The Tribunal must approach and decide the case in a judicial spirit and record its reasons in support of the decision. The rule that increased remuneration can only be justified if there be corresponding increase in the profits of the employer is erroneous.

Judgement

SHAH, J. : The respondent (hereinafter called the assessee) is a private limited Company registered under the Companies Act. 1913. The assessee carries on the business of acting as Managing Agents for nine public limited Companies. The business of the assessee was managed by three Directors. Each Director was paid a remuneration of Rs. 2,500 per month. The assessee had employed three executive officers to administer its affairs. By resolution dated July 9, 1952 the remuneration of each of the Directors of the, assessee was increased with retrospective effect from April 1, 1952 by Rs. 1.000 per month and of two out of the three officers by Rs. 500 per month and of the remaining officer by Rs. 750 per month. In the year 1953 the remuneration of each of the Directors was increased by Rs. 500 per month and of each of the officers by Rs. 250 per month.

2. In proceedings for assessment of income for the years 1953-54 and 1954-55 the Income-tax Officer called upon the assessee to show cause why the increase in the remuneration of the Directors and officers should not be disallowed in the computation of the taxable income of the assessee. The assessee submitted that the managed Companies had considerably increased the area and activities of the business and they had undertaken new lines which entailed greater burden on the Directors and officers of the assessee. The Income-tax Officer disallowed the increase in the remuneration of the Directors and officers of the assessee. He was of the view that since the increase in the remuneration or the salary of the officers "was not reflected in the increase in the profits of the assessee", it was not expenditure which could be justified as laid out wholly and necessarily for the purposes of the business under S. 10 (2) (xv) of the Indian Income-tax Act. In appeal, the Appellate Assistant Commissioner confirmed the order. The Income-tax Appellate Tribunal modified the order of assessment. The Tribunal observed that "it was not for the Income-Tax Officer to run the assessee s business and to fix the salary of every member of the staff. That however does not mean that it is open to an assessee to allow unreasonable rise in the salaries without a valid reason. It may amount to giving a gift in the garb of a salary". The Tribunal then directed that considering the salaries previously drawn by the Directors, "salary at the rate of Rs. 4,000 per month in each case be allowed as a revenue deduction". In making this order the Tribunal apparently lost sight of the fact that in the account year 1952-53 the Directors received Rs. 42,000 as remuneration for the whole year, and it was only in the year 1953-54 that the Directors received Rs. 48,000 as remuneration. The Tribunal also directed that in regard to each employee increase in salary not exceeding Rs 3,000 per annum as compared to the preceding year s assessment be allowed as a permissible deduction. The Tribunal gave no reasons for disallowing the balance of the salary paid to the three officers.

3. The Tribunal submitted the following question for determination of the High Court of Bombay :-

"Whether on the facts and in the circumstances of the case the Tribunal acted without evidence in disallowing Rs. 30.000 (Rupees thirty thousand)"

The High Court was of the view that the Tribunal acted without evidence in partially disallowing the increase in the remuneration of the three executive officers during the assessment years 1953-54 and l954-55. The Commissioner of Income-tax has appealed to this Court, with special leave.

4. The assessee claimed the additional remuneration paid to the Directors and to the executive officers as a permissible allowance under S. 10 (2) (xv) of the Indian Income-tax Act, 1922 which reads:

"Such profits or gains shall be computed after making the following allowances, namely :-

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(xv) any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in th