VEERASWAMI J. - This reference under section 66(2) of the Indian Income-tax Act, 1922, relates to the assessment years 1949-50 to 1953-54. A portion of the remuneration paid to the managing director and a director having been disallowed for the years, the assessee eventually came up to this court on a reference at his instance in which certain directions were given, with the result the Tribunal went into the question over again and held that the assessee was entitled to allowance of the entire remuneration paid to the directors in each of the years. The propriety of this view is the subject-matter of the first question under reference which is :
'Whether, on the facts and in the circumstances of the case, the Tribunals order allowing the remuneration of the managing director and director in full for the assessment years 1949-50 to 1953-54 as a proper claim under section 10(2)(xv) of the Income-tax Act is based on any material ?'
There is also another question which raises the admissibility of an allowance for the initial and extra depreciation under section 10(2)(via) of the Income-tax Act. But this is confined to the year 1950-51. The question referred to us reads :
'Whether, on the facts and in the circumstances of the case, the initial and extra depreciation is admissible under the provisions of section 10(2)(via) of the Income-tax Act in respect of diesel engines and bodies fitted to old chassis ?'
So far as this question is concerned, we may immediately dispose it of, as it is covered by two decisions of this court. As regards the allowance in respect of diesel engines, Commissioner of Income-tax v. Mir Mohammad Ali settles it which is in favour of the assessee. As for bodies fitted to old chassis, though T. C. No. 29 of 1964 related to current repairs, the principle of that decision, with even better force, applies to it which is again in favour of the assessee. We, therefore, answer the second question in favour of the assessee.
On the first question, we consider that the point posed by it has not been appositely phrased. It has been so phrased, perhaps in order that it may appear it involves a question of law. As a matter of fact, this is not a case where one can possibly say that there is no material to make the allowance. The factum of payment of the full remuneration to the directors has never been in dispute. What has been in controversy is but the quantum of remuneration which the assessee is entitled t allowance under section 10(2)(xv). That question, of course, has been approached from different angles. So far as the revenue is concerned, the point of view urged before the Tribunal was that, though the managing director had contributed very largely to the business of the assessee, the increase in the gross collections in the transport business of the assessee could be attributed to natural causes as, for instance, the increase in seating capacity, travel habits of the public and the economy in the working cost which came out of experience. Certain other considerations also were urged which basically did not differ from that approach of the revenue to the question of admissibility of the allowance. The Tribunal, however, was of opinion that the entire remuneration paid to the directors in each of the years was expenditure laid out wholly and exclusively for the purpose of business and the assessee was, therefore, entitled as a matter of right to the allowance claimed.
We see that the assessee was a private limited company in the relevant assessment years running a fleet of buses and lorries. Since 1942-43 it appears to have made considerable progress in its business and its gross receipts had steadily increased from year to year up to 1953-54. Narayana Iyer, who was the managing director, owned 350 shares, his son, Kasiraman, owned 20 shares and most of the remaining shares were held by other close relatives of the managing director. In March, 1949, the board of directors passed a resolution fixing the salary payable to Narayana Iyer at Rs. 32,500 per annum and to Kasiraman, as director, at Rs. 17,500 per annum. This court, while disposing of the previous reference in Raman and Raman Ltd. v. Commissioner of Income-tax, observed that the question was not so much whether the amounts that were paid over to the directors were large or not, but whether, having regard to the value of the services rendered by the individuals concerned, the payments made to them can be said to be influenced by considerations of commercial expediency and not by other extraneous considerations. The Tribunal applied this observation in granting allowance of the full remuneration paid to the two directors. In our opinion, the Tribunal is right.
But in taking that view, we would approach the question from a different standpoint. We accept the principle that for eligibility of an allowance under section 10(2)(xv), there should be a nexus between the expenditure and the purpose of the business and the expenditure should have been wholly and exclusively laid out for that purpose. The first part of this proposition may not raise any problem of complexity, for its determination will be on a factual basis. From the given facts, it should be easy to say whether there is any connection between the expenditure and the purpose of the business. But the expression, 'Wholly and exclusively laid out' is capable of raising fine questions. But we do not propose in this case to embark on that aspect, for it has not been suggested at any stage of the assessment proceedings that factually the payment as remuneration has not been made and in that character. It is also obvious that the remuneration was paid to the directors in that capacity. Once those facts are found, seldom can the revenue or the court justifiably claim to put itself in the arm-chair of a businessman or in the position of the board of directors and assume the role of ascertaining how much is a reasonable remuneration, having regard to all the circumstances. That is a matter of business expediency and should be wisely left to the businessman concerned or the board of directors. But that is not to say that the revenue or the court should simply take it for granted that once the payment has been as a fact made as remuneration, it is necessarily wholly and exclusively laid out for the purpose of the business. There may be cases where the quantum of remuneration claimed to have been paid is so patently excessive that it may throw doubt at the honesty and purpose of the outgoinng. But, as we observed, no such question arises on the facts of this case. We noticed above the point putt forward before the Tribunal for the revenue. We do not think that it is a correct approach for the purpose of applying section 10(2)(xv) to determine so much of remuneration has to be allowed as may be justified by so much of services. We are satisfied that, on the facts of this case, the Tribunal was right in its view that the assessee is entitled to the full allowance of the entire payment made as remuneration to the directors in the years in question.
Mr. Balasubrahmanyan for the revenue tried a line of argument based on section 10(4A) and suggested that this provision is but clarificatory of section 10(2)(xv). He said that, though section 10(4A) was inserted on April 1, 1956, and the present case concerns the years prior thereto, nevertheless on the application of the principle of this new provision, we should probe into the circumstances of the payment of remuneration to the board of directors and rule that the assessee being a close company as it is, the revenue was justified in allowing only a part of the allowance claimed. In our opinion, the revenue is not entitled to take up this stand. That was not the point of view of the revenue at any stage below. Further, we are not satisfied that sub-section (4A) was merely clarificatory of section 10(2)(xv). This is because sub-section (4A) will come into play even where there is an expenditure wholly and exclusively laid out for the purpose of the business. Where it is a case of a closed company, discretion, of course, is given to the revenue to see whether the allowance is excessive or unreasonable. But that discretion is not given to the revenue under section 10(2)(xv). Under that provision, once it is shown that a certain amount is expended wholly and exclusively for the purpose of the business, there is no option for the department but to make the allowance.
We answer the first question too in favour of the assessee, with costs, Rs. 250.