l Appeals Nos
2143 to 2145 of 1968
315 Appeals from the judgments and orders dated March 18 1965 of the Calcutta High Court in Income tax References Nos 154 155
and 156 of 1961
MC Chagla P C Bhartari and 0
C Mathur for the appellant in CAs
2143 and 2144 of 1968
SMitra P C Bhartari and 0
C Mathur for the appellant in CA No 2145 of 1968
ST Desai section K Aiyar and B D Sharma for the respondent in all the appeals
The Judgment of the Court delivered by Shah Actng CJ
These appeals relate to the assessment to tax of Ms Bengal Enamel Works Ltd a public limited com pany for the assessment years 1951 52 1952 53 and 1953 54
The Company is doing business of manufacturing enamelled ware
It had originally employed a technician  at a monthly salary of Rs 5001 
In June 1941 the technician was relieved and one Col Bhattacharya who was a director of the Company was appointed its Technical Adviser
 He was to receive as remuneration 15 of the gross annual profits of the Company
Col Bhattacharya resigned his office and Dr Ganguly son inlaw of Col Bhattacharya was appointed to that office
The Board of Directors resolved on May 18 1950 to pay to Dr Ganguly 15 of the gross annual profits without deducting depreciation as his remuneration
In the assessment years 1951 52 1952 53 and 1953 54 the Company claimed under section 102 xv of the Income tax Act 1922 as admissible allowance in computing its taxable income Rs 52947  Rs 64356 and Rs 79227 respectively paid as remuneration to Dr Ganguly under the terms of the resolution dated May 48 1950
The Income tax Officer Companies District III Calcutta allowed for each of the years remuneration at the rate of Rs 42000 only as a permissible deduction
The order was confirmed in appeal to the Appellate Assistant Commissioner and by the Tribunal
The Tribunal referred in respect of each of the three years the following question Whether on the facts and in the circumstances of the case the disallowance of a part of the expenses incurred by the assessee for payment of remuneration to its Technical Adviser is permissible under the Provisions of section 102 xv of the Indian Income tax Act 216 The High Court answered the question in the affirmative and disallowed the claim of the Company
With certificate of fitness these appeals are preferred against the order of the High Court
In computing the taxable income of an assessee whether an amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of the business profession or vocation of the assessee must be decided on the facts and in the light of the circumstances of each case  Swadeshi Cotton Mills Co Ltd vs Commissioner of Income tax UP1
Resolution of the assessee fixing the remuneration to be paid to an employee and production of vouchers for payment together with proof of rendering service do not exclude an enquiry whether the expenditure was laid out wholly and exclusively for the purpose of the assessee s business
It is open to the Tax Officers to hold agreement to pay and payment notwithstanding that the expenditure was not laid out wholly and exclusively for the purpose of the business Swadeshi Cotton Mills CoLtd s case 
But an inference from the facts found that the expenditure was wholly and exclusively laid out for the purpose of the business is one of law and not of fact and the High Court in a reference under section 66 of the Income tax Act is competent to decide that the inference raised by the Tribunal is erroneous in law
In the present case the facts found are these  Col Bhattacharya and his son in law Dr Ganguly were two of the directors of the Company who between them held on January 1 1950 49 of the total number of shares of the Company and the other directors of the Company held only I  of the shares
Dr Ganguly had received no training in the technique of enamelling  he was a medical practitioner earning Rs 20000 per annum by the exercise of his profession
Apparently no applications were invited for the appointment of a Technical Adviser when Col Bhattacharya resigned his office
In the resolution passed by the Directors it was recorded that many personal enquiries regarding the post were made but no candidate was found suitable The Board it was recorded considered the applications of section Urbeneck and J Schulser but the qualifications of these two candidates did not impress the directors moreover the terms of service offered by J Schulser were not acceptable to the Board and therefore the only applicant Dr Ganguly who was working on Probation in the post for some time past and had worked without remuneration up to December 31 1949 was considered the applications of section urbeneck and J Schulser though called for by the Incometax Officer were not produced by the Com pany
At the relevant time a good technical expert in enamelling 1 63 IT 
R 57
317 could be secured for a monthly remuneration of Rs 1000 or Rs 1200 provided that appointment was not for a short period
In the view of the Income tax Officer Dr Ganguly came to be appointed to the post of Technical Adviser of the Company as soon as his father in law vacated the post and the generous remuneration offered to him was influenced by factors other than commercial considerations and considering that Dr Ganguly was giving up his professional practice in allopathic medicine which yielded him an annual income of Rs 20000 to engage himself as a whole time Adviser attending to the development of the industry a gross remuneration of Rs 3500 per month beside the remuneration of Rs 1000 per month that he obtained as Secretary of the Managing Agents of the Company would be adequate
 With that view the Applicate Assistant Commissioner and the Income tax Appellate Tribunal have substantially agreed
The Tribunal observed that they were inclined to conclude that extra commercial considerations had influenced the fixation of remuneration of Dr Ganguly and that partial disallowance of the remuneration so influenced seems quite fair
Counsel for the Company urged relying upon the judgments of this Court in J K Woollen Manufacturers vs Commissioner of Income tax UP1 and Commissioner of Income tax Bombay vs Walchand  Co Private Ltd  that in determining the admissibility of an allowance as expenditure laid out and expended wholly and exclusively for thee purpose of the business has to be adjudged from the point of view of the employer and not of the revenue the Taxing authorities had no power to disallow the remuneration paid to its Technical Adviser merely because they think that the Company may probably have secured the services of another Adviser for a smaller remuneration
But these cases in our judgment have no bearing here
The departmental authorities have not attempted to reduce the allowance on the ground that the remuneration paid to Dr Ganguli was in their view excessive
Indisputably an employer in fixing the remu neration of his employee is entitled to take into consideration the extent of his business the nature of duties to be performed the special aptitude of the employee the future prospects of the business and other related circumstances and the taxing authorities cannot substitute their own view as to the reasonable remuneration which should have been agreed to be paid to the employee
But the taxing authority may disallow an expenditure claimed on the ground that the payment is not real or is not incurred by the assessee in the course of his business or that it is not laid out wholly and exclusively for the purpose of the business 1  2  318 of the assessee
Thereby the authority does not substitute its own view of how the assessee s business affairs should be managed but proceeds to disallow the expenditure because the condition of its admissibility is absent
It has been uniformly found by all the authorities that the remuneration agreed to be paid to Dr Ganguly was influenced by extra commercial considerations
Ganguly and Col Bhattacharya were able to control the voting before the Board of Directors
Dr Ganguly was not trained in the technique of 
enamelled ware and had no special qualifications for the post
The remuneration agreed to be paid was much in excess of what was normally payable and also of what Dr Ganguly was earning by practising his profession as a doctor of medicine
The criticism that the Tribunal s finding was based on no evidence or was based on irrelevant considerations cannot therefore be accepted
Where an amount paid to an employee pursuant to an agreement is excessive because of extra commercial considerations the taxing authority has jurisdiction to disallow a part of the amount as expenditure not incurred wholly and elusively for the purpose of the business  Swadeshi Cotton Mills Co Ltd The appeals fail and are dismissed with costs
One hearing fee
VPS Appeals dismissed


Summary:
The appellant which was doing the business of manufacturing enamelled ware appointed a technical adviser and the Board of Directors resolved to pay him 15 of the gross annual profits as his remuneration
For the assessment years 1951 52 1952 53 and 1953 54 the appellant claimed the amounts paid to the technical adviser as admissible allowances under section 102xv of the Income tax Act 1922
The Income tax Officer found that the technical adviser was a doctor of medicine without any special qualification for the post that he was not trained in the technique of enamelled ware that he and his father in law by the number of shares they held were able to control the voting before the Board of Directors that good technical experts in enamelling could have been secured for a smaller remuneration that the remuneration agreed to be paid to the technical adviser was influenced by extra commercial considerations and therefore disallowed a part of the amount holding that it was expenditure not incurred wholly and exclusively for the purpose of the business
The order was confirmed by the Appellant Assistant Commissioner the Tribunal and the High Court
In appeal to this Court
HELD  The question whether an amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of the business must be decided on the facts and circumstances of each case and the inference drawn from the facts found is one of law
Ordinarily an employer in fixing the remuneration of his employee is entitled to take into consideration the extent of his business the nature of duties to be performed the special aptitude of the employee the future prospects of the business and other related circumstances and the taxing authorities cannot substitute their own view as to the reasonable remuneration which should have been agreed to be paid to the employee
But the taxing authority may disallow an expenditure claimed on the ground that the payment is not real or is not incured by the assessee in the course of his business or that it is not laid out wholly and exclusively for the pur pose of the business
In doing so the authority does not substitute its own view of how the assessee s business affairs should be managed but proceeds to disallow the expenditure because the condition of its admissibility is absent
316 B D 317 F H  318 A D Swadeshi Cotton Mills Co Ltd vs CIT UP  followed