Madras High Court
A. Natesa Iyer vs The Commissioner Of Income-Tax on 2 February, 1962
Equivalent citations: AIR1963MAD383, [1962]46ITR802(MAD), (1963)1MLJ1, AIR 1963 MADRAS 383, (1962) 46 ITR 802, ILR (1962) MAD 1110, (1963) 1 MADLJ1
JUDGMENT Jagadisan, J.
1. This tax reference arises under the Indian Income-tax Act. The assessee was assessed on his business income for the assessment years 1953-54 and 1954-55. The relevant accounting years are the calendar years 1952 and 1953. In computing the business income the assessee claimed as permissible deduction the salary and bonus paid to his son, Sankaran, who was employed in the business. The salary and bonus payments claimed as deduction by the assessee for the two assessment years were as follows:
Assessment years Salary Bonus 1953-54 Rs. 12000 per year Rs. 3000 per year 1954-55 do do Rs. 3500 per year The Additional Income-tax Officer, Tinnevelly allowed as deduction salary, for both the years, of Rs. 4500 a year and allowed Rs. 900 as bonus for the year 1953-54 and Rs. 1400 as bonus for 1954-55 as proper deduction. The rest of the assessee's claim for deduction was disallowed. The assessee preferred an appeal to the Appellate Assistant Commissioner, Tuticorin. The Appellate authority except for enhancing the deduction of bonus for the year 1953-54 to Rs. 1100 affirmed the decision of the Income-tax Officer. There was a further appeal to the Income-tax Appellate Tribunal, Madras, which however dismissed the appeal, affirming the decision of the Appellate Assistant Commissioner. The assessee filed an application under Section 66 of the Act to the Tribunal for reference of questions of law to this Court but failed. The assessee filed an application in this Court under Section 66(2) of the Act raising the following question: "Whether on the facts and in the circumstances of the case there was material which justified the Tribunal in disallowing the payments of Rs. 7000 as salary and Rs. 2100 as bonus to the Manager, Sankaran, in each of the assessment years?"
2. The figures contained in the question as framed are not correct. The disallowed portion of the salary in both the years is Rs. 7500 per year. The bonus amount disallowed for the year 1953-54 is only Rs. 1900. This inaccuracy does not however affect the real question for determination, namely, whether the assessee is entitled to claim by way of proper deduction the entire amount of salary and bonus paid by him to the employee, his son.
3. At the time when this Court ordered the application for reference a direction was given to the Tribunal that it should allow the assessee and the department an opportunity to place further material and to submit the case with its findings. This has now been done by the Tribunal, it is not now necessary for us to express any opinion on the question whether the direction to take further evidence in the matter was properly given in a proceeding under Section 66 of the Act.
4. The business of the assessee was during the relevant period carried on at Kallidaikurichi and at Pollachi. Formerly the business was owned by a firm of two partners, the assessee and his brother, Mani Iyer. Between the years 1929 and 1949 the assessee's brother Mani Iyer was managing the business at Pollachi. Mani Iyer died sometime in December 1949. Thereafter the assessee seems to have become the sole owner of the business, sankaran, the son of the assessee was born in 1929 and he passed the first year Intermediate examination sometime in the middle of 1949. It is now claimed that Sankaran entered this business carried at Kallidaikurichi in the year 1948 and he took charge of the business at Pollachi in February 1950 after the demise of Mani Iyer. Whether the story of Sankatan having taken to business at Kallidaikurichi in 1948 is true or not, it is quite obvious that he was a mere lad about 21 years old when he is said to have been placed at the helm of the business affairs at Pollachi. For the assessment years 1951-52 and 1952-53 the assessee made a claim for deduction of salary paid to Sankaran. The Income-tax Officer allowed a salary of Rs. 2500 per year though the assessee claimed as deduction the salary of Rs. 1000 a month of Rs. 12000 a year. The assessee took up the matter to the Tribunal which held that the proper salary to be allowed was Rs. 4500 per annum. For the years in question 1953-54 and 1954-55 both the department and the Tribunal have accepted this standard payment of Rs. 4500 per year by way of salary as the proper deductible amount.
5. The expense of salary payment can be claimed as deduction in computing the business income of an assessee only if the requirements of Section 10(2)(xv) of the Act are complied with; that is "the expenses should have been laid out or expended wholly and exclusively for the purpose of the business". Bonus payments paid to the employee in a business concern can be claimed as proper deduction by the employer-assessee if they satisfied the conditions prescribed under Section 10(2)(x) of the Act. That provision reads;
"Any sum paid to an employee as bonus or commission for services rendered where such sum would not have been payable to him as profits or dividends if it had not been paid as bonus or commission; provided that the amount of the bonus or commission is of a reasonable amount with reference to (a) the pay of the employee and the conditions of this service; (b) the profits of the business, profession or vocation for the year in question and (c) the general practice in similar business, professions or vocations."
6. We shall first deal with the question as to whether the claim of the assessee to deduct Rs. 12,000 per annum, salary paid to Sankaran, falls within the provisions of Section 10(2)(xv) of the Act. The fixation and payment of salary arises out of the terms of employment between the employer and the employee. Nothing prevents an employer being liberal and even lavish in the matter of his paying wages or salary to the employed staff, and indeed it is his sole prerogative over which the Court has no domain or jurisdiction. But the Indian Income-tax Act has its own code in the matter of allowing deductions of expenses and payments in computing the business income of an assessee. A payment of salary as such would not be a permissible deduction unless the payment can be said to have been incurred wholly and exclusively for the purpose of the business. The assessee must satisfy the department that it was necessary to have incurred the salary expenses to carry on the business and to earn the Income therefrom. He must also establish that the payment of salary was essential for the purpose of business and was not motivated by non-commercial considerations such as piety, benefaction or mere love and affection. There must be correlation of the work done by the employee to the remuneration received by him. Any amount which the assessee may pay alleging it to be remuneration or salary over and above the requirements of the business for the purpose of its being carried on efficiently would be excessive remuneration from the point of view of the departmental authorities who owe a duty to estimate and apportion that amount of payment as would fall within the language of Section 10(2)(XV) of the Act.
7. Payment of salary in excess of the needs of the business cannot be justified as a proper revenue charge on the Income. The taxing authorities have a difficult task to perform when they have to determine whether a salary payment, in whole or in part, is expended wholly and exclusively for the business. Does the payment represent a fair measure of remuneration for services rendered; is it within the limits of commercial prudence of a reasonable business man conducting a business of that magnitude; does the capacity, ability and skill of the employee deserve the salary paid;--these are a few pertinent questions, which if answered may lead to a satisfacory solution of the problem of permissible deduction. Business needs and requirements and the quantum of salary disbursements cannot be nicely and evenly balanced on delicate scales. The department should not use the scissor to prune salary payment to reach absurdly low levels, disregarding the potent factor that the assessee has the privilege and latitude to run his business in the way he likes. A dictatorial assumption and a doctrinaire approach to the problem should of course be avoided.
8. Learned counsel for the petitioner referred us to the decision in the Newtone Studios v. Commr. of Income-tax Madras, and contended that the Income-tax Act does not clothe the taxing authority with a power or jurisdiction to determine the reasonableness of the amount fixed and paid by the assessee. We respectfully agree with that decision and we have no doubt that the only test for the deductibility of remuneration paid to an employer is whether the expenditure has been incurred solely and exclusively for the purpose of the business. Our attention has also been drawn to the decision of this Court in R. C. No. 65 of 1957 Raman and Raman Ltd. v. Commr. of Income-tax, Madras. We respectfully agree with the following observation of the learned Chief Justice in that case :
"The case is not one of the department making an estimate or making an allowance. It has only to decide whether the expenditure is proper or not. For that purpose, it has got to see whether such expenditure was voluntarily Incurred for the purpose of the business. Once that test is satisfied, namely, correlation of the business purpose with the expenditure, the department is not concerned with the question what in its opinion would have been the proper expenditure."
9. What are the facts in this case? A boy just out of the College is said to be in independent charge of a business in the place of a deceased partner. He is paid a salary of Rs. 1000 a month and bonus of about 3 to 4 months salary. The annual income of the business when it was run by the deceased partner Was roughly Rs. 55062 in 1947; Rs. 34460 in 1948, Rs. 43605 in 1949. After Sankaran, the son of the assessee, took charge the annual earnings were Rs. 20878 in 1951, Rs. 32360 in 1952; Rs. 31979 in 1953 and Rs. 40048 in 1954. It cannot be said that the business income of the assessees has been augmented by reason of the special endeavour or skill displayed by Sankaran. The finding of the tribunal is that the son was merely carrying out the directions of his father in the management of the business. There were as many as 21 employees at the Pollachi branch of whom Venkataraman, the manager of Valparai estate was paid Rs. 200 a month; Sundaram was paid Rs. 165 a month; Gopal Rao Rs. 115 a month and Sambasivan Rs. 105 a month. There was plenty of staff quite experienced and competent to assist the son in the management of the business.
It is not a relevant criterion that the deceased partner, Mani Iyer, drew a half share of the profits each year in his right as a partner to justify the salary drawn by the son as a permissible deduction in computing the income of the assessee in these circumstances the inference is irresistible that the assessee paid his son the amounts claimed by way of deduction only out of family feeling, and not for his ability and capacity in earning the income of the business. The largeness of the payment is so great having regard to the scope and income of the Pollachi business that it almost raises a presumption that it is not a payment of remuneration. We are unable to say that the department was not justified in allowing portions of the salary, as being not incurred for the purpose of earning the profits of the business. It may be that the department made a slight underestimate of the adequate rate of remuneration payable to the employee, but it is not within the province of this Court to set right matters, and direct the department to make a further allowance. On the basis of the allowed salary the bonus allowed is reasonable and in conformity with Section 10(2)(x).
10. The digression of the Tribunal into the scales of pay of an I.A.S. officer and of a I Clsss Honours graduate employed in the Accountant General's office cannot remain un-noticed. In our opinion a comparison of wages earned by an employee in a business concern with those of an official employed in Government service is wholly irrelevant in determining the question of propriety of a deduction claimed under Section 10(2)(xv) of the Indian Income-tax Act. Despite the faulty reasoning adopted by the tribunal it managed to reach the correct conclusion, and we uphold its decision.
11. The reference is answered against the assessee. The assessee will pay the costs of the department, Rs. 250/-.