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J.R. Patel and Sons (P.) Ltd. Vs. Commissioner of Income-tax, Gujarat - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 1 of 1967
Judge
Reported in[1968]69ITR782(Guj)
ActsIncome Tax Act, 1922 - Sections 10(2)
AppellantJ.R. Patel and Sons (P.) Ltd.
RespondentCommissioner of Income-tax, Gujarat
Appellant Advocate K.H. Kaji, Adv.
Respondent Advocate J.M. Thakore, Advocate-General
Cases ReferredJ.R. Patel and Sons Private Ltd. v. Commissioner of Income
Excerpt:
direct taxation - deduction - section 10 (2) of income tax act, 1922 - assessee-company claimed deduction of certain amount paid as remuneration to managing director - remuneration paid at certain rate - income tax officer (ito) held that amount paid in excess of remuneration could not be allowed as legitimate deduction - excess remuneration paid by assessee company wholly and exclusively for business and hence deductible allowance within section 10 (2) (xv). - - ' at page 730 of the report, it has been pointed out :even if the view which the agency company as well as patel took about the legal position was correct and if some person other than patel had been appointed to do the work of a selling agent and to do the work of a technical adviser to the managed company, the amount of.....divan, j.1. in this reference under section 66(1) of the indian income-tax act, 1922 (hereinafter referred to as the act), the following question has been referred to the high court at the instance of the assessee : 'whether, on the facts and in the circumstances of the case, the amounts of rs. 24,500, rs. 49,865 and rs. 18,000, being the excess over the amount of rs. 12,000 paid to shri a.j. patel in the respective assessment years 1958-59, 1959-60 and 1961-62, are properly allowable under section 10(2)(xv) of the indian income-tax act, 1922 ?' 2. the assessee is a private limited company incorporated in the then baroda state on december 18, 1944. the relevant assessment years are 1958-59, 1959-60 and 1961-62, the corresponding previous years being calendar years 1957, 1958 and 1960. for.....
Judgment:

Divan, J.

1. In this reference under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act), the following question has been referred to the High Court at the instance of the assessee :

'Whether, on the facts and in the circumstances of the case, the amounts of Rs. 24,500, Rs. 49,865 and Rs. 18,000, being the excess over the amount of Rs. 12,000 paid to Shri A.J. Patel in the respective assessment years 1958-59, 1959-60 and 1961-62, are properly allowable under section 10(2)(xv) of the Indian Income-tax Act, 1922 ?'

2. The assessee is a private limited company incorporated in the then Baroda State on December 18, 1944. The relevant assessment years are 1958-59, 1959-60 and 1961-62, the corresponding previous years being calendar years 1957, 1958 and 1960. For the assessment year 1958-59, the assessee-company claimed a deduction of Rs. 36,500 paid as remuneration to its managing director, A.J. Patel. Similarly, for the assessment year 1959-60, the deduction claimed for such remuneration was Rs. 61,866; and for the assessment year 1961-62, the deduction claimed for such remuneration was Rs. 30,000. Till March 31, 1956, the assessee-company was paying to its managing director remuneration at the rate of the Rs. 12,000 per annum. The Income-tax Officer came to the conclusion that the amount paid in excess of Rs. 12,000 in each of the three assessment year unders consideration in this reference had nothing to do with the services rendered by the managing director to the assessee-company and further that, if services were rendered by the managing director to another company of which the assessee-company were the managing agents, the remuneration referable to the services rendered to the managed company could not be allowed as a legitimate deduction in the assessment of the assessee-company. In respect of the assessment year 1957-58, identical view had been taken by the Income-tax Officer and the same view was also held by him in respect of the assessment for assessment years 1958-59, 1959-60 and 1961-62. Against the decision of the Income-tax Officer, there was an appeal by the assessee regarding the disallowance of the amounts of Rs. 24,500, Rs. 49,865 and Rs. 18,000, being the amounts of excess over the amount of Rs. 12,000, which was paid as remuneration to the managing director prior to March 31, 1956. The Appellate Assistant Commissioner upheld the disallowance made by the Income-tax Officer and dismissed to the assessee. Further appeals were filed by the assessee to the Appellate Tribunal. At the stage of the hearing before the Tribunal, it was contended that there were certain facts which were not present before the Gujarat High Court when it dealt with the reference arising out of the assessment for the assessment year 1957-58 and that these material required further consideration; and accordingly, a statement of facts was submitted to the Tribunal for its consideration. The tribunal remanded the matter to the Income-tax Officer with a direction to furnish a report on the statement of facts. This remand order was passed by the Tribunal on March 8, 1965. Thereafter, the Income-tax Officer submitted his remand report and therein he stated that the service rendered by A.J. Patel to the managed company for which excess remuneration was claimed by the assessee were rendered by him in his capacity as the managing director of the managed company and, therefore, no claim for deduction lay in the assessee's case. When the matter came up again for hearing before the Tribunal, it was pointed out on behalf of the assessee that A.J. Patel was not the managing director of the managed company but was merely a director of the managed company and managing director of the managing agency company and, therefore, the conclusion of the Income-tax Officer in his remand report was based on a wrong conclusion of fact. The tribunal at the instance of the assessee passed a second remand order on October, 14, 1965, and the Income-tax Officer was asked to give his finding on several points specified by the Tribunal in this second remand order. The Income-tax Officer submitted his second remand report on January 13, 1966, and therein he conceded that the actual fact was that A.J. Patel was not the managing director of the managed company but was only the managing director of the assessee-company. He, however, came to the conclusion that the service rendered by A.J. Patel were rendered by him not to the assessee-company but to the managed company and, hence, no allowance could be claimed by the assessee as regards that excess remuneration and he held that the remuneration referable to such service rendered to the managed company could not form part by way of legitimate deduction in computing the assessee's income for tax purposes. Thereafter, the matter was given placed before the Tribunals for final disposal and after considering the facts and further evidence led by the assessee in both the remand proceedings, the Tribunal came to the conclusion that on the facts in the circumstances, Having regard to the admitted position that extra service rendered by A.J. Patel were not rendered by him to the assessee-company but were rendered by him to the managed company and that no additional remuneration was paid to him by the managed company, the assessee could not claim a deduction thereof in its assessments and thus upheld the disallowance of the excess amount for all the three assessment years. At the instance of the assessee, the above question has been referred to us by the Tribunal.

3. We may point out that in connection with the assessment for the assessment year 1957-58, the relevant previous year being the calendar year 1956. the matter had come before this High Court on a reference and the decision of the High court is reported at 51 I.T.R. 717. The main arguments before us at the hearing of the present reference have turned upon the additional material which has been placed on behalf of the assessee before the income-tax authorities, for the purpose of showing that the excess over Rs. 12,000 should have been allowed as a deductible allowance under section 10(2)(xv) of the Act in each of the three relevant years. On behalf of the revenue, it has been contended before us that, in spite of the additional material which has been led after the decision of the High Court in the earlier reference, the final conclusion on the point of law should be the same as before and that the additional material does not justify any departure from the conclusion in the earlier reference. It will, therefore, be necessary for us to examine in detail the decision reported at 51 I.T.R. 717. We wish to make it clear that, apart from the additional evidence which has been led in this case before the Income-tax Officer at the time of the remand by the Tribunal, the basic facts which led to the reference for the assessment year 1957-58 were the same as in the instant case.

4. At the time when the earlier reference relating to the assessment year 1957-58 was heard by this High Court, the following materials were available on the record of the case :

(1) Letter, dated June 13, 1956, from A.J. Patel to the assessee-company.

(2) Resolution, dated June 13, 1956, passed by the board of direction of the assessee-company.

(3) Notice, dated June 13, 1956, convening the extraordinary general meeting of the assessee-company; and the explanatory statement that accompanied that notice.

(4) Resolution, dated July 31, 1956, passed at the extraordinary general meeting of the assessee-company.

5. Prior to April 1, 1956, A.J. Patel, the managing director of the assessee-company was getting Rs. 1,000 per month from the assessee-company and was getting 2,500 per month as technical adviser from the managed company, and he was also getting commission at the rate of 2 1/2% on the sale price of healds and reeds manufactured and sold by managed company. Over and above these items of remuneration, A.J. Patel was being paid Rs. 3,000 per year as bonus by the managed company. The total remuneration by way of salary and commission as selling agent paid by the managed company in the calendar year 1955, came to Rs. 53,629 and, inclusive of the amount of Rs. 12,000 paid by the assessee company, the total remuneration of A.J. Patel came to Rs. 65,629. When the new Indian Companies Act came into force with effect from April 1, 1956, it was felt that under section 198 of the Companies Act, 1956, the total remuneration payable by the managed company to its directors, managing agents and treasurers, if any, could not exceed 11% of the net profit of the managed company computed as provided in the Companies Act, the percentage being exclusive of any fees payable to directors for the meetings of the board attended by them. Moreover, under section 356 of the Companies Act, 1956, no managing agent and no associate of a managing agent could receive any commission or other remuneration from the managed company in respect of sales of goods produced by the managed company if the sales were made from the premises at which they were produced or from the head office of the managing agent or from any place in India. A.J. Patel came within the definition of an associate of a managing agent as defined in section 2(3)(c) of the Companies Act, 1956. It was in view of these provisions, particularly the provisions of section 198 and 356 of the Companies Act, 1956, that a new arrangement, as suggested in the letter of June 13, 1956, by A.J. Patel to the assessee-company, and as set out in the resolution, dated July 31, 1956, passed at the extraordinary general meeting of the assessee-company, was brought about. Under the new arrangement, A.J. Patel was to be paid by the assessee-company as remuneration as its managing director on the following basis :

(a) Rs. 30,000 per year.

(b) In any year in which the total remuneration from the Mahendra Mills Ltd. (managed company) exceeded Rs. 1,00,000, the amount equal to 30% of such excess over Rs. 1,00,000.

6. For the calendar year 1956, a sum of Rs. 44,367 was paid by the assessee-company to A.J. Patel. Out of this amount, Rs. 3,000 was his remuneration at the rate of Rs. 1,000 per month for the period from January 1, 1956, to March 31, 1956; and the balance amount of Rs. 41,367 was paid by way of his remuneration on the basis of the resolution dated July 31, 1956; and the question before this High Court at the time of the earlier decision reported in 51 I.T.R. 717 was whether the entire amount of Rs. 44,367 paid by the assessee-company to A.J. Patel should be allowed or only Rs. 12,000 should be allowed; and on these facts the reference was heard by this High Court on the earlier occasion. In the judgment delivered by the Division Bench on that earlier reference, the decision of the Bombay High Court in Tata Sons Ltd. v. Commissioner of Income-tax, the decision of the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income-tax and the decision of the Bombay High Court in F.E. Dinshaw Ltd. v. Commissioner of Income-tax were considered. After considering these three decisions, the following legal principles were culled out from these reported cases by the Division Bench :

(1) One has not got to take an abstract or academic view of what was proper expenditure laid out or expended wholly and exclusively for the purposes of one's business but one has got to take into consideration questions of commercial expediency and the principles of ordinary commercial trading and the main consideration that has got to weigh with the court is whether the expenditure was a part of the process of profit-making.

(2) The test for the purpose of deciding whether a particular amount can be allowed as deductible allowance under section 12(2) of the Act is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertakings in order indirectly to facilitate the carrying on of its business. If the transaction had been entered into on the carrying on of its business. If the transaction had been entered into the ground of commercial expediency in order even indirectly to facilitate the carrying on of the business of the assessee, it would attract the provisions of section 12(2) even though the transaction might have been voluntarily entered into.

(3) If the payment was made with an indirect or improper motive for some considerations aliunde the business or out of generosity, then the payment is not liable to be regarded as one covered by the provisions of section 10(2)(xv) : that the matter has to be viewed in the light of principles of commercial trading and commercial expediency and what is required is that the expenditure must be germane to the business of the assessee and not something which is de hors the business.

In the light of these legal principles, the Division Bench posed the following question :

'Whether the payment made by the assessee-company to its managing director was a payment made on ground of commercial expediency for the ultimate benefit of the assessee-company; and whether that benefit accrued immediately or whether if accrued after a lapse of time, directly or indirectly ?'

Applying these principles to the fact of the case before it, the Division Bench observed :

'The mere fact that so far as the assessee is concerned Patel (A.J. Patel) did not render any extra services cannot be regarded as the only relevant circumstance which may be considered in deciding whether the expenditure had been wholly and exclusively laid out for the purpose of the business of the assessee-company. There services for which the assessee-company sought to remunerate its managing director were services which were to be rendered by the managing director not to the assessee-company but to the managed company. The question that we would have to consider would be whether there was such a nexus between the managed company and the assessee-company which would justify the assessee-company in entering into such a transaction from the point of view of business expediency. Rightly or wrongly, the assessee-company considered that its managing director, Patel, was not entitled to receive the remuneration which he was receiving in the past for the services rendered by him personally to the managed company, as the law precluded the managed company from making such payment to Patel. It was an attempt on the part of the assessee-company to pay to Patel what it considered could not be paid to him by the managed company.'

At page 730 of the report, it has been pointed out :

'Even if the view which the agency company as well as Patel took about the legal position was correct and if some person other than Patel had been appointed to do the work of a selling agent and to do the work of a technical adviser to the managed company, the amount of the managing agency commission would then have been reduced to the extent of ten per cent. of the amounts which the managed company would have had to pay to such other technical adviser and such other selling agent. In order to avoid this loss of ten per cent. the agency company entered into an agreement where under it gave away to Patel many times more than that amount. No evidence has been led which would show that expenditure of this nature had been incurred by the assessee-company for considerations of business or commercial expediency or that expenditure was laid out wholly or exclusively for the purpose of the business of the agency company or that, as a result of the arrangement, the agency company derived any gain or a long term advantage or was expected to derive such advantage either directly or indirectly. Having regard to the facts and the circumstances of the case, it is not possible for us to come to the conclusion that the sum of Rs. 32,367, being the balance of the sum of Rs. 44,367 referred to by us earlier, was laid out or expended wholly and exclusively for the purpose of the business of the assessee-company and was liable to be allowed as a deduction under the provisions of section 10(2)(xv) of the Act.'

7. It is true that in the light of the facts on the record at the time of the earlier reference, the Division Bench had observed that the arrangement arrived at between A.J. Patel on the one hand and the assessee-company on the other after the coming into force of the Companies Act, 1956, was an attempt on the part of the assessee-company to pay to Patel what it considered could not be paid to him by the managed company. But we must bear in mind that these observations were made by the Division Bench at the time of the earlier reference because there was no evidence on the record of the case which would show that the expenditure by the assessee-company had been incurred for considerations of business or commercial expediency or that this expenditure was laid out wholly and exclusively for the purpose of the business of the assessee-company or that as a result of the arrangement the assessee-company derived any gain or a long-term advantage or was expected to derive such advantage either earlier directly or indirectly. After the above decision of this High Court, when the assessment proceedings for assessment years 1957-58, 1958-59, 1959-60 and 1960-61 were being dealt with the Appellate Tribunal at the instance of the assessee, the matter was remanded back to the Income-tax Officer so that an opportunity could be given to the assessee for leading additional material regarding the arrangement arrived at between the assessee-company and A.J. Patel. Besides the items which we have already pointed out as having been present before the income-tax authorities at the time of the assessment for the assessment year 1957-58, the following materials were brought on the record at the time of the remand proceedings :

(1) Letter dated March 31, 1956, addressed by A.J. Patel to the board of directors of Mahendra Mills Ltd. (managed company).

(2) Statement in the form of an affidavit sworn by A.J. Patel before the Income-tax Officer on June 24, 1965, setting out the circumstances under which the Mahendra Mills Ltd. came to be incorporated and also the circumstances under which the different arrangements were made from time to time by the Mahendra Mills Ltd. (managed company) and the managing agents.

(3) Statement on oath made by Vishwas Vinayak Joshi before the Income-tax Officer, this particular witness being a director of Mahendra Mills Ltd. since 1959 as nominee of the Industrial Finance Corporation, from which the managed company had taken a large loan.

(4) Letter, dated November 19, 1965, from the chartered accountant engaged by the assessee-company addressed to the Income-tax Officer setting out different contentions on behalf of the assessee-company and setting out the facts.

(5) Oral evidence of A.J. Patel before the Income-tax Officer and oral evidence of Vishwas Vinayak Joshi before the Income-tax Officer.

What we have to consider in the light of the legal principles culled out by the Division Bench of this High Court on the earlier occasion in whether in the light of the additional material and additional evidence on the record of the case, it can be said that the excess over Rs. 12,000 paid by the assessee-company to its managing director in the three different years of assessment under consideration in the present case was expended wholly and exclusively for the purpose of its business.

8. On the additional materials, the findings of the reached by the Income-tax Tribunal as set out in paragraphs 18, 19 and 20 of its order are :

(a) A.J. Patel was a man of considerable experience and high training and he was greatly responsible for the progress of the mill-company.

(b) At the time of the changes brought about by the new Companies Act 1956, A.J. Patel approached the assessee-company for being asked to render the same services to the mill-company as he had been doing prior to April 1, 1956, but on behalf of the assessee-company, instead of directly and in his personal capacity to the managed company; and A.J. Patel asked that he should be additionally remunerated by the assessee-company to compensate him for the loss of remuneration till then received by him from the mill-company (managed company).

9. Certain statements showing the progress of the mill and the profits made by the mill company from time to time were also filed before the Tribunal and on the basis of these statements it was argued before the Tribunal that because of the services rendered by A.J. Patel to the managed company, the profits of the managed company had risen as follows :

----------------------------------------------------------------------Years of Income Gross profitsRs.1955 10,41,4021956 22,96,3811957 14,64,0531958 28,72,5671959 34,00,0011960 34,93,657---------------------------------------------------------------------

10. In regard to these statements the Tribunal came to the conclusion that these statements did not necessarily mean that it was in the interest of the assessee-company to ask A.J. Patel to continue to render the same services rendered prior to April 1, 1956, to the mill-company. The Tribunal came to the conclusion that on the basis of those statements, the higher remuneration paid to A.J. Patel by the assessee-company could not be said to be justified. In paragraph 20 of its order, the Tribunal has held :

'There is no dispute that such services for which higher remuneration has been paid by the assessee-company as were rendered by Shri Patel were the same services as were being rendered by him to the mill-company prior to April 1, 1956. If that is so, then what is there to show that after April 1, 1956, the position changed for the assessee-company so that it had to take upon itself the payment of such services.'

11. The Tribunal further held that it was not the liability of the assessee-company as the managing agents to incur such expenditure for payment of the services to be rendered by the managing director of the assessee-company to the managed company. The Tribunal came to the conclusion that there was no evidence of any extra service rendered by A.J. Patel to the assessee-company and the service rendered by Patel were the same as were being rendered by him prior to April 1, 1956. These services were rendered direct to the mill-company. The Tribunal then observed :

'After all, if the mill-company progressed and if the mill-company made more profits, the assessee, as the managing agents, were entitled to receive larger remuneration under the managing agency agreement. Therefore, the mere fact that the company, in fact, progressed and made more profit does not necessarily mean that there was every justification for remunerating Shri A.J. Patel through whose efforts such prosperity and such profits came to the mill-company higher than hitherto.'

The Tribunal further observed :

'An indirect benefit that may flow to the managing agents cannot justify the employment of a person who renders to the managed company as being in the interests of the business of the managing agents.'

In the light of these facts found by the Tribunal, it came to the conclusion that it could not be said that there was any commercial expediency in employing A.J. Patel on higher remuneration and there was equally no nexus established between the payment and the services with reference to which the payment had been made as rendered to the assessee-company. The Tribunal further held that where the managed company makes more profits, necessarily the managing agents earn higher remuneration. But, according to the Tribunal, that can never be made an argument for justifying the employment of a person allegedly on behalf of the managed agent when the services of such an employee are required by the managed company and not by the managing agency company.

12. In our opinion, the Tribunal erred in law in holding that an indirect benefit flowing to the managing agents could not justify the employment of a person, who rendered services to the managed company, as being in the interest of the business of the managing agency. As has been observed in J.R. Patel and Sons Private Ltd. v. Commissioner of Income-tax the correct approach should be whether the payment was made on grounds of commercial expediency for the ultimate benefit of the assessee-company, whether that benefit is to accrued immediately or to accrue after a lapse of time, directly or indirectly. Even if the benefit which flows to the assessee-company comes to it indirectly, that payment can be considered on grounds of commercial expediency if it is for the ultimate benefit of the assessee-company. The Tribunal has held that even though there was no question that A.J. Patel was a qualified and experienced man and had, in fact, rendered services which deserved such higher remuneration, still, since the services were admittedly rendered to the mill-company and not to the assessee-company, the additional remuneration paid to Patel could not be considered as expenditure laid out or expended wholly and exclusively for the purpose of the assessee's business. Thus, the fact that the services which A.J. Patel rendered to the managed company deserved such higher remuneration has been accepted by the Tribunal. Throughout its order, there is no finding by the Tribunal that the arrangement arrived at by the assessee-company with A.J. Patel, from April 1, 1956, was in any way mala fide or a subterfuge or a colourable arrangement; and thus the bona fides of the assessee were not doubted by the Tribunal in any manner. The major point which seems to have weighed with the Tribunal was the fact that the additional remuneration paid to A.J. Patel was for the services rendered to the managed company and not to the assessee-company. In this connection, the Tribunal has overlooked the observations made by this High Court at the time of the earlier reference, viz., that the mere fact that so far as the assessee is concerned, Patel did not render any extra services could not be regarded as the only relevant circumstance, which might be considered in deciding whether the expenditure had been wholly and exclusively laid out for the purpose of the business of the assessee-company. In spite of that specific observation by the High Court on the earlier occasion, the Tribunal has treated this fact of Patel rendering services to the managed company and not to the assessee-company as the only relevant circumstance in deciding whether the expenditure has been wholly and exclusively laid out for the purpose of the business of the assessee-company. The Tribunal has overlooked, in coming to its conclusion regarding the deductibility of this particular expenditure, being the excess amounts paid to Patel over the sum of Rs. 12,000, viz., that A.J. Patel in his capacity as a highly experienced and technical man had been responsible for floating Mahendra Mills Ltd. as far back as 1942; further that A.J. Patel was the managing director of the assessee-company since his father's death in 1954 and was working as an ex-officio director of the managed company from that time and was responsible for the progress and development of the managed company; and the further fact that the managed company expanded its activities as shown by the following figures :

------------------------------------------------------------------------Year Unit No. 1. Unit No. 2.------------------- ---------------------Spindles Doubling Spindles Doubling-----------------------------------------------------------------------1954 9,704 4,984 -- --1956 (end of) 20,512 -- -- --1957 26,940 7,432 -- --1958 26,940 7,432 3,616 --1959 26,940 7,432 29,832 11,5001960 26,940 7,432 29,832 11,500---------------------------------------------------------------------

These additions to the machinery and plant of the managed company were reflected in the larger scales and corresponding larger profits earned by the managed company from 1956 onwards and correspondingly the commission receive by the managing agents, i.e., the assessee-company, also went up. The additional material led before the Tribunal showed that the managing agency commission earned by the assessee-company went up as follows :

----------------------------------------------------------------------Rs.1956 1,86,8531957 1,21,6651958 2,06,2191959 1,44,5071960 1,17,117----------------------------------------------------------------------

13. Under these circumstances, since the bona fides of the arrangement arrived at between the assessee-company and A.J. Patel, the managing director, has not been challenged nor doubted in any finding of the Tribunal, it is clear that because of the services which A.J. Patel began to render to the managed company in his capacity as the managing director of the assessee-company, the gross profits of the managed company and also the commission earned by the managing agents both went up. This High Court, at the time of the earlier reference, came to the conclusion that it did because no evidence had been led to show that the expenditure of that nature had been incurred by the assessee-company for considerations of business or commercial expediency or that the expenditure was laid out wholly and exclusively for the purposes of the business of the assessee-company or that as a result of the arrangement, the assessee-company derived any gain or long-term advantage or was expected to derive such advantage either directly or indirectly. Prior to 1st April, 1956, the managing director of the assessee-company, A.J. Patel, was receiving remuneration in his personal capacity as also as selling agent of the company and as a managing director of the assessee-company. The total remuneration paid to A.J. Patel for the different years is as follows :

Year Total remuneration Rs.1955 65,6291956 63,1121957 36,5001958 61,8661959 43,3521960 36,184.

The fact that part of the remuneration which A.J. Patel received prior to April 1, 1956, was derived by him as commission for working as selling agent of the managed company, in our opinion, should not make any difference because what Patel put forward as the basis for arriving at the new arrangement was that he should be adequately remunerated, if he was not to receive any amount from the managed company after April 1, 1956. In the letter of June 13, 1956, which was also before the Division Bench at the time of the earlier reference, A.J. Patel had pointed out that he should be sufficiently remunerated for looking after the mill-company on behalf of the managing agency company. But what was not before the Division Bench on that occasion was the material going to show the extent to which the managing agency company, i.e., the assessee-company had benefited even indirectly because of the higher remuneration which the assessee-company began to A.J. Patel under the new arrangement with effect from April 1, 1956.

14. It was urged before us by the learned Advocate-General that as far as possible there should be no inconsistency between the earlier judgment of the Division Bench of this High Court in J.R. Patel and Sons Private Ltd. v. Commissioner of Income-tax and the conclusion that we arrive at on the present reference. We accept his submission that as a matter of general principle, as far as possible inconsistency between the different decisions of the High Court should be avoided; but at the same time it is clear that the facts which are available on the record at the time of the present reference were not available on the record at the time of the earlier reference. We have already referred to the additional material which is now available on the record of this reference; and, therefore, the question that we have to consider is whether, in the light of the additional material which has been brought on the record, it can be said that on grounds of commercial expediency the excess amount over Rs. 12,000 paid by the assessee-company to A.J. Patel was expended by it wholly and exclusively for the purpose of its business.

15. It is true that the totality of all the circumstances should be taken into consideration and one of the circumstances, as has been pointed out by the learned Advocate-General, is that the assessee-company was a family concern of the members of the Patel family and all the shares of the assessee-company have been held by members of that family. It is true that the articles of association of the assessee-company, and particularly articles 85A and 85B, provide that first Jivabhai Revabhai Patel, the father of A.J. Patel, and after him, A.J. Patel, are to be the managing directors of the company and they are to hold office until the individual concerned resigns, dies or ceases to hold his share in the capital of the assessee-company; and as such managing director he has to exercise all the powers and discretion conferred by article 85A; and the powers under sub-clause (2) of that article are very wide. All the other directors of the assessee-company for the time being are to be under the control of the managing director and are bound to conform to his directions in regard to the company's business. These powers were in the first instance conferred on Jivabhai and after Jivabhai's death, these powers were vested in A.J. Patel as the managing director of the assessee-company. Under article 85B, the managing director for the time being, viz., Jivabhai, and then A.J. Patel are to be the ex-officio directors of Mahendra Mills Ltd., and thus under the articles of association wide powers are conferred upon the managing director. It was contended that in his position as the managing director of the assessee-company, A.J. Patel had full control over the assessee-company and he was enjoying this control when he wrote the letter of June 13, 1956, to the directors of the assessee-company. On that very day, i.e., June 13, 1956, the board of directors of the assessee-company passed its resolution recommending to the general body the terms which A.J. Patel has suggested in his letter and on that very day the notice convening the extraordinary general meeting of the company was issued. Hence, it was contended before us on behalf of the revenue that A.J. Patel was in a position to dominate the assessee-company and to get whatever resolutions that he wanted, passed by the assessee-company and that it was under these circumstances that the resolution of July 31, 1956, came to be passed by the assessee-company. These facts regarding the circumstances in which the letter came to be written by A.J. Patel and ultimately the resolution came to be passed by the assessee-company on July 31, 1956, are relied upon as part of the totality of the circumstances under which the new arrangement was arrived at and not with a view to challenge the bona fides of the arrangement arrived at by the assessee-company with A.J. Patel. It is true that because of this arrangement arrived at by the assessee-company with A.J. Patel, A.J. Patel was sought to be remunerated as far as possible to the same extent that he used to be totally remunerated prior to April 1, 1956; but the question that we have to consider in the light of all these circumstances is whether as a result of this arrangement the assessee-company derived of was expected to derive any additional benefit directly or indirectly. The fact remains that because of the services which A.J. Patel rendered to the managed company, the profits of the managed company went up and as a result of those higher profits of the managed company, the income derived by the assessee-company (managing agency company) also went up. The fact that the services were not rendered by A.J. Patel directly to the managing agency company makes, in our opinion, no difference to the ultimate conclusion to be reached in the case because the test to be applied is whether, as a result of the arrangement which came into force with effect from April 1, 1956, even an indirect benefit was derived or was expected to be derived by the assessee-company.

16. As has been observed by the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income-tax, in order to justify a deductible allowance under such circumstances, the assessee has only to show that the money was expended voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee. Here, as a result of the arrangement arrived at by the assessee-company with A.J. Patel, the managed company extended its activities and increased its profits; thus resulting in indirect benefit to the assessee-company. What we have to consider while applying the test of commercial expediency is whether this particular expenditure can be justified, not because of any obligation under which the assessee-company pay to the managed company, but even on the ground of the amount being expanded voluntarily by the assessee-company. Applying the principle approved of by the Supreme Court in Eastern Investments Ltd.'s case, it is clear that in the instant case, in the light of the additional materials which have been brought on the record of the case, the assessee-company did derive indirect benefit from the remuneration which it paid to its own managing director. Thus the services which A.J. Patel rendered to the managed company for the period commencing from April 1, 1956, were rendered by him to the managed company on behalf of the assessee-company, and as the managing director of the assessee-company.

17. We may at this stage point out that in Tata Sons Ltd. v. Commissioner of Income-tax, Tata Sons Ltd. were the managing agents of Tata Iron and Steel Co. Ltd. Under the managing agency agreement, Tata Sons Ltd., were to be paid a commission at a certain rate which was to be computed upon the net profits of the managed company. During the relevant year the assessee-company paid voluntarily a certain sum as its share of the bonus which the managed company paid to some of its officers. The assessee-company claimed that the payment made by it was a permissible deduction under section 10(2)(xv) of the Act of the Act of 1922. It was held by the Bombay High Court that looking at the payment from the point of view of commercial principles, what the assessee had done was something which had increased the profit of the managed company and thereby increased its own share of the commission and, therefore, the sum claimed by the assessee was wholly and exclusively expended for the purposes of its business and was a permissible deduction under section 10(2)(xv) of the Act. In Tata Sons Ltd.'s case, the managing agency company had expended the money for payment of bonus not to its own officers but to the officers of the managed company; but still in the light of the fact that this payment had as its object increasing of the profits of the managed company and thereby increasing the commission which the managing agency company (assessee) was going to earn, it was held to be wholly and exclusively expended for the purpose of the business of the assessee-company and was thus held to be an allowable deduction. In the instant case, the assessee-company has paid the extra remuneration to its own managing director with the object of seeing to it that the affairs of the managed company are properly looked after in the same manner as before and thus the profits of the managed company are increased and its own share of the commission is thereby increased. This decision of the Bombay High Court in Tata Sons Ltd.'s case, was followed by the earlier Division Bench of this High Court in the earlier reference in respect of this assessee in J.R. Patel and Sons Private Ltd. v. Commissioner of Income-tax, and we also follow the principles laid down by Chagla C.J. in that case. Applying the tests laid down by Chagla C.J. in that case to the present case, it is clear that the excess over Rs. 12,000 paid by the assessee-company to its managing director in the relevant assessment years was expended wholly and exclusively for the purpose of its business. The test of commercial expediency does not require that the assessee-company itself should derive any direct benefit from the service for which extra remuneration had been paid to its managing directors; even if the benefit is derived by the assessee-company indirectly, it is enough.

18. It was sought to be urged before us on behalf of the revenue by the learned Advocate-General that the statement furnished by the assessee as part of the additional evidence shows that from 1956, though the assessee-company went on receiving larger amounts of managing agency commission than before, still, after payment of the remuneration to A.J. Patel, the net amount left with the assessee-company was more or less the same in all the years since 1956. We do not agree with this submission. The question that has to be considered is not what the assessee-company actually received but what the assessee-company was expected to receive even by way of indirect benefit at the time when it entered into this agreement with A.J. Patel after April 1, 1956. Applying the well-known decision which we have referred to above as regards the notions of commercial expediency and the principles to be applied as to when an amount paid can be said to be expended wholly and exclusively for the purpose of the business of the assessee-company, we have come to the conclusion the in the instant case, the excess remuneration over the sum of Rs. 12,000 paid by the assessee-company to A.J. Patel was wholly and exclusively expended by it for the purpose of its business and was, hence, a deductible allowance within the meaning of section 10(2)(xv) of the Act.

19. A copy of the memorandum and articles of association of the assessee-company has been taken on the record since it was already before the Tribunal; and the memorandum shows that when the assessee-company was floated in 1945, out of the total issue of the 960 shares of the assessee-company, each share being of Re. 1,60 shares were allotted at the initial stage to Jivabhai Revabhai Patel, 630 shares were allotted to A.J. Patel and 270 shares were allotted to Gopaldas J. Patel brother of A.J. Patel. We have already dealt with the contention urged before us by the learned Advocate-General regarding the shareholding of the Patel family. This holding of shares was in 1945, but the exact position of different shareholding and the number of shares held by the different members of the family at the time when the resolution came to be passed on July 31, 1956, are not clear from the materials on record.

20. We, therefore, answer the question in the affirmative. The Commissioner will pay the costs of this reference to the assessee.

21. Question answered in the affirmative.


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