1. The assessee is a registered firm consisting of four partners, the father and three of his sons, and its business was the purchase and sale of yarn. The trading results of the firm for the assessment years 1958-59 to 1962-63 were as under :
Assessment yearTurnoverNet profit as per booksRs.Rs.
1958-5912,96,088 4,5181959-6024,75,600 63,8401960-6131,70,045 40,6501961-6233,66,189 51,3351962-6344,20,3201,00,331
2. In respect of the assessment year 1962-63, a claim was made by the assessee for deduction of a sum of Rs. 2,140 paid as salary and of Rs. 31,355 paid as remuneration. The sum of Rs. 31,335 is made up of as under:
Rs.(1)The remuneration paid to P. Shanmughasundaram18,813(2)The remuneration paid to M. P. Murugesa Mudaliar12,542
3. It was contended by the assessee before the Income-tax Officer that the above two persons were entitled to remuneration at the rate of 0-3-0 and 0-2-0 in the rupee respectively out of the net profits of the firm in addition to the salary drawn by them, and that the said amount of remuneration has to be allowed under Section 37 of the Income-tax Act, 1961, as having been wholly and exclusively incurred for the purposes of the business of the firm.
4. The Income-tax Officer considered the above claim of the assessee in the light of the various circumstances in the case. He found that the two persons are the sons-in-law of Palaniandi Mudaliyar, the father-partner, that Shanmughasundaram joined the services of the assessee-firm in the assessment year 1960-61, that Murugesa Mudaliyar came into the picture only in the assessment year 1961-62, that Shanmughasundaram was paid a salary of Rs. 785 in the assessment year 1960-61, and another sum of Rs. 1,200 in the assessment year 1961-62 and that there was no justification for the payment of such a large amount of remuneration to these two persons. In that view, he allowed a further sum of Rs. 1,750 as reasonable remuneration to Shanmughasundaram and a sum of Rs. 1,200 as reasonable remuneration to Murugesa Mudaliyar. The rest of the claim for deduction was disallowed.
5. Against the disallowance of the claim for deduction in relation to the remuneration paid to the said two persons, the assessee went in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, after considering all the relevant circumstances including the nature of the work done by these two persons in connection with the business of the firm, upheld the disallowance.
6. There was a further appeal to the Appellate Tribunal. Before the Tribunal, it was contended by the assessee that the remuneration paid to the two persons was supported by valid agreements that the amount of remuneration in question had actually been paid to the above two persons, that the payment of the remuneration was quite justified in view of the increase in the volume of the business as also the net profits, that the revenue itself has permitted similar deduction in the assessment year 1964-65, and that therefore it was not open to the revenue to disallow the claim for deduction either wholly or in part so far as remuneration paid is concerned.
7. The revenue, however, contended before the Appellate Tribunal that the increase in the turnover as also the profits was not exclusively due to the services rendered by the two persons to the firm, that the increase in the turnover and the profits was due to normal trading conditions, that there was no evidence of any special services having been rendered by these two persons on account of which the turnover and the profit increased, that the large amount of remuneration sought to be deducted, had been paid only due to the close relationship between these persons and the partners of the firm, and that, therefore, the remuneration in question cannot be taken to have been laid out wholly and exclusively for the purpose of the business.
8. On these rival contentions, the Appellate Tribunal held that the revenue was justified in taking into account the relationship between thepartners and the two persons to whom the remuneration had been paid and in disallowing a portion, of the remuneration claimed by the assessee. The reasons given by the Tribunal for upholding the disallowance are:
(i) There was no evidence to show that the increase in the turnover was due to the efforts put in by these two persons.
(ii) Even without the services of these two persons, the firm had earned considerable income in the assessment years 1958-59 and 1959-60.
(iii) Even during the assessment years 1960-61 and 1961-62, Shanmugasundaram who was working in the firm had been paid Rs. 7SO and Rs. 1,200 respectively and there was no claim for any remuneration in these two years.
(iv) Murugesa Mudaliyar has not been shown to have contributed in any way to the increase in the turnover of the firm, though there was evidence that Shanmugasundaram rendered services to the firm.
(v) The two persons are the sons-in-law of the father-partner, and the share of profit of each of the partners was found to be less than what has been given to Shanmugasundaram. For these reasons, the Appellate Tribunal felt that the revenue was justified in disallowing a portion of the remuneration on the ground that the disallowed portion has not been shown to have been incurred wholly and exclusively for the purpose of the business of the firm.
9. At the instance of the assessee, the following question has been referred to this court:
'Whether, on the facts and in the circumstances of the case, the disallowance of the two sums amounting to Rs. 28,405 out of the remuneration paid to the two employees as not laid out wholly and exclusively for the purpose of the assessee's business for the assessment year 1962-63 is valid ?'
10. We have perused the agreement between the firm and Shanmugasundaram. It specifically states that Shanmugasundaram has been attending to the day-to-day business of the firm and receiving salary therefor, and that having regard to the fact that he has to attend to all the affairs of the firm, he will be paid, in addition to the salary, a remuneration of 0-3-0 in the rupee in the net profits of the firm after deduction of all expenses, depreciation and reserves, etc., with effect from April 1, 1961. It also states that in the event of any loss, Shanmugasundaram will be entitled only to salary but not to any remuneration. The agreement was to be in force for a period of three years. The genuineness of the agreement has not been questioned by the revenue. Therefore, we have to proceed on the basis that the recitals contained in the agreement are true. Even otherwise, the Income-tax Officer, the Appellate Assistant Commissioner as well as the Tribunal have found that Shanmugasundaram had been working in this firm in the assessment year and the earlier two years. Though there issome dispute as to the nature of the services rendered, the fact that he was attending to the business of the firm cannot be disputed. The Appellate Assistant Commissioner found that Shanmugasundaram was in fact attending to sales of yarn. But whatever be the nature of the services rendered by Shanmugasundaram, having regard to the fact that there was a sudden jump in the turnover of business from Rs. 33 lakhs odd in the assessment years 1961-62 to Rs. 44 lakhs odd in the assessment year 1962-63, it is possible to say that the increase in the turnover was partly due to the efforts taken by Shanmugasundaram. It may be that Shanmugasundaram took extra effort to get at a large turnover of business as he was given a share in the profits as remuneration. The mere fact that he took comparably a small salary in the earlier two years will not enable the revenue to conclude that the services rendered by Shanmugasundaram were not of much consequence. It is possible that Shanmugasundaram did not insist on a higher salary or any separate remuneration because of his relationship with the partners in the earlier years. The question is whether the remuneration paid to Shanmugasundaram in the assessment year 1962-63 has been laid out wholly or exclusively for the purpose of the business of the firm.
11. The only ground on which the revenue has relied, so far as Shanmugasundaram is concerned, is his relationship with the partners. If Shanmugasundaram is found to have rendered services to the firm in pursuance of the agreement in question and the business was in consequence benefited by those services, the remuneration paid to him has to be deducted under Section 37 as an amount wholly and exclusively incurred for the business of the firm. On the facts found by the Income-tax Officer, the Appellate Assistant Commissioner as well as the Tribunal, it has to be taken that Shanmugasundaram rendered services to the firm during the assessment years. The services rendered by him has been taken only in pursuance of the agreement entered into between him and the firm which provides for payment of remuneration to him by the firm of 0-3-0 in the rupee in its profits. We are, therefore, of the view that the payment of remuneration to Shanmugasundaram was only for services rendered and not for other consideration such as his relationship to the partners. It cannot be said that the remuneration paid to him was for non-business considerations. On the materials on record, we are of the view, that the remuneration paid to Shanmugasundaram was an expenditure laid out wholly and exclusively for the purpose of the business and that it was not one for non-business considerations.
12. However, the position, so far as Murugesa Mudaliyar is concerned, appears to be somewhat different. There is absolutely no evidence placed by the assessee before the revenue as to what was the actual servicerendered by Murugesa Mudaliyar in connection with the business of the firm. Admittedly, Murugesa Mudaliyar came into the picture only in the assessment year and he had not rendered any services in the earlier assessment years, as was done by Shanmugasundaram. Even though he has entered into an agreement with the firm, that agreement does not clearly set out the nature of service to be rendered by him. No material also has been placed as to how he contributed to the increase in the volume of turnover as also the profits. The Tribunal specifically found that there was no material as so what service Murugesa Mudaliyar did render and how he was responsible for the increase in the turnover. The Tribunal also felt that Murugesa Mudaliyar might have been given the remuneration because Shanmugasundaram was being given such a remuneration. The Tribunal thought that, so far as Murugesa Mudaliyar was concerned, the reason for payment of remuneration can only be his relationship with the partners. Having regard to the above findings given by the Tribunal, we are not able to say that the service rendered by Murugesa Mudaliyar was such as to warrant the payment of remuneration at the rate of 0-2-0 in the rupee in the profits of the firm, in addition to the salary allowed by the Income-tax Officer. We have to, therefore, agree with the Tribunal so far as the remuneration paid to Murugesa Mudaliyar is concerned.
13. We answer the question accordingly. The result is that the assessee will be entitled to deduction only in relation to a sum of Rs. 17,063 paid as remuneration to Shanmugasundaram as against the total amount of Rs. 28,405 claimed in respect of Shanmugasundaram as well as Murugesa Mudaliyar. There will be no order as to costs.