IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR J U D G M E N T 1. INCOME TAX APPEAL No. 12 of 2007 C.I.T.UDAIPUR V/S M/S UDAIPUR DISTILLERY LTD. 2. INCOME TAX APPEAL No. 142 of 2006 C.I.T. V/S M/S UDAIPUR DISTILLERY CO.LTD. 3. INCOME TAX APPEAL No. 99 of 2008 C.I.T.UDAIPUR V/S M/S UDAIPUR DISTILLERY CO.LTD. 4. INCOME TAX APPEAL No. 124 of 2006 C.I.T. V/S M/S UDAIPUR DISTILLERY CO.LTD. Date of Judgment : 21.11.2008 PRESENT HON'BLE SHRI N P GUPTA,J. HON'BLE SHRI KISHAN SWAROOP CHAUDHARI,J. Mr. KK BISSA, for the appellant / petitioner Mr. MAHENDRA GARGIEYA, for the respondent BY THE COURT : (PER HON'BLE GUPTA,J.) These four appeals arise out of different orders of the Tribunal, passed on different dates, and relate to different assessment years, but relate to the same assessee. Likewise, various questions were involved in the impugned judgments; however, all these appeals have been admitted only on one substantial question of law, vide different orders. The question as framed in ITA No. 12, 99, 124 reads as under, while in ITA No. 142 the language is bit differently worded but in substance that also covers the same controversy :- “Whether on the facts and in the circumstances of the case deletion of additions made by Assessing Officer under Section 40A(2)(a) of the Act were founded by ignoring the relevant considerations which were required to be taken into account in terms of sub- section 2(a) of Section 40A of the Act?” The necessary facts in this regard are, that the assessee entered into a lease agreement, to have full finance for purchase of an effluent and a bottling plant, and other assets on lease for five years, with another company of this group, viz. M/s. Harbert Son Ltd. and Mac Dowell & Company Limited, and claimed deduction for the lease rent paid to the lessee. The Assessing Officer observed that these two companies were substantially owned by Vijay Mallya, whose United Breweries own the assessee company. It was also observed by the Assessing Officer, that the lease rent, as paid, gave annual rate of return of 33.6%. Since in his opinion these companies were related to the assessee, hence provisions of Section 40A (2)(a) were applicable. It was also considered, that the prime lending rates of bank was 15.6%, therefore, he allowed the deduction @ 15.6%, and made additions of the remaining amount. The matter was carried in appeal, and the learned Commissioner deleted the additions. The learned Commissioner had found that it is a fact on record that this issue has already been examined in the earlier 2 assessment years by the Assessing Officer while completing assessment under Section 143(3), and they have accepted the claim of the assessee with regard to payment of lease rent. Admittedly, the Assessing Officer has not brought any evidence or material for departure from settled issue, and therefore, no useful purpose can be served by setting aside the items. Then even de-hors this, the learned Commissioner proceeded to consider the matter on merits, and considered, that in absence of any proper evidence, and also considering the fact, that it is a contractual liability under a valid agreement, and there is no justification to draw adverse inference arbitrarily; It was also held, that the Assessing Officer cannot compel any businessman to take loans from any bank where the interest charged is less than the rate charged by the outsider, and the difficulty to obtain huge loan was understood, and comparable case was not confronted to the assessee. It was held that it is required to be decided by the businessmen themselves, after taking expediency and interest of the business, and it is upto them how to protect their interest of the business. It was also considered that no material evidence was brought on record to establish, that the rate of rent are not reasonable, or transactions of lease are bogus. As such, it was found, that there is no reason for making any disallowance. Thus, the addition was deleted. The Revenue carried the matter in appeal before the Tribunal, and the learned Tribunal found, that the assessee has been paying this amount as per the agreement in earlier years, which was allowed in the assessment made 3 under Section 143(3), and there is no change in the factual position from the earlier years vis-à-vis the instant year, and lease rent continues to be paid at the same level, and it was also held, that there is no material worth the name with the Assessing Officer, justifying deviation from the earlier stand taken by the Revenue, in not accepting this payment of lease rent, as per the agreement. Thus, it was found, that the Commissioner (Appeals) rightly dealt with the matter in allowing the assessee's claim. Consequently, the appeal of the Revenue was dismissed. We have heard learned counsel for the either side, and have gone through the impugned orders, and the relevant provisions of law. At the outset it may be observed, that in all these cases the learned authorities below have interalia proceeded on the ground, that in still earlier years the deduction was allowed, and there is neither any reason to deviate, nor is there any material, on the basis of which any deviation is required to be, or can be made. The learned counsel for the Revenue could not point out this factual position to be incorrect. Thus, with a view to maintain consistency, no interference is required to be made in allowance of the deduction. This is one aspect of the matter. Then, we proceed to independently consider the matter on merits also, in view of the recent judgment of the Hon'ble Supreme Court in C.K. Gangadharan Vs. 4 Commissioner of Income Tax, Cochin, being Civil Appeal Nos. 5210-5216 of 2002 decided on 21.7.2008. To start with we may gainfully quote the provisions of Section 40A(2)(a) which read as under:- “(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub- section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.” Thus, a look at this provision does show, that it is only if, the Assessing Officer is of the opinion, that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made, or the legitimate needs of the business or profession of the assessee, or the benefit derived by or accruing to him therefrom, so much of the expenditure, as is so considered by him to be excessive or unreasonable, shall not be allowed as a deduction. Essentially the question, as to whether the expenditure is unreasonable or excessive in the opinion of the Assessing Officer, which has been subject matter of adjudication by two appellate authorities below, is primarily a brass question of fact, and does not give rise to any substantial question of law. This is second aspect of the matter. However since the question as framed comprehends 5 the aspect, that the deletion of addition has been made by ignoring relevant considerations, which were required to be taken into account in terms of Section 40A(2)(a), we proceed to examine this aspect of the matter as well, and find, that these considerations are also no more res- integra. We may straightway refer to the judgment of Hon'ble the Supreme Court in Commissioner of Income Tax Vs. Walchand & Co. Private Ltd., reported in 65 ITR-381, which was rendered by a bench of three Hon'ble Judges, wherein the Hon'ble Supreme Court were laying down the tests, and proper approach for disallowance, and Appellate Tribunal’s duty to approach problems in judicial spirit and record reasons in support of its decision. It was held, that in applying the test of commercial expediency, for determining, as to whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman, and not of the revenue. It was also held, that it is open to the Tribunal to come to a conclusion, either that the alleged payment is not real, or that it is not incurred by the assessee in the character of a trader, or that it is not laid out wholly and exclusively for the purpose of the business of the assessee, and to disallow it. But it is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee. An employer in fixing the remuneration of his employees is entitled to consider the extent of his business, the nature of the duties to be performed, and the special aptitude of the employee, future prospects of extension of the business, and a host of other related 6 circumstances. It is erroneous to think, that increased remuneration can only be justified if there is a corresponding increase in the profits of the employer. Laying down these principles the disallowance, as set aside by the High Court was maintained, and appeals of the revenue were dismissed with costs. We may then refer to yet another judgment of the Hon'ble Supreme Court in J.K. Woollen Manufacturers Vs. Commissioner of Income Tax, U.P. reported in 72 ITR-612, wherein again the Bench presided by three Hon'ble Judges, considered the aspect of disallowance of part of expenditure, and its permissibility, and held, that in applying the test of commercial expediency, for determining, whether an expenditure was wholly and exclusively laid out for the purpose of assessee's business, reasonableness of the expenditure has to be judged from the point of view of the businessman, and not of the income-tax department. It is, of course open to the Appellate Tribunal to come to a conclusion, either that the alleged payment is not real, or that it is not incurred by the assessee in the character of a trader, or it is not laid out wholly and exclusively for the purpose of the business of the assessee, and to disallow it. It is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee. In that case the assessee had appointed one V as its general manager at a salary of Rs. 1,000/- per month, and commission of 12 ½ %, on the net profits, and certain other benefits, in case the profits exceeded Rs. 1 lakh the commission was payable at 25%. The 7 employee did not get any commission in the first year, as the assessee suffered a loss. Then, in the next year V earned a commission of Rs. 4,063/-. In the year relevant to the assessment year 1948-49 V was paid a commission of Rs. 75,465/- at 25% of the profits. After the death of V the firm was converted into a company, and the post of general manager abolished, and a director with a total remuneration of Rs. 24,000/- p.a. managed the affairs of the company. The Income-tax Officer allowed only a sum of Rs. 5,000/- as reasonable commission, while the Appellate Assistant Commissioner held, that commission at 12 ½% was reasonable. Then, the Appellate Tribunal disallowed 50% of the commission, on the view, that the commission paid to V in excess of Rs. 24,000/- was not really paid wholly for the purpose of carrying on the business. It was in that fact situation, that the Hon'ble Supreme Court held, that the entire amount of Rs. 75,465/-, was an amount laid out or expended wholly and exclusively for the purpose of the business of the assessee. In our view, these two judgments are complete answer to the question, to the effect, that the learned Commissioner (Appeals), and the learned Tribunal, had not ignored the relevant considerations, which were required to be taken into account, in terms of Section 40A(2)(a) of the Act. In addition to the above, though it may not very relevant, still in order to ensure the interest of the Revenue, we may observe, that we had inquired from the learned counsel appearing, and we were informed, that the entire amount of lease rent, as paid by the present 8 assessee, has already been, and is being, taxed as income, in the hands of the lessor. The net result of the aforesaid discussion is, that the question as framed is required to be, and is, answered against the Revenue, and in favour of the assessee. The appeals thus have no force, and are hereby dismissed. (KISHAN SWAROOP CHAUDHARI),J. (N P GUPTA),J. /Sushil/ 9