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Prior to March 1947, one Deo Datt Sharma carried on business in Delhi in the name of Sharma Trading Company. The business was quite a prosperous one and the record shows that Deo Datt Sharma was making an average profit of about Rs. 36,000 per year. In March 1947, the assessee was incorporated as a private limited company with Ganga Saran Sharma as its managing director and it took over the business of Sharma Trading Company as a going concern in consideration of allotment of 1703 shares in the share capital of the assessee to Deo Datt Shrama. The share capital of the assessee consisted of 8500 shares out of which 1703 shares were allotted to Deo Datt Sharma, 5 shares were held by Ganga Saran Sharma and 3500 shares, by a company called Narendra Trading Company controlled by Ganga Saran Sharma and his wife. It may be pointed out at this stage that Deo Datt Sharma was the brother-in-law of Ganga Saran Sharma. When business of Deo Datt Sharma was taken over by the assessee, Deo Datt Sharma was appointed Director of the assessee along with two other persons. Deo Datt Sharma was placed in charge of management of the business of Delhi Branch of the assessee and he was paid a salary of Rs. 1000 per month, commission at the rate of 1 per cent on the sales of the Delhi Branch and bonus equivalent to three months' salary. Ganga Saran Sharma and the other two directors were also paid salary, commission and bonus but it is not necessary to set out the quantum of the emoluments paid to them, because in this appeal we are concerned only with the emoluments paid to Deo Datt Sharma and not with the emoluments paid to other directors.

1. On 31st July 1957 he made a gift to Shri Narendra Sharma son of Shri Ganga Saran Sharma, Managing Director of the Company. Rs. 12,550.00

2. On 25th August 1958 he made a loan to Ganga Saran Sharma. Rs. 2,25,000.00

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Total 2,37,550.00

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and thereafter, out of the amount lying to his credit in the account with the assessee, he had made the following gifts:

On 5th December 1960 gift to Brahma Devi wife of Ganga Saran Sharma Rs.1,01,101.00 On 21st December 1960 gift to Indu Sharma daughter-in-law of Ganga Saran Sharma Rs. 15,101.00 On 26th December 1961 gift to Hemlata Sharma daughter-in-law of Ganga Saran Sharma. Rs. 50,101.00 The Income Tax Officer stated that out of the total amount of remuneration of Rs. 3,51,000 received by Deo Datt Sharma during the period upto 31st March 1962, he had paid tax in the sum of about Rs. 65,000/- and spent a total sum of Rs. 2,37,550 on account of gifts and loan as aforesaid and the withdrawals made by him for his own purposes thus did not amount to more than Rs. 4000 per year. These facts, according to the Income Tax Officer, showed that the remuneration paid to Deo Datt Sharma was not genuine and was sham and bogus and the amount of such remuneration alleged to have been paid to Deo Datt Sharma was wrongly allowed as a permissible deduction and hence the assessment of the assessee was liable to be reopened by issue of a notice under section 147 (a).

The Revenue, however, relied strongly on the fact that out of the total amount of remuneration of Rs. 3,51,000 received by Deo Datt Sharma and credited to his account with the assessee, he had not withdrawn more than Rs. 4,000 per year for himself and an aggregate sum of Rs. 2,37,550 was expended by him in giving a loan to Ganga Saran Sharma and making gifts to the son, wife and daughters-in-law of Ganga Saran Sharma on diverse dates between 31st July, 1957 and 26th December 1961. We fail to see how this fact can lend itself to the inference that the payment of remuneration to Deo Datt Sharma was bogus and not genuine. It is an admitted fact that Deo Datt Sharma was the brother-in-law of Ganga Saran Sharma and there is nothing unusual in Deo Datt Sharma giving a loan to Ganga Saran Sharma or making gift to the son, wife and daughters-in-law of Ganga Saran Sharma who were his close relatives. It is indeed difficult to appreciate how any inference can reasonably be drawn that the payment of remuneration to Deo Datt Sharma was sham and bogus merely from the manner in which he expended the amount of remuneration received by him, particularly when the persons to whom he gave a loan and made gifts were his close relatives. It is possible that Deo Datt Sharma had other financial resources apart from the remuneration derived by him from the assessee and he therefore decided to give a loan and make gifts to his close relatives out of the remuneration received by him for valuable services rendered to the assessee. In fact, if he had no other financial resources, it is extremely difficult-one might say, almost impossible-to believe that he worked for the assessee and managed and looked after the business of the Delhi Branch on a full time basis without any remuneration or in any event on a paltry remuneration of Rs. 4,000 per year when the managing director and other directors who were working like him were getting much more from the assessee and as the proprietor of the business prior to its taking over by the assessee, he was earning an average profit of about Rs. 36,000/- per year. We are clearly of the view that on these facts the Income Tax Officer could have no reason to believe that the payment of remuneration to Deo Datt Sharma was sham and bogus and that the amount of remuneration paid to him was wrongly allowed as a permissible deduction.

We may point out that, in fact, the statement of account of Deo Datt Sharma with the assessee for the relevant accounting year as also the previous years were with the Income Tax Officer at the time of the original assessment and these statements of account clearly showed that out of the amount of remuneration credited to his account, he had made a gift of Rs. 12,550 to the son of Ganga Saran Sharma on 31st July 1957 and given a loan of Rs. 2,25,000 to Ganga Saran Sharma on 25th August, 1958 and the Income Tax Officer was fully aware that Ganga Saran Sharma was the managing director of the assessee. It is possible and we may assume it in favour of the Revenue, that the subsequent gifts made by Deo Datt Sharma to the wife and daughters-in-law of Ganga Saran Sharma were not disclosed to the Income Tax Officer at the time of the original assessment, but these gifts being subsequent to the relevant accounting year, the assessee was not bound to disclose the same to the Income Tax Officer. Moreover, it is difficult to appreciate how the assessee could be said to be under an obligation to disclose to the Income Tax Officer in the course of its assessment as to how a director who was in sole charge of the management of the business of the assessee and who was being paid remuneration for the services rendered by him to assessee, had utilised the amount of remuneration received by him. We do not think it possible to sustain the conclusion that the assessee omitted or failed to disclose fully and truly any material facts relating to his assessment.