expenditure laid out or expended wholly or exclusively for the purpose of business ?'
The assessee had claimed Rs. 36,000 as deduction due to the amount having been paid as salary to Lakshmana Reddiar, the general manager, for the previous year for the assessment year 1951-52. The Income-tax Officer had allowed only Rs. 20,000 and disallowed the rest, but the Appellate Assistant Commissioner allowed the whole. His reasons for doing so were that there was an agreement between the assessee and the manager about the latter getting 1/3rd of the profit or suitable salary; that the manager had in the earlier years been getting 1/3rd of the profits but in 1124 M. E. there was a loss, that the manager thereafter relied on his alternative right of being given fixed salary, which was fixed at Rs. 3,000 and paid, and that in the circumstances it would not be reasonable to decide what would be reasonable salary. The Appellate Tribunal has reversed the decision, and the ground for doing so can shortly be given in the words of the Tribunal itself;
'In the past the Tribunal has held that only a part thereof can be said to have been wholly and exclusively laid out for purpose of business. In this year, 1/3rd of the profits will amount to Rs. 22,000. This must delimit the allowance in any case. The Appellate Assistant Commissioners order is incorrect and deserves to be modified. Only Rs. 22,000 shall be allowed as a deduction.'
The assessee claimed the decision to be legally incorrect and hence the question has been referred to us. Now the legal proposition should not be disputed that the deduction can be claimed under section 10(2)(xv) of the Income-tax Act, and that the fact of having paid the money is not decisive; for, it would be open to the taxing authority to find upon the other facts and circumstances that only part of such payment should be allowed as expenditure incurred for the purpose of the assessees business. It is equally well settled by the Newtone Studios Ltd. v. Commissioner of Income-tax, that if the remuneration be paid out of purely commercial considerations, it should be allowed as expenditure incurred wholly or exclusively for the purpose of the business and it would not be open to the taxing authority to adopt a subjective standard of reasonableness and disallow a part of the remuneration as being unreasonably large. Acting on the aforesaid principle, the Appellate Assistant Commissioner has found that Lakshmana Reddiar was rendering valuable services to the business, his claim to demand a suitable salary instead of a share of the profits, due to the losses in 1124, was justified and the entire deduction claimed should be allowed. The Tribunal has relied upon what was being done in the previous years, but has failed to note that has been earlier allowed were with salary calculated at 1/3 of the profit which precedent would not be relevant when the employee had claimed the benefit of the alternative form, and been in fact given fixed salary. Indeed, the Tribunal has allowed fully what the manager would have got had he not selected the alternative mode of getting the salary, and there should be cogent reasons for disallowing part of what the employee was being on equally effective ground given as his legal salary. The grounds on which the salary paid according to the terms of employment had not been allowed in the assessment year are merely that in the earlier years, less has been allowed, but the employees had then been getting remuneration on a different basis and this difference had not been noticed in reducing the claim.
The learned Government Pleader has endeavoured to sustain the Tribunals decision on a different ground. He has said that the assessees representative before the Income-tax Officer had asked for the deduction being given on the basis of 1/3rd of the profit. We, however, find no such concession stated in the statement of the facts, though the order of the Income-tax Officer does mention such a concession. But even then such a concession is in the alternative and should be relied upon only where the taxing department finds full deduction not permissible on rational grounds. If the case is to be decided on admission then the whole admission should be taken. In other words, the concession would not be available unless the earlier claim be disallowed on rational grounds and we do not find any such ground for reversing the order of the Appellate Assistant Commissioner in this case. In this context we feel that the answer to the question referred to us should be in the negative. Let the aforesaid answer be sent to the department and the assessee will be entitled to his costs, the counsels fee being Rs. 100.
Question answered in the negative.