1. The assessee in this case is a private limited company called Sri Krishna Tiles and Potteries (Madras) Private Ltd., engaged in the manufacture and sale of roofing tiles, etc. The above company was originally a public limited company managed by an agency company by name, A.K. Ranganathan and Sons (P.) Ltd., on a remuneration of Rs. 1,000 p.m. together with a commission of 10% on the net profits. One A.R. Krishnamoorthy and A.R. Rajagopalan were the directors in the managing agency company. The managing agents resigned with effect from December 1, 1956. The directors of the company appointed the said two persons as the managing directors of the company. The articles of association was suitably altered and an agreement was entered between these two persons and the company on November 22, 1956, whereunder these two persons were to be managing directors for a period of 10 years from December 1, 1956, on a remuneration of Rs. 1,000 per month for each and a commission of 5% each on the net profits of the company. The share capital of the company was 3,500 preference shares of Rs. 100 each and 35,000 ordinary shares of Rs. 10 each. The shareholding of the above two persons and their father, A.K. Ranganathan, were as under :
A. R. Krishnamoorthy7,881334A. R. Rajagopalan7,656436A. K. Ranganathan3,200
2. The father, A.K. Ranganathan, was the technical director and he was being paid a remuneration of Rs. 1,500 per month, from July 1, 1954, and it was increased to Rs. 2,000 per month from January 1, 1960.
3. At a meeting of the board of directors of the company held on January 23, 1960, it was resolved that the remuneration payable to the two managing directors should be increased to Rs. 2,000 per month with effect from January 1, 1960, as against a remuneration of Rs. 1,000 per month paid earlier. The commission payable to them was retained at the original figure of 5% each of the net profits and the period of the agreement was extended for a period of 10 years from January 1, 1960. In pursuance of this resolution, a fresh agreement dated February 8, 1960, was executed between the said two managing directors and the company.
4. For the assessment year 1961-62, corresponding to the accounting year ending June 30, 1960, the assessee-company returned an income of Rs. 2,19,054, after claiming a deduction of three amounts, (1) salary paid to the two managing directors at Rs. 1,000 each for six months and Rs. 2,000 for the other six months--Rs. 36,000; and (2) bonus paid to them at Rs. 10,000 each--Rs. 20,000; and (3) commission at 5% each--Rs. 24,059-60, For the assessment year 1962-63 corresponding to the accounting year ending 30th June, 1961, the company returned an income of Rs. 2,67,603 after claiming a deduction of the following:
1. Salary to the managing directors at Rs. 2,000 each-Rs. 48,000
2. Bonus at Rs. 15,000 each--Rs. 30,000
3. Commission at 5/o each--Rs. 29,455'90.
5. The Income-tax Officer considered the remuneration of Rs. 2,000 per month for each of the two managing directors as excessive. According to him these two persons had no technical qualification and they owed their jobs to their father who was in effective control of the affairs of the company and a salary of Rs, 1,000 each per month alone will be legitimate, having regard to the business needs of the company and the benefit derived by or accruing to the company. He, therefore, disallowed Rs. 12,000 for the first year and Rs. 24,000 for the second year as regards remuneration. On the question of bonus, he disallowed the entire sum of Rs. 20,000 for the first year and Rs. 30,000 for the second year, on the ground that payment of bonus was necessary in the case of employees as an incentive and that there was no need for the payment of bonus to the managing director who held a sizable number of shares in the company and who had also been given a commission of 5% each on the net profits of the company.
6. The assessee. appealed to the Appellate Assistant Commissioner contending that neither Section 10(4A) of the old Act nor Section 40(c)(i) of the new Act warranted the disallowance of either the remuneration or the bonus, that the view of the Income-tax Officer that the two managing directors lacked technical qualification and they owed their jobs to their father who was in effective control of the affairs of the company was not justified, that the two managing directors had considerable experience in the business, that it. is only because of their efforts in starting new avenues of business they expanded the business of the company in various ways and that it is only in view of the improved profits of the company the enhancement of salary as well as bonus had been voted by the company. The Appellate Assistant Commissioner found that the remuneration of Rs. 1,000 each per month was fixed by the company as early as 1956, having regard to the conditions which then prevailed and that as the company has made tremendous strides, the increase in remuneration from Rs. 1,000 to Rs. 2,000 voted by the company in respect of the two managing directors was quite reasonable. He, however, considered that there was no reason for payment of bonus to the managing directors as they were entitled to a 5% commission on the net profits. Thus, he allowed the remuneration in full as claimed by the assessee, but confirmed the orders of the Income-tax Officer in regard to the disallowance of the whole of the bonus.
7. The assessee appealed to the Appellate Tribunal on the question of the disallowance of bonus. The revenue also filed an appeal against the allowance of the remuneration by the Appellate Assistant Commissioner. The Tribunal upheld the order of the Appellate Assistant Commissioner in regard to bonus as well as remuneration. Aggrieved against the disallowance of the bonus the assessee sought a reference to this court; and the following question has been referred to us under Section 66(1) of the Indian Income-tax Act, 1922:
' Whether, on the facts and in the circumstances of the case, the disallowance of the payment of bonus to the two managing directors in the two assessment years 1961-62 and 1962-63 was justified under the provisions of Section 10(4A) of the Indian Income-tax Act, 1922, and Section 40(c)(i) of the 1961 Act respectively? '
8. It is contended on behalf of the assessee that though the introduction of Section 10(4A) vested some powers with the Income-tax Officer for judging the reasonableness of the expenditure, the paramount consideration is still the commercial expediency, that is, what a businessman in his experience and knowledge of the needs of the business would decide, and that the reasonableness or otherwise of the expenditure cannot even now be left to the subjective standard of the Income-tax Officer. It was further contended that the concept of bonus has completely changed, that it is no longer an ex-gratia payment but one paid to make up the gap in the wages or salary, that the managing directors are the employees of the company acting under the supervision and control of the board of directors, and as the other members of the staff had been paid bonus calculated at 4 months' salary, the two managing directors were also entitled to the payment of bonus, and that the department was not justified in disallowing the bonus to the managing directors alone. It was also contended that the bonus of Rs. 10,000 each for the first year and Rs. 15,000 each for the second year was below their four months' salary and that in calculating the monthly salary of the managing directors the commission payable to them has also to be included.
9. Several decisions were cited before us in support of the contention that the managing directors are employees of the company, but it is not necessary to refer to all the decisions. We propose to refer to only a few of them. In K.L. Kothandaraman v. Commissioner of Income-tax,  62 I.T.R. 348, this court dealt with the relationship between a managing director and a company and, after a consideration of the various decisions on the point, expressed the view that in that particular case having regard to the terms of the agreement and the functions assigned to the assessee as the managing director and the reservation to the board of directors of the right of superintendence, direction and control, the relationship between the managing director and the company was that of employer and employee. In Catherine Lee v. Lee's Air Farming Ltd.,  A.C. 12 : 31 Comp. Cas. 233 (P.C.), the Judicial Committee, while construing the scope of the definition of the word 'worker' in Section 2 and the liability of the employer-company to pay compensation to the governing director of the company under Section 3(1) of the Workers' Compensation Act, 1922, of New Zealand, expressed the view that the sole governing director was a worker within the meaning of the Act, that his position as sole governing director did not make it impossible for him to be a servant of the company in the capacity of chief pilot, that the director and the company were separate entities which could enter and had entered into a valid contractual relationship which was not invalidated by the circumstances, that the deceased was sole governing director in whom was vested the full government and control of the company and also the controlling shareholder and that it is possible for one person to function in dual capacities, and acting in one capacity give orders to himself in another capacity. According to their Lordships the contractual relationship between the company and the deceased was that of master and servant as a contract of service had been entered into and operated and the deceased was a ' worker ' under the Act.
10. On the basis of the above decisions, the learned counsel for the assessee submits that the two managing directors of the company, to whom bonus was paid are employees of the company, that, therefore, they are entitled to get the same bonus as has been paid by the company to the other employees and that this factor has almost been overlooked by the authorities below. In support of his contention that the bonus paid during the two years will be within four months' salary payable to the managing directors, the learned counsel refers to the decision in J.K. Woollen Manufacturers v. Commissioner of Income-tax, : 72ITR612(SC) , wherein the commission paid to a general manager was treated as part of his salary and its allowability was considered under Section 10(2)(xv), We are not inclined to treat that decision as an authority for the proposition that wherever commission is paid at a certain percentage of the net profits in addition to the salary, it has to be treated as part of the salary. Section 10(2)(x) specifically refers to any sum paid to an employee as bonus or commission for the services rendered where such sum would not have become payable to him as profits or dividend if it had been paid as bonus or commission, and Section 10(2)(xv) is a residuary clause dealing with any expenditure not being in the nature of capital expenditure or personal expenses of the assessee laid out wholly and exclusively for the purpose of the business. When there is a specific clause dealing with commission in Section 10(2)(x), it is not possible to say that the commission should be taken as part of the salary and brought in within Section 10(2)(xv). It appears that in the case before the Supreme Court their Lordships were not called upon, to decide whether the Income-tax Officer could proceed under Section 10(2)(x) as the question referred by the Tribunal was only with reference to the claim of deduction made under Section 10(2)(xv) and not under Section 10(2)(x).
11. The learned counsel also contends that bonus is a deferred wage, that the old concept that it is a gratuitous payment no longer survives and that, therefore, the bonus paid should be treated as part of the wages or salary paid to the managing directors. In this connection reference is made to Shyamlal Pragnarain v. Commissioner of Income-tax, : 27ITR404(All) , where the following observations have been made at page 413 :
' It does not appear to be necessary to enter into the history of the relations between the industrialists and their workmen in order to determine the nature of 'bonus'. There can be no doubt, however, that, in modern times, bonus is clearly regarded as deferred wages payable to employees which may be claimed by them as of right under the terms of employment. In the conditions under which modern industries function, bonus has now come to be recognised as a right of employees which they can claim from their employers under certain circumstances.
The practice of payment of bonus or commission out of the profits of a business has grown by reason of the recognition that the profits are not entirely due to the capital invested but are, at any rate, partly due to the labour put in by the workmen, who should, therefore, get a share in them. It is also now recognised that such payments work as an extra incentive and help to promote efficiency and also contentment.'
12. As pointed out in the same decision, for the purpose of taxation the question whether the payment of bonus was made under a legal contract or it was merely an ex-gratia payment does not appear to be of much importance. The payment of bonus has been made and the amount has been claimed as an allowable deduction and that has to be considered in accordance with the provisions in Section 10(2)(x) read with Section 10(4A).
13. This leads us to the scope of Section 10(4A) of the old Act and Section 40(c)(i) of the new Act which is substantially the same. In Natesan and Co. v. Commissioner of Income-tax,  511.T.R. 386, the scope of Section 10(4A) which is as follows came up for consideration before this court:
' Nothing in Sub-section (2) shall, in the computation of the profits and gains of a company, be deemed to authorise 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. '....
14. In that case the Income-tax Officer disallowed a portion of the remuneration paid to a director as excessive or unreasonable and that was affirmed by the Tribunal, This court expressed the view that in exercising his power under Section 10(4A) of the Indian Income-Act, 1922, to disallow such portion of the remuneration paid to a director as he considers excessive or unreasonable, the Income-tax Officer must apply his mind to the nature of the business of the company, the actual work done by the directors, the quantum of income earned by the company, the necessity to pay the remuneration to the director and to other allied considerations, to form an opinion whether or not the payment is reasonable or excessive and that the mere ipse dixit of the officer unrelated to the criteria laid down by the statute would not be a considered opinion, but dogmatic assertion, and that the statute does not permit the department to adopt such a course. In Nund and Samont Co. Pvt. Ltd. v. Commissioner of Income-tax, : 78ITR268(SC) , the Supreme Court had occasion to consider the scope of Section 10(4A). There, the assessee-company had provided certain amounts in accordance with its articles of association as remuneration for its managing director and deputy managing director. The Income-tax Officer, in the absence of evidence in support of the company's claim for deduction of the entirety of the remuneration so provided, allowed remuneration at an average of the amounts allowed during the last three years and disallowed the balance under Section 10(4A) and the Tribunal as well as the High Court confirmed the same. Their Lordships of the Supreme Court held that in the absence of evidence relating to the duties of the managing director and the deputy managing director, the services rendered by them, the manner in which the profits of the company were enhanced by reason of their special aptitude or qualifications, the legitimate business needs of the company and the benefit derived by the company in consequence of the services rendered by them, the finding recorded by the Income-tax Officer and confirmed by the Tribunal had to be accepted even though it has not been proved by the department that the payment of remuneration was influenced by extra-commercial considerations. The Supreme Court also observed that in an enquiry under Section 10(4A) into the excess!veness or unreasonableness of an allowance resulting in the provision of any remuneration or benefit or amenity to a director or a person who has a substantial interest in the assessee-company, it is for the taxpayer to establish by evidence that the particular allowance is justifiable and that the Income-tax Officer is not bound independently to collect evidence and decide that the allowance claimed is excessive or unreasonable having regard to the legitimate business needs of the assessee-company before the power under Section 10(4A) is exercised. In Commissioner of Income-tax v. Indian Molasses Co. Pvt. Ltd., : 78ITR474(SC) , the Supreme Court, has laid down that an amount proved to be expended by a taxpayer carrying on business is a permissible allowance in the computation of taxable income of the business, if it be established that the allowance claimed is : (1) expenditure which is not of the nature described in Clauses (i) to (xiv) of Section 10(2); (2) that it is not of the nature of capital expenditure or personal expenses of the assessee; and (3) that the expenditure was laid out or expended wholly or exclusively for the purpose of such business, and that such allowance is also subject to the provisions in Section 10(4A). According to the principle laid down by the Supreme Court in the above decisions the bonus paid by the assessee to the two managing directors has to satisfy not only the conditions laid down in Section 10(2)(xv) but also the conditions contemplated in Section 10(4A) and if the assessee fails to adduce evidence as to the legitimate business needs of the assessee and the benefit derived by the company in consequence of the services rendered by them, the Tribunal would be justified in going into the reasonableness of the bonus paid.
15. According to the learned counsel the Tribunal itself has accepted the assessee's case, while considering the reasonableness of the salary paid, that it is by the efforts of the two managing directors considerable improvements in the financial stability had been effected, sales had increased considerably and new products had been put in the market and these findings which found acceptance by the Tribunal are themselves sufficient to hold that the bonus paid is reasonable and not excessive. It is also contended by the learned counsel that once the nexus is shown between payment of bonus and the business needs and the benefit of the company, the Income-tax Officer will have to perforce accept the amount of bonus paid as reasonable-and that it is not open to him to go into its reasonableness. We find it very difficult to accept both the above contentions, tt is true the Tribunal has found that the two managing directors were responsible for improving the status and financial stability of the company and that such of those services as have been rendered by the two managing directors deserve a rise in remuneration from Rs. 1,000 to Rs. 2,000, in addition to the 5% commission each on the net profits. But, the finding that the services of the two managing directors were such as to entitle them to claim a higher salary in addition to the commission will not automatically be taken to justify the payment of bonus as contended by the assessee. In the nature of things the reasonableness of the sum total of the amount claimed under the various heads under Section 10(2)(i) to (xv) has to be decided with reference to Section 10(4A), and in doing so, the claim for allowance made under each clause cannot be considered separately and exclusively. The learned counsel for the assessee is not right, in our view, in contending that Section 10(4A) has to be applied separately to each item of the allowance claimed under the various heads of Section 10(2)(i) to 10(2)(xv). The object of introducing Section 10(4A) appears to be to have a check on the quantum of the allowance in respect of any expenditure which relates directly or indirectly to the provision of any remuneration, benefit or amenity to a director or a person who has a substantial interest in the company. Therefore, the totality of the allowances claimed towards any remuneration, benefit or other amenity paid or given to a director who has a substantial interest in the company has to be considered under Section 10(4A). In this case the Tribunal has found that the services rendered by the two managing directors deserve a higher salary of Rs. 2,000 per month in addition to the 5% commission but it has disallowed the bonus as excessive and unreasonable. The Tribunal has felt that, having regard to the enhanced salary as also the 5% commission on the net profits, the provision for payment of bonus is unreasonable. According to the Tribunal sufficient incentive has been given by the company to the managing directors by providing for a commission of 5% on the net profits especially when they have got substantial shareholding in the company which will entitle them to get a substantial portion of the profits earned by the company. The Tribunal also was not willing to accept the contention of the assessee that the bonus has been paid with a view to bridge the gap in wages. As a matter of fact it found on facts that the technical director has also been paid* a salary of Rs. 2,000 and that no bonus had been paid to him and the company did not think it necessary to provide for payment of bonus to him especially when 5% commission is not payable to him. On these facts the Tribunal thought that there is no question of bridging the gap in the wages, as the payment of Rs. 2,000 as salary per month and 5 p.c. commission on the net profits of the company are sufficient to constitute proper incentive for promoting efficiency to the managing directors. As a matter of fact in Nand and Samonta, Co. (P.) Ltd. v. Commissioner of Income-tax, : 62ITR538(Patna) , the articles of association of the company authorised payment of 30 per cent. of the net profits as the remuneration to directors and 30 per cent. was allowed by the income-tax authorities for some years. But, for the assessment year 1959-60, the income-tax authorities acting under Section 10(4A) felt that the payment of remuneration to the directors of the company in the ratio of 30 per cent. of the net profits was excessive and unreasonable, regard being had to the legitimate business needs of the company and the benefit derived by or accruing to it from the services rendered by the directors. As a matter of fact in the assessment year 1959-60, the company had made more profits than in the previous years. Nonetheless, the Income-tax Officer took the view that as the extra profits earned by the company in that year cannot necessarily be correlated to the services rendered by its director or directors, but various other factors might have contributed to the earning of the extra profits and that it is unreasonable to allow the directors 30 per cent. of the net profits. When the matter was taken to the Tribunal, the Tribunal upheld the order of the Income-tax Officer disallowing part of the remuneration paid to the managing director and that it was the legitimate exercise of the discretion by the Income-tax Officer in disallowing a portion in the commission as remuneration as excessive and unreasonable. The court, on reference, upheld the decision of the Tribunal. The learned judges observed:
' In principle, therefore, if the income-tax authorities think that payment of remuneration to the directors of the private limited company on the ratio of thirty per cent. of the net profits, when the company is making more profits is excessive and unreasonable, regard being had to the legitimate business needs of the company and the benefit derived by or accruing to it from the services rendered by the directors, it cannot be said that the exercise of the discretion given to the Income-tax Officer, under Section 10(4A) of the Act, has been arbitrary or capricious. It is a matter of common knowledge and experience that the extra profits earned by a company in a particular year cannot necessarily be correlated to the services rendered by its director or directors. Various other factors contribute or may contribute to the earning of extra profits in a particular year or years. And, in that event, it will be a legitimate exercise of the discretion by an Income-tax Officer, if he says that the amount of remuneration paid to the director or directors is excessive or unreasonable within the meaning of Sub-section (4A) of Section 10 of the Act.'
16. We are, therefore, of the view that the authorities below have not exercised their discretion capriciously or unreasonably in. disallowing the bonus under Section 10(4A). The assessee's contention that as bonus of four months' salary had been paid to the other employees by the company, it is entitled to pay the same bonus to the managing directors as well cannot also be accepted as tenable, for the bonus paid to the employees are only subject to the limitations provided under Section 10(2)(x). But, any bonus paid to a managing director will attract also Section 10(4A) and it has to satisfy the considerations laid down therein. If it is considered to be unreasonable or excessive, the Income-tax Officer has the discretion to disallow the same. Further, payment of bonus to the managing directors seems to be on an ad hoc basis and not on the basis of four months' salary. Even otherwise, the considerations which will weigh with the court in determining the reasonableness of the bonus paid to the employees and that paid to the managing directors will have to be naturally different, for while payment of bonus to workers may be necessary due to business considerations for giving an incentive to them with a view to promoting efficiency and contentment and to have their services continued, payment of bonus to a managing director who has got a substantial interest in the company and who derives benefit by way of dividend from the shareholding has to be treated on a different footing.
17. The learned counsel for the revenue puts forward a plea that the authorities below, after taking into account all the relevant considerations, found that the payment of bonus was unreasonable and such a finding based on relevant considerations cannot be said to be a question of law warranting an interference from this court in reference proceedings. He refers to the decision in Commissioner of Excess Profits Tax v. N. M. Rayaloo Iyer & Sons, : 41ITR671(SC) , and contends that in considering whether the deduction is properly claimed the primary duty of the Income-tax Officer under Section 10(4A) is to find whether it is reasonable or excessive, subject to review by the Tribunal, and to decide the question of reasonableness and necessity having regard to the business needs and the benefit that will accrue to the company as a result of the services rendered, and that the jurisdiction which the High Court exercises under Section 66(1) is merely advisory and not appellate. He also refers to the decision in Mercantile Express Co. (P.) Ltd. v. Commissioner of Income-tax, : 47ITR125(Cal) , where the jurisdiction of the Income-tax Officer under Section 10(4A) was specifically considered. In that case it was held that once the Income-tax Officer has not travelled beyond the two grounds laid down in the section, namely, (1) the legitimate business needs of the company, and (2) the benefit derived by or accruing to the company therefrom, and if there is no suggestion that the power has been exercised capriciously or without jurisdiction, no question of law could arise from the decision of the Income-tax Officer for reference to the High Court.
18. We are of the view that the principle laid down in Commissioner of Excess Profits Tax v. N.M. Rayaloo Iyer & Sons has to be applied to the facts of this case. In that case, in construing the scope of Clause 12 of Schedule I of the Excess Profits Tax Act, 1940, which allowed a deduction in respect of expenses in excess of the amounts which the Excess Profits Tax Officer considered reasonable and necessary having regard to the requirements of the business, the Supreme Court expressed the view that in considering whether the deduction claimed by the assessee for payment made as bonus or commission to an employee should be allowed, the taxing officer must have regard to the provisions of Section 10(2)(x) of the Income-tax Act and Clause 12 of Schedule I to the Excess Profits Tax Act; and in assessing the reasonableness, consideration of commercial expediency must undoubtedly be taken into account, and that the deduction to be allowed does depend upon the objective satisfaction of the Excess Profits Tax Officer having regard to the requirements of the business, and in the case of payments for services, to the actual services rendered, that in considering whether the deduction has been properly claimed, the primary duty was vested by the legislature in the Excess Profits Tax Officer and that it is not open to the High Court to substitute its own view as to what might be regarded as reasonable and necessary. We find that Section 10(4A) also vests the power to find out the reasonableness or excessiveness primarily on the Income-tax Officer and his decision is only subject to review by the Tribunal. The legislature having specially empowered the Income-tax Officer to find out the reasonableness or otherwise of an allowance claimed, giving certain criteria and that officer having considered those criteria and decided the allowability of the deduction one way or the other, and the same has been confirmed by the Tribunal, this court cannot interfere unless the decision of the Income-tax Officer or the Tribunal is unreasonable or capricious. In this case it is not possible for us to say that the inference drawn by the Tribunal from the basic facts is unreasonable or perverse so as to call for interference by this court on reference. The question is, therefore, answered in the affirmative and against the assessee. The assessee will pay the costs of the revenue. Counsel's fee Rs. 250.