1. MUHAMMAD HALEEM ACTG. C. J: This order will govern Civil Appeals Nos. 24 add 25 of 1972 which arise from the common order of the former High Court of West Pakistan, Lahore; dated 9th of March, 1970, by which Civil Miscellaneous Applications Nos. 967 and 968 of 1970 were dismissed.
2. Leave to appeal in both the appeals .Was granted to consider the common question as to whether disallowance of Rs. 18,000, incurred by the assessee/ appellant for payment - of salary to S. M. Ilyas, a Director, was permissible under the provisions of section 10(1)(xvi) of the Income-tax Act.
3. On the analogy of a similar question, decided by this Court in a case reported in PLD 1969 SC 70, this question arose as under; The appellant/assessee is a private limited company and carries on the business of a stockist and distributor of locally manufactured goods of other concerns and as commission agent. It has five Directors, namely, Sh. Muhammad llyas, Sh. Muhammad Ilmas, Sh. Muhammad Riaz, Sh.
4. Muhammad Fayyaz and Sh. Muhammad Ikhlas. Sh. Muhammad Ilyas is the father of the other four Directors and also the Chairman of the Board of Directors. In the resolution, appointing them as such, their remuneration was fixed as under :- Sh. Muhammad IlyasRs. 1,500 p.m.
5. Sh. Muhammad IlmasRs. 2,000 p.m.
6. Sh. Muhammad RiazRs. 2,000 p.m.
7. Sh. Muhammad FayyazRs 2,000 p.m.
8. Before the incorporation as a private limited company, it carried on business as a partnership firm in which Sh. Muhammad Ilyas was not a partner but acted as an Adviser to the firm without any specific duty. In the returns submitted by the firm before its incorporation in 1959, the identical allowance of Sh. Muhammad Ilyas was disallowed in the previous years which was not contested further.
9. The remuneration now was in respect of the duties performed as a Director such as signing the vouchers of expenditure, co-ordinating the functions of the department of the company, contacting the Principals of the local manufacturers in connection with the business of the company and presiding over the meetings of the Directors.
10. In the returns submitted for the charge years 1961-62 and 1962-63, the assessee claimed exemption of the remuneration of these Directors for each year under section 10(2)(xvi) of the 'Income-tax Act, but the Income-tax Officer, by separate orders disallowed the exemption claimed in respect of Sh. Muhammad Ilyas while in regard to the other Directors, the exemption was granted. In the order for the charge year 1961-62, the Income-tax Officer held, after noticing the duties purported to be carried out by Sh. Muhammad Ilyas that they were of no avail as similar claims were disallowed in the case of the firm in the preceding years for the reason that the exemption was claimed not for business consideration but to reduce the tax liability. The appellant next filed an appeal before the Income-tax Appellate Tribunal, Lahore, but did not succeed as it was dismissed on 4th of December, 1968.
11. While upholding the judgment of the Income-tax Officer, the Tribunal held that the old arrangements had been repeated duly backed by legal sanction in the shape of Articles of Association and resolution. Nevertheless, as no contribution 'of Sh. Muhammad Ilyas was noticeable from the mere signing of a few vouchers, there was no business or commercial expediency for associating Sh. Muhammad Ilyas with the conduct of the business. Hence no question of payment of remuneration to him arose. It was just an arrangement to reduce the tax liability which could not be equated with the genuine expense incurred for carrying on the business of the appellant.
12. The appellant then moved the Income-tax Appellate Tribunal, Lahore, under section 66(I) of the Income-tax Act with the prayer- to refer the following questions of law said to have been arisen from the .Consolidated order of the Tribunal in I. T. As. No. 1195 of 1961-62 and 197 of 1965-66 1961-62.
13. "Whether on the facts and in the circumstances of the case, the disallowance of Rs. 18,000 incurred by the assessec for payment of salary to Mr. S. M. Ilyas, Director, is permissible under the provisions of section 10(2)(xvd) of the Income-tax Act ?"
14. 1962-63 "Whether on the facts and in the circumstances of the case, the dis--allowance of Rs. 18,000 incurred by the assessee for payment of salary to Mr. S. M. Ilyas, Director, is permissible under the provisions of section 10(2j(.Xvi) of the Income-tax Act'?
15. Whether on the facts and in the circumstances of the case, the dis--allowance of Rs. 3,300 paid by the assessee as conveyance allowance to Mr. S. M. Ilyas, Director, is permissible under the provisions of section 10(2)(xvi) of the Income-tax Act ?"
16. It was urged before the Tribunal that the payment of remuneration for both the charge years was not in dispute and related to his functions such as of signing vouchers, presiding over the meetings of the Directors, performing such other functions as were assigned to him, giving advices for t-he smooth running of the business, contacting the Principals of local manufacturers for soliciting business and that as the company had a distinct identity, the previous disallowance of the remuneration had no relevance. The Depart--mental Representative, however, took the stand that the previous arrangement continued and only legal semblance was given. To the whole arrangements with the sole object of avoiding the higher incidence of taxation. The Income-tax Appellate Tribunal, after noticing its earlier conclusion re-affirmed it and held that its finding was one of fact from which no question of law arose. Accordingly, the Income-tax Appellate Tribunal refused to refer the questions to the High Court by order dated 15th of July, 1969.
17. The appellant, thereupon, filed the aforementioned applications in the High Court under section 66(2) of the Income-tax Act praying that the Income--tax Appellate Tribunal may be directed to state and refer the questions to the High Court for its opinion but failed as- the High Court dismissed these applications. The High Court held that no doubt an assessee was entitled to arrange his affairs in accordance with law in such a manner as to avoid or reduce the burden of income-tax but in the instant case the arrangement made was not genuine which was a distinct finding of fact. As to the previous disallowance of the remuneration, the High Court observed :- .
18. The facts of the previous proceedings, to which the reference has been made by the Tribunal are undeniable and the conclusion drawn in the changed circumstances leaves no doubt that it is a factual conclusion, which could be drawn from the record ofthis case."
19. Sh. Ghias Muhammad, learned counsel for the appellant .In both the appeals, contended that the finding of the Tribunal, that the arrangement made for the payment of remuneration was a device to avoid the incidence of taxation, stood vitiated on the grounds: firstly, that payment to him was not disputed ; secondly, that there was no room for any comparison of his functions as a Director with that of an Adviser of a firm, as the company had a distinct legal status and for this reason to disallow the said remuneration for each year ; and thirdly, that the Tribunal failed to apply its mind to the functions performed by Sh. Muhammad Ilyas in regard to which proof was furnished in the shape of vouchers. Accordingly, it was a case of an erroneous conclusion from which a question of law arose as was held in Messrs Ata Hossain Khan Ltd. v. Commissioner of Income-tax, East Pakistan, Dacca PLD 1969 SC 517In this case the Appellate Assistant Commissioner had reduced the allowance and the question arose as to whether the Income--tax Department could determine the reasonableness of the amount fixed and paid by the company to the Managing Director. It was held that the Income-tax Department was precluded from applying some subjective standard of reasonableness but if it was found in evidence that the expenditure was not incurred on grounds of commercial expediency but for a consideration other than that, it was open to the Income-tax Officer to disallow such an expenditure. Further, the onus of showing that the amount was spent bona fide for such purpose is upon the assessee.
20. The High Court, while upholding the conclusion of the Tribunal, held :- In the present case, the finding of the Income-tax tribunal is that the arrangement, which has been made is not genuine. This is a finding of fact. An attempt was made on behalf of the present applicant to meet this conclusion of the Tribunal at the time of the hearing of the case by the Tribunal by emphasising the distinc--tion between the business of a Firm and that of Private Limited Company by pointing out that the personality of a Private Limited Company cannot be identified with that of its members whereas a Firm has no personality apart from that of its members. The Income tax Tribunal has rightly pointed out that this being a Private Limited Company, the interest of the Company is not in reality and according to the generally accepted concept different from the interest of its members and Directors. The emphasis placed by the counsel on the distinction between the finding that was given at the time of the existence of the concern as a firm and after its legal status as a Private Limited Company was created, does not impress us as of much value, because the facts of the case in both the circumstances were before the Income-tax Officer as well as the Tribunal."
21. The Tribunal had applied its mind on evidence . Such as the few signed business vouchers and it was of the opinion that it showed no noticeable contribution to the conduct of the business but it was a legal device to add force to the claim for deduction of the remuneration. There was no other tangible evidence before the Tribunal in regard to -the other functions performed by Sh.
22. Muhammad Ilyas of which the onus was on the appellant to establish. The Tribunal, accordingly, reached the conclusion that there was no business or commercial expediency in associating Sh.
23. Muhammad Ilyas with the conduct of the business. In other words, the payment made to him was thus held not to be bona fide. This finding the Tribunal could give on a consideration of the material placed before it which is one of fact to which no exception can be taken. Therefore, it could not be said that there was exercise of any subjective consideration while disallowing the remuneration in disregard of the evidence to attract the dictum of this Court in the case cited above.
24. The net conclusion thus is that no question of law arises from this finding of fact. There is, therefore, no merit in these appeals which are dismissed with costs.