COMMISSIONER OF INCOME TAX Vs. SATHE D R

JUDGEMENT

(1.) THE question referred to us on this reference under s. 66(1) of the Indian IT Act at the instance of the CIT is as follows :

(2.) THE question arises out of the assessment of the assessees for the asst. yr. 1947-48. THE two assessees, viz., D. R. Sathe and N. R. Sathe, who are brothers, were employed by their third brother, G. R. Sathe, in his biscuit and chocolate factory, which was run under the name and style of "Sathe Biscuit and Chocolate Works". D. R. Sathe was a mechanical engineer and N.R. Sathe was a chemist and both of them were looking after the manufacturing side of the biscuit factory. In the asst. yr. 1947-48 the regular salary of D. R. Sathe was Rs. 5,700 for the year and that of N. R. Sathe was Rs. 4,980. During that year, however, a further sum of Rs. 34,382 was paid to each of them as additional remuneration by way of share of profits calculate at four annas share of the profits under an agreement entered into by them with the employer. In the assessment of the employer, G. R. Sathe, for the asst. yr. 1947-48, the entire amounts which were paid to D. R. Sathe and N.R. Sathe by way of remuneration inclusive of the payment of Rs. 34,382 to each of them by way of share of profits were claimed by G. R. Sathe as a deduction under s. 10(2)(xv) of the IT Act. THE ITO took the view that the entire amount so claimed as paid to the two employees by way of remunera- tion could not be allowed as the increased salary granted was quite abnormal and out of all proportion to the services rendered by them. According to him only Rs. 9,000 could be allowed as an expense of salary in respect of each of them. Allowing, therefore, a sum of Rs. 18,000 for the salary of the two brothers, he disallowed the rest of the amount claimed as deduction under s. 10(2)(xv). In the appeal against this order of assessment by the ITO, the AAC allowed salary to each of the two brothers at the rate of Rs. 1,000 per month. He, therefore, allowed a further deduction of Rs. 6,000 and disallowed the rest. In the second appeal to the Tribunal, salary to each of the two brothers was allowed at Rs. 1,500 per month and the rest was disallowed. THE Tribunal observed that they considered the balance of the payment made to the brothers as expenditure incurred not wholly and exclusively for the purpose of the assessee's business.

(3.) AS observed by their Lordships of the Supreme Court in CIT vs. M. K. Kirtikar (1959) 36 ITR 360 (SC) in order to claim exemption under the notification, the three cumulative conditions specified in the said notification had to be fulfilled and the said three conditions were :