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1960 Supreme(Cal) 246
High Court Of Calcutta
P.B. Mukharji, Bose, JJ.
Mercantile Express Co Private Ltd - Appellants
Vs
Commissioner Of Income Tax Calcutta - Respondents
Decided on: Dec 23, 1960
S.B.Mukherji, T.K.Bose,
The opinion of the Income Tax Officer is the primary deciding factor in determining the reasonableness of the allowance for director's remuneration, and questions regarding the reasonableness of the allowance are essentially questions of fact.
Headnote:
Income Tax Act - Director's Remuneration - The court held that the opinion of the Income Tax Officer is now the primary deciding factor in determining whether a particular allowance for director's remuneration is excessive or unreasonable, following the amendment to section 10 (4a) of the Income Tax Act. The court emphasized that the Income Tax Officer's opinion should be exercised judicially and not capriciously, and that the questions raised by the petitioner were essentially questions of fact.
Fact of the Case:
The petitioner claimed a certain amount as remuneration to a Director, which was reduced by the Income Tax Authority. The question proposed by the assessee related to the claim for remuneration as a permissible deduction under the newly amended section 10 (4a) of the Income Tax Act.
Finding of the Court:
The court found that the questions raised by the petitioner were essentially questions of fact, and that the opinion of the Income Tax Officer is now the primary deciding factor in determining the reasonableness of the allowance for director's remuneration.
Issues: The issues revolved around the claim for remuneration to a Director as a permissible deduction under the newly amended section 10 (4a) of the Income Tax Act, and whether the opinion of the Income Tax Officer was exercised judicially and not capriciously.
Ratio Decidendi: The court emphasized that the opinion of the Income Tax Officer is now the primary deciding factor in determining whether a particular allowance for director's remuneration is excessive or unreasonable, and that the questions raised by the petitioner were essentially questions of fact.
Final Decision: The court dismissed the application, stating that no question of law arose in the case.
1. WE do not feel inclined to issue a Rule in this case. We are satisfied that no question of law arises in this application under section 66 (2) of the Income Tax Act. The questions, as framed in paragraph 8 of the petition, in our view, are really and essentially questions of facts in this case.
2. THE question proposed by the assessee relates to a claim for remuneration to a Director as a permissible deduction. The petitioner claimed a certain amount and the Income Tax Authority has reduced that amount. It turns on the newly amended section 10 (4a) of the Income Tax Act introduced by section 7 of the Finance Act of 1956 with effect from the 1st April, 1956. By the opening expression, "nothing in sub-section (2) shall, in the computation of profits and gains of a Company", this newly amended sub-section gets rid of the effect of the legal decisions on section 10 (2) prior to the amendment. The material portion of the language now is:
"if in the opinion of the Income Tax Officer any such allowance is excessive or unreasonable having regard to the legitimate business needs of the Company and the benefit derived by or accruing to it there from. . . . . . "
The result of introducing the opinion of the Income Tax Officer is to get round the effect of the previous decisions on section 10 (2) (xv) and similar expressions used in section 12 (2) of the Income Tax Act reflected respectively in the decisions of the New-ton Studios Ltd., Madras v. Commissioner of Income Tax, Madras, (1) A. I. R. 1955 Mad. 646 decided on April 11, 1855 and Eastern Investments Ltd. v. Commissioner of Income Tax, West Bengal (2) A. I. R. 1951 S. C. 278 decided on May 4, 1951, which appeared to suggest that it was not the Income Tax Officer but the business concerned to judge its commercial needs and the remuneration it chooses to pay.
3. THE result, therefore, today is, after the amendment, that the opinion of the Income Tax Officer is now the primary deciding factor whether the particular allowance is excessive or unreasonable. No doubt the Statute lays down the guides by saying, (1) "having regard to the legitimate business needs of the Company" and (2) "the benefit derived by or accruing to it there from. " No question here arises to suggest that the Income Tax Officer traveled beyond these two tests of (1) legitimate business needs and (2) the benefit derived. If he did, then it would have been a question of law. What is really being said is that the quantum that he permitted was too small. That, in our opinion, is a question of pure fact. There is no doubt again that the opinion of the Income Tax Officer should be exercised judicially and not capriciously. But the facts in this case do not even suggest far less allege any capricious or unjudicial expression of that opinion. Therefore, in our view, no question of law arises. The application is dismissed.
