Ajit K. Sengupta, J.
1. This reference under Section 256(1) of the Income-tax Act, 1961, relates to the assessment year 1972-73.
2. The facts shortly stated are that, during the accounting year, the assessee claimed service charges amounting to Rs. 29,250 paid to Messrs. Karam Chand Thapar and Bros. (P.) Ltd. for doing secretarial work, carrying on of liaison work and services in the capacity of registrars. The Income-tax Officer held that no direct business was carried on for which liaison work was necessary and that the payment was illusory. Hence, he added back Rs. 29,250 to the assessee's total income.
3. When the assessee went in appeal before the Appellate Assistant Commissioner, he found that the assessee entered into an agreement from time to time with Messrs Standard Refinery and Distillery Ltd to lease out its factory and in consideration thereof was to receive royalty in the production of sugar and sale of molasses. The assessee appointed Messrs. Karam Chand Thapar and Bros. (P.) Ltd. as its secretaries. It was claimed earlier before the Income-tax Officer that K.C. Thapar and Co. (P.) Ltd. was supposed to look after the affairs of the assessee and its remunerationas secretary of the company was fixed at 7 1/2% of the net profit with a minimum of Rs. 12,000 per annum. He held that it was not known whether K.C. Thapar and Bros. (P.) Ltd. were, at any time, paid maximum remuneration at 7 1/2% of the net profit He further held that even a moiety of the minimum remuneration of Rs. 12,000 was forgone by Messrs K. C. Thapar and Bros. (P.) Ltd. in the preceding four assessment years and the net debit claimed by the appellant-company amounted to Rs. 6,000. It was submitted before him on behalf of the assessee that, due to change in the Companies Act with effect from April 1. 1970, resulting in the termination of the agreement for payment of remuneration to the secretaries, the assessee-company entered into two separate agreements on March. 15, 1971, whereby the following remuneration was fixed as payable to Messrs. K.C. Thapar and Bros. (P.) Ltd. at the rates indicated with effect from May 1, 1970:
(i) As per the first agreement, payment in connection with services in the capacity of the registrar of the company : Rs. 750 per month.
(ii) As per the second agreement (a) to perform all secretarial and legal work on behalf of the company ; Rs. 500 per month.
(b) to perform work connected with maintenance of accounts, banking operations and taxation of the company : Rs. 500 per month.
(c) for maintenance and carrying on liaison activities at Delhi, Chandigarh, Bombay and other places and representation before any Government, semi-Government, statutory body or corporation or authorities : Rs. 500 per month. Thus the aggregate remuneration amounted to Rs. 2,250 per month.
The claim was for a period of 13 months and hence the claim was restricted to Rs. 27,000. The Appellate Assistant Commissioner did not hold that the payment was illusory but he held that the root of the matter that is to be considered is whether the payments were for business considerations. According to him, the assessee was entitled to claim Rs. 6,000 as payment to Messrs K.C. Thapar and Bros, for rendering services to the assessee and that there was no reason to increase the remuneration to Rs. 27,000.
4. The assessee came up in second appeal before the Tribunal. Learned counsel for the assessee referred to the memorandum and articles of association of the company and according to Clause 159 of the articles of association, Messrs K.C. Thapar and Bros. (P.) Ltd. were the secretaries of the company. The secretaries were, from June 1, 1967, entitled to the remuneration of commission at 7 1/2% of the net annual profits of the company, subject to a minimum of Rs. 12,000 in case of no profits or inadequacy of profits in any financial year of the company. In Clause 160 of the articles of association, it could also be found as follows :
'The secretaries shall be entitled to charge and be paid all the postage, telegrams, printing, stationery, telephone rents, taxes and all otherout-of-pocket expenses incurred by them on behalf of the company whether at Calcutta or elsewhere and the company shall pay the salaries, wages, bonus, allowances, provident fund contribution, etc., which shall become payable to managers, agents, clerks, servants, workmen, brokers, bankers, solicitors, engineers, experts, technicians and other officers and employees employed solely in company's business, whether employed in Calcutta office or elsewhere, and all the expenses of manufacture and cost of all purchases for the company, and the company shall also bear and pay such proportion of salaries, wages, bonus, allowances, provident fund contributions, commission, etc., if any, of any staff and workers employed partly in connection with the business of the company and partly in connection with the business of other companies including secretaries, and/or firms, as also office expenses such as rents, telephone, electricity and conveyance expenses, etc., pertaining to such staff and workers likewise incurred, as the directors of the company may from time to time determine, The board may, from time to time, agree to pay either a certain fixed monthly amount or fixed percentage of salaries, allowances, provident fund contributions, fees, commission and bonus, etc., of the establishment employed partly in connection with the business of the company and partly for the business of the other companies including secretaries, and/or firms at Calcutta and elsewhere, and all other office incidentals pertaining thereto and the board may also, from time to time, vary the monthly amount or the percentage so fixed.'
The Tribunal, after considering the rival contentions, held as follows :
'The common ground is that this payment is not hit by the provisions of Section 40B of the Act. As soon as it is held that Section 40B is not applicable, we have to go by the general provisions of Section 37 of the Income-tax Act. The expenditure laid out and expended wholly and exclusively for the purpose of the business has to be allowed in computing the income chargeable under the head 'Profits and gains' of business or profession. The only restriction is that the expenditure must not be of capital nature or personal expenses of the assessee. The Income-tax Officer held that the payment was illusory. The Appellate Assistant Commissioner did not give his finding that the payment was illusory but he held that part of the expenses could be allowed as business expenditure. It would be open for us to come to the conclusion that the payment was not real or that it was not incurred by the assessee in the character of a trader or it was not laid out wholly and exclusively for the purpose of the business. On that ground, the payment could be disallowed. It is for the assessee to fix the remuneration having regard to the extent of the business and the nature of duties to be performed by the parties with whom the assessee has entered into an agreement and the special aptitude of the party.
Having gone through the agreement between the assessee and Messrs. K.C. Thapar and Bros. (P.) Ltd. and also having considered the nature of the remuneration for the services to be rendered by Messrs K.C. Thapar and Bros. (P.) Ltd., the remuneration fixed cannot be said to be unreasonable. It is not the case of the Revenue that it was a scheme for avoidance of tax by any of the parties because both the parties are limited companies.
Thus, in view of the discussion hereinbefore, we are of the opinion that the claim of the assessee can be allowed to the extent of Rs. 27,000 and not Rs. 29,250 because the total claim was made for a period of 13 months as we are concerned with the assessment for a period of 12 months and not 13 months.'
On the above facts, the following question of law has been referred to this court:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing the expenditure of Rs. 27,000 paid to Messrs. Karam Chand Thapar and Bros. (P.) Ltd. as a deductible expense under Section 37(1) of the Income-tax Act, 1961, relating to the assessment year 1972-73 ?'
At the hearing Mr. Bagchi, learned counsel appearing for the Revenue, has drawn our attention to the fact that the assessee did not carry on business in the relevant assessment year and, accordingly, the provision of Section 37(1) of the Act could not be applied and the expenditure could not be allowed as claimed as business expenditure.
5. On the other hand, Dr. Pal, learned counsel appearing for the assessee, has drawn our attention to the relevant orders of the Income-tax Officer and the Appellate Assistant Commissioner to highlight the fact that there is no dispute that the assessee incurred the expenditure even if there was no business which was not however urged before the Tribunal. The expenditure can be allowed if otherwise admissible under Section 57(iii) of the Act. He has, therefore, submitted that this court has ample power to reframe the question to bring out the actual controversy between the parties.
6. In our view, the contention of Dr. Pal has substance. The controversy before the authorities below and the Tribunal was whether the payment of Rs. 27,000 made to Messrs Karam Chand Thapar and Bros. (P.) Ltd. was deductible or not. The Income-tax Officer held that the expenditure was illusory. But the Appellate Assistant Commissioner held that a part of the expenditure could be allowed as business expenditure,
7. The Tribunal considered the question whether the expenditure was wholly and exclusively for the purpose of business or not and thereafter held that the expenditure incurred for 12 months should be allowed.
8. We are, therefore, of the view that the question referred to us should be reframed as follows :
'Whether, on the facts and in the circumstances, the Tribunal was right in allowing the expenditure of Rs. 27,000 claimed to have been made to Messrs Karam Chand Thapar and Bros. (P.) Ltd. in computing the income for the assessment year 1972-73 ?'
It is not in dispute that there was an agreement by and between the assessee and M/s. Karam Chand Thapar and Bros (P.) Ltd. and, under the said agreement, M/s. Karam Chand Thapar and Bros. (P.) Ltd. had been rendering their services as registrars of the company. They were to perform all secretarial and legal work on behalf of the company. They were also required to maintain accounts, perform banking work and look after taxation matters of the company. They had to maintain and carry on liaison activities at Delhi, Chandigarh, Bombay and other places and represent before any Government, semi-Government, statutory body or corporation or other authorities. No one has disputed that M/s. Karam Chand Thapar and Bros. (P.) Ltd. have rendered their services to the assessee. As a matter of fact, under the articles of association, the remuneration of the secretary of the company was fixed at 7 1/2% on the net profits subject to a minimum of Rs. 12,000 per annum. We have already set out the payments which have been made under the different heads to M/s. Karam Chand Thapar and Bros. (P.) Ltd. Under Clause 160 of the articles of association already extracted hereinbefore, the secretaries shall be entitled to charge and be paid all the postage, telegrams, printing, stationery, telephone rents, taxes and all other out-of-pocket expenses incurred by them on behalf of the company whether at Calcutta or elsewhere. The company shall also pay the salaries, wages, bonus, allowances, provident fund contributions, etc., which shall become payable to the employees employed solely in the company's business whether employed in Calcutta Office or elsewhere. The Revenue contended that the assessee was earning income from the lease rent. As a matter of fact, that the entire concern was leased out and that the assessee was earning income from such lease rent will be apparent from the records. Accordingly, the expenditure which is incurred for earning the income only can be allowed. The Income-tax Officer has recorded as follows :
'Service charges of Rs. 29,250 included in office expenses. This was paid to M/s. Karam Chand Thapar and Bros. (P.) Ltd. for doing secretarial work, banking work, carrying on of liaison work in Delhi, etc., and services in the capacity of Registrars. It may be noted that the assessee has leased out its factory, etc. No direct business was carried out for which liaison work, etc., might be necessary. Besides, the assessee has got its own staff for whom salary, etc., has been debited. Hence, secretarial service rendered is illusory. In addition, services in the capacity of the registrar is also not clear. The entire expense is disallowed on the ground that no business purpose was served as a result of these payments.'
But the Income-tax Officer did not take into account whether, under the said agreement, any service was rendered to the assessee-company or not. As indicated, the assessee has to maintain liaison activities with the Government, semi-Government, statutory body or corporation or other authorities. The finding of the Tribunal is that this expenditure is wholly and exclusively laid out by the company. The Supreme Court in CIT v. Rajendra Prasad Moody : [1978]115ITR519(SC) has held that the expenditure, to be deductible under Section 57(iii), must be laid out or expended wholly or exclusively for the purpose of making or earning such income. The argument of the Revenue was that unless the expenditure sought to be deducted resulted in making or earning of income, it could not be said to be laid out or expended for the purpose of making or earning such income. The Supreme Court also considered the difference between Section 37(1) and Section 57(iii) and observed as follows (at p. 522) :
'What Section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of Section 57(iii) and that purpose must be making or earning of income. Section 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of Section 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. A plain natural construction of the language of Section 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical view was taken by this court in Eastern Investments Ltd. v. CIT : [1951]20ITR1(SC) , where, interpreting the corresponding provision in Section 12(2) of the Indian Income-tax Act, 1922, which was ipsissima verba in the same terms as Section 57(iii), Bose J., speaking on behalf of the court, observed :
'It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned.'
It is indeed difficult to see how, after this observation of the court, there can be any scope for controversy in regard to the interpretation of Section 57(iii).'
The Supreme Court then proceeded to hold (at p. 523) :
'We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income.'
In our view, a limited company, even if it does not carry on business, even if it derives income only from 'other spurces', has to maintain its establishment so long as it is in operation and its name is not struck off the register or until the company is dissolved which means cessation of allcorporate activities of the company. Irrespective of the question whether the activity of earning rental income and income from other sources is a business activity of the company, a limited company is to act through its employees, whatever may be the nature of income derived by it. It is necessary that the company should have proper staff to enable it to function properly. It has to maintain a registered office for which rent has to be paid for its continued existence. The limited company has to carry on its activities in regard to allotment of shares, transfer of shares and to record proper entries in proper registers, and file returns as required by the statute. It has to discharge its statutory obligations so long as it is in operation whether or not it carries on any business. Failure to comply with the statutory obligation will visit the company and its principal officers and directors with civil and penal consequences. The company has to obtain trade licence, incur general charges, printing and stationery and also to pay directors' fees. It is a statutory requirement that the accounts of the limited company should be audited for which the company has to incur expenditure on audit fees. In our opinion, such expenditure is in connection with and in relation to the earning of income from property and other sources. Reasonableness of such expenditure will depend on the facts of the particular case and it is for the Tribunal to decide whether the expenditure is wholly incurred for the purpose of keeping the company in operation and earning income inasmuch as the concept 'wholly' pertains to the quantum of the money expended. Even if a particular expenditure is unremunerative, such expenditure is none the less a proper deduction if such expenditure is made wholly and exclusively for the purpose of making or earning such income.
9. The Income-tax Officer held that the payment was illusory. The Appellate Assistant Commissioner held that part of the expenses could be allowed as business expenditure.
10. The finding of the Tribunal is that the expenditure was reasonable on the facts of this case and that it was wholly and exclusively laid out for the purpose of business. Although there may be disagreement as to whether the expenditure was for the purpose of business as no contention was raised before the Tribunal that the assessee only derived lease rent which could not be termed as business activity, there cannot be any dispute that it was wholly and exclusively laid out or expended for the purpose of making or earning the income. We are of the view that on the facts of this case, the Tribunal came to a correct conclusion regarding the allowability of the expenditure in question.
11. In the result, we answer the question in this reference as reframed in the affirmative and in favour of the assessee.
12. There will be no order as to costs.
Bhagabati Prosad Banerjee J.
13. I agree.