# Swadeshi Cotton Mills Co. Ltd v. CJ.T., U.P. 63 I.T.R. 57 (S.C.)

- **Citation:** [1970] 3 S.C.R. 314
- **Court:** Supreme Court of India
- **Decided:** 1969-12-09
- **Case number:** Civil Appeals Nos. 2143 to 2145 of 1968
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/swadeshi-cotton-mills-co-ltd-v-cj-t-u-p-63-i-t-r-57-s-c-4919
- **Pages:** 5

## Headnote

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BENGAL ENAMEL WORKS LTD.
v ..
COMMISSIONER OF INCOME-TAX, WEST BENGAL
December 9, 1969
_- [J. C. SHAH, ACTING C.J. AND K. S. llEGDE, J.] ·
Income-tax Act (11 of 1922), s. 10(2)(xv)-Payment of remuneration by ·employer to employee-:-lurisdiction of tax_ officers tO hold that
expenditure was not laid wholly· and exclusively for the purpose of .business-Whether question of law.
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The appeIIant, which was doing the bUsiness of manufacturing en.a.-
. melled wa're, appointed a technical adviser and the Board of Directors
. resolved to pay him 15% of the gross annual profits,as his remuneration •
. for the ~ssessmeqt years, 1951-52, 1952-53 and 1953-54, the appellant
claimed the amounts paid to-the- technical adviser- as admissible allowances
under s. 10(2)(xv) of the Income-tax Act, 1922. The Income-tax.Officer
found, · that the technical adviser was a doctor of medicine without any
"<pecial qualification for the post/that he was not trained.in the technique
,. of enamelled ware, that he and his father-in-law, by the number of shares
<they. held, were able to control the voting before the Board of Directors,
. that good technical experts in enamelling could have been secured for a
·_'smaller remuneration, that the remuneration agi'eed to be paid to -the
· technical adviser was . influenced by extra-commercial considerations and
· · · therefore, disallowed a part of the · amount, holding that it was expenditure not incurred wholly and exclusively for the purpose of the business.
The order was confirmed by the Appellant Assistant Commissioner, the
· Tribunal and the High Court.
In· appeal tO this Court,
HELD : The question -whether an amount claimed as expenditure was
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laid out or expended wholly and exclusively for the pu'rpose of the business must be decided on the facts and circumstances of each case, and the
inference drawn from the facts found is one of law. Ordinarily, an em ..
ployer, in fixing the remuneration of his employee, is entitled to take into
F
consideration the extent of his business, the nature of duties to be performed, the special aptitude of the employee, the future plrospects of the
business and other related· circumstances, and the taxing authorities can·
not substitute their own view as to the reasonable remuneration which
should have been agreed to be paid to the employee. But,
the taxing
authority may disallow an expenditure claimed, on the ground that the
payment is not real or is not incu'rred by~ the assessee in the course of
his business or that it is not "laid out wholly and exclusively for the purpose of the business.
In doing so, the authority does not substitute its
own· view of how the assessce's business affairs should be managed, but
proceeds to disallow the expenditure, because, the -'Condition of its admissibility is absent. [316 B, D; 317 F-H; 318 A, D]
.
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Swadeshi Cotton Mills Co. Ltd. v. CJ.T., U.P. 63 I.T.R. 57 (S.C.),
followed.

## Text

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BENGAL ENAMEL WORKS LTD.
v ..
COMMISSIONER OF INCOME-TAX, WEST BENGAL
December 9, 1969
_- [J. C. SHAH, ACTING C.J. AND K. S. llEGDE, J.] ·
Income-tax Act (11 of 1922), s. 10(2)(xv)-Payment of remuneration by ·employer to employee-:-lurisdiction of tax_ officers tO hold that
expenditure was not laid wholly· and exclusively for the purpose of .business-Whether question of law.
-·
·
'
The appeIIant, which was doing the bUsiness of manufacturing en.a.-
. melled wa're, appointed a technical adviser and the Board of Directors
. resolved to pay him 15% of the gross annual profits,as his remuneration •
. for the ~ssessmeqt years, 1951-52, 1952-53 and 1953-54, the appellant
claimed the amounts paid to-the- technical adviser- as admissible allowances
under s. 10(2)(xv) of the Income-tax Act, 1922. The Income-tax.Officer
found, · that the technical adviser was a doctor of medicine without any
"<pecial qualification for the post/that he was not trained.in the technique
,. of enamelled ware, that he and his father-in-law, by the number of shares
<they. held, were able to control the voting before the Board of Directors,
. that good technical experts in enamelling could have been secured for a
·_'smaller remuneration, that the remuneration agi'eed to be paid to -the
· technical adviser was . influenced by extra-commercial considerations and
· · · therefore, disallowed a part of the · amount, holding that it was expenditure not incurred wholly and exclusively for the purpose of the business.
The order was confirmed by the Appellant Assistant Commissioner, the
· Tribunal and the High Court.
In· appeal tO this Court,
HELD : The question -whether an amount claimed as expenditure was
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laid out or expended wholly and exclusively for the pu'rpose of the business must be decided on the facts and circumstances of each case, and the
inference drawn from the facts found is one of law. Ordinarily, an em ..
ployer, in fixing the remuneration of his employee, is entitled to take into
F
consideration the extent of his business, the nature of duties to be performed, the special aptitude of the employee, the future plrospects of the
business and other related· circumstances, and the taxing authorities can·
not substitute their own view as to the reasonable remuneration which
should have been agreed to be paid to the employee. But,
the taxing
authority may disallow an expenditure claimed, on the ground that the
payment is not real or is not incu'rred by~ the assessee in the course of
his business or that it is not "laid out wholly and exclusively for the purpose of the business.
In doing so, the authority does not substitute its
own· view of how the assessce's business affairs should be managed, but
proceeds to disallow the expenditure, because, the -'Condition of its admissibility is absent. [316 B, D; 317 F-H; 318 A, D]
.
.
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Swadeshi Cotton Mills Co. Ltd. v. CJ.T., U.P. 63 I.T.R. 57 (S.C.),
followed.
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 2143 to
2145 of 1968.
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BENGAL ENAMEL V. C.I.T. (Shah, Ag. C.J.)
315
Appeals from the judgments and orders dated March 18, 1965
of the Calcutta High Court in Income-tax References Nos. 154,
155 and 156 of 1961.
M. C. Chagla, P. C. Bhllltari, and 0. C. Mathur, for the appellant (in C.As. Nos. 2143 and 2144 of 1968).
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S. Mitra, P. C. Bhartari and 0. C. Mathur, for the appellant (in
C.A. No. 2145 of 1968).
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S. T. Desai, S. K. Aiyar and B. D. Sharma, for the respondent
(in all the appeals) .
The Judgment of the Court was delivered by
Shah, Actng C.J.
These appeals relate to the assessment to
tax of M/s. Bengal Enamel Works Ltd.-a public limited company-for the assessment years 1951-52, 1952-53 and 1953-54.
The Company is doing business of manufacturing "enamelledware". It had originally employed a "technician" at a monthly
salary of Rs. 5001-. In June 1941 the technician was relil}ved,
and one Col. Bhattacharya who was a director of the Company
was appointed its "Technical Adviser." He was to receive
as
remuneration 15% of the gross annual profits of the Company.
Col. Bhattacharya resigned his office and Dr. Ganguly (son-inlaw of Col. Bhattacharya) was appointed •o that office.
The
E Board of Directors resolved on May 18, 1950 to pay to Dr.
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Ganguly 15 % of the gross annual profits (without deducting
depreciation) as his remuneration.
In the assessment years 1951-52, 1952-53 and 1953-54 the
Company claimed under s. 10(2)(xv) of the Income-tax Act,
1922, as admissible allowance, in computing its taxable income,
Rs. 52,947/-, Rs. 64,356/- and Rs. 79,227/- respectively, paid
as remuneration to Dr. Ganguly under the terms of the resolution
dated May 18, 1950. The Income-tax Officer, Companies District m, Calcutta, allowed for each of the years remuneration at
the rate of Rs. 42,000 /- only as a permissible deduction.
The
order was confirmed in appeal to the Appellate Assistant Commissioner and by the Tribunal.
The Tribunal referred in respect of each of the three years
the following question :
"Whether on the facts and in the circumstances of
the case, the disallowance of a part of the r.•menses
incurred by the assessee for payment of remuneration
to its Technical Adviser is pem1issible under the provisions of s. 10(2) (xv) of the Indian Income-tax Act?"
:l 16
SUPREME COURT REPORTS
[1970) 3 S.C.R.
The High Court answered the question in the aJfirmative, and
disallowed the claim of the Company.
With certificate of fitness,
these appeals are preferred against the order cf the High Court.
In computing the taxable income of an assessee whether an
amount claimed as expenditure was laid out or expended wholly
and exclusively for the purpose of the business, profession or
vocation of the assessee must be decided on the facts and in the
light of the circumstances of each case : Swadcshi Co/Ion Mills
Co. Ltd. vs. Commissioner of Income-tax, U.P. (1). Resolution of
the assessee fixing the remuneration to be paid to an employee
and production of vouchers for payment together with proof of
rendering service do not exclude an enquiry whether the expenditure was laid out wholly and exclusively for the purpose of the
assessee's business.
It is open to the Tax Officers to holdagreement to pay and payment notwithstanding-that the expenditure was not laid out wholly and exclusively for the purpose of
the business: Swadeshi Cotton Mills Co. Ltd.'s case('). But an
inference from the facts found that the expenditure was wholly
and exclusively laid out for the purpose of the business is one of
law and not of fact, and the High Court in a reference under s. 66
of the Income-tax Act is competent to decide that the inference
raised by the Tribunal is erroneous in Jaw.
In the present case, the facts found are these : Col. Bhattacharya and his son-in-law Dr. Ganguly were two of the directors
of the Company who between them held on January I, 1950 49%·
of the total number of shares of the Company and the other directors of the Company held only 1 % of the shares. Dr. Ganguly had
received no training in the technique of enamelling : he was a
medical practitioner earning Rs. 20.000 '- per annum by the
exercise of his profession.
Apparently no annlications were
invited for the appointment of a Technical Adviser when Col.
Bhattacharya resigned his office. In the resolution passed by' the
Directors it was recorded that many "nersonal enquiries" regarding the post were made, but no candidate was found suitable
The Board, it was recorded, considered the annlications of S.
Urbeneck and J. Schulser but the qualifications of these two candidates did not imoress the directors: moreover the terms of
service offered by J. Schulser were not accentable to the Bo~rd
and therefore the only applicant Dr. Ganguly who was working
on nmbation in the post for some time past and had worked
without remuneration un to December 31. 1949 was considered.
The a11niications of S. TTrheneck and J. Schulser thouoh called
for bv the. Income-tax Offker were not nrocluced bv the rompany. At the relevant time "a good technical expert in enamelling"
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11) 63 1.T.R. 57.
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BENGAL ENAMEL V. C.I. T, (Shah, Ag. C.J.)
31 7
could be secured for a monthly remuneration of Rs. 1,000/ · or
Rs. 1,200/- provided that appointment was not for a short period.
In the view of the Income-tax Officer, Dr. Ganguly came to
be appointed to the post of Technical Adviser of the Company
as soon as his father-in-law vacated the post and "the generous
remuneration offered to him was influenced by factors other than
commercial considerations, and considering that Dr. Ganguly was
giving up his professional practice in allopathic medicine which
yielded him an annual income of Rs. 20,000/- to engage himself
as a whole-time Adviser attending to the development of the industry a gross remuneration of Rs. 3,500/- per month, beside the
remuneration of Rs. 1,000/- per month that he obtained as Secretary of the Managing Agents of the Company, would be
adequate." With that view the Appellate Assistant Commissioner
and the Income-tax Appellate Tribunal have substantially agreed.
The Tribunal observed that they were inclined to conclude that
"extra-commercial considerations" had influenced the fixation of
remuneration of Dr. Ganguly and that partial disallowance of the
remuneration "so influenced seems quite fair".
Counsel for the Company urged, relying upon the judgments
of this Court in J. K. Woollen Manufacturers v. Commissioner
of Income-tax, U.P. ( 1 ) and Commissioner of Income-tax, Bombay v. Walchand & Co. Private Ltd.( 2 ) that in determining the
admissibility of an allowance as expenditure laid out and expended wholly and exclusively for the purpose of the business
has to be adjudged from the point of view of the employer and
not of the revenue, the Taxing authorities had no power to disallow the remuneration paid to its Technical Adviser, merely
because they think that the Company may probably have secured
the services of another Adviser for a smaller remuneration. But
these cases, in our judgment, have no bearing here.
The departmental authorities have not attempted to reduce the allowance
on the ground that the remuneration paid to Dr. Ganguli was in
their view excessive. Indisputably an employer in fixing the remuneration of his emoloyee is entitled to take into consideration the
extent of his business, the nature of duties to be performed, the
special aptitude of the employee, the future prospects of the
business and other related circumstances and the taxing authorities cannot substitute their own view as to the reasonable remuneration which should have been agreed to be paid to the employee.
But the taxing authority may disallow an expenditure
claimed on the ground that the nayment is not real or is not
incurred by the assessee in the course of his business or that it is
not laid out wholly and exclusively for the purpose of the business
(I) A.l.R. 1969 S.C. 609.
f2) 65 l.T.R. JRI.
318
SUPREME COURT REPORTS
[1970) 3 S.C.R.
of the assessee. Thereby the authority does not substitute its own
view of how the assessee's business affairs should be managed,
but proceeds to disallow the expenditure because the condition
of its admissibility is absent.
It has been uniformly found by all the authorities that the
remuneration agreed to be paid to Dr. Ganguly was influenced
by "extla-commercial considerations". Dr.
Ganguly and Col.
Bhattacharya were able to control the voting before the Board
of Directors.
Dr. Ganguly was not trained in the technique of
"enamelled-ware," and had no special qualifications for the post.
The remuneration agreed to be paid was much in excess of what
was normally payable, and also of what Dr. Ganguly was earning by practising his profession as a doctor of medicine. 'The
criticism that the Tribunal's finding was based on no evidence or
was based on irrelevant consideraiions cannot therefore be
accepted. Where an amount paid to an employee pursuant to an
agreement is excessive because of "extra-commercial considerations," the taxing authority has jurisdiction to disallow a part of
the amount as expenditure not incurred wholly and exclusively
for the purpose of the business : Swadeshi Cotton Mills Co. Ltd.
\'. Commissioner of Income-tax, U.P.(').
The appeals fail and are dismissed with costs.
One hearing
fee.
V.P.S.
Appeals dismissed.
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(!) 63 l.T.R. 57.
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