Income-tax---

----Business expenditure---Reference---Salary paid by assessee---Finding that employee had rendered services---Finding of fact---Salary was deductible-- Indian Income Tax Act, 1961, S.37.

The assessee was a firm engaged in the business of distribution and exploitation of motion pictures, production of cine-films, exploitation of talents of film stars, etc. In April, 1971, the assessee entered into an agreement with N and one of the terms of the said agreement was that the assessee had to provide him a secretary, make-up man and a special attendant. In pursuance of this agreement, the assessee appointed R, N's wife, as his secretary and paid her a salary of Rs.1,5,20 per month. Tax was deducted at source and the salary received by her was assessed in her hands. However, the Income-tax Officer was of the opinion that this was a device to divert the income of N. In the assessment of the firm, he disallowed the salary and this was confirmed by the Appellate Assistant Commissioner. However, the Tribunal considering the statements contained in the letter with regard to the services rendered by R to her husband, ultimately came to the conclusion that the assessee had established that R rendered services to N. The Tribunal held that the assessee was entitled to the deduction of the salary: On a reference:

Held, that the Income-tax Department did not doubt the genuineness of the letters, before the Tribunal. The conclusion arrived at by the Tribunal, was on the basis of facts. The assessee was entitled to the deduction of the salary paid to R while computing its income for the assessment years 1973-74, 1974-75 and 1975-76.

C. V. Rajan for the Commissioner.

P.P.S. Janarthana Raja for the Assessee

JUDGMENT

K. A. THANIKKACHALAM; J.---As per the directions given by this Court, the Tribunal referred the following questions for the opinion of this Court under section 256(2) of the Income Tax Act, 1961, for the assessment years 1972-73, 1973-74 to 1975-76, respectively:

T.C. No. 200 of 1982

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to the deduction of Rs.17.000 being the salary paid to Mrs. Regina Nagesh ?

(2) Whether the Appellate Tribunal's view that Mrs. Regina Nagesh did render service to her husband, Sri C. K. Nagesh, as secretary is based on valid and relevant materials and is a reasonable view to take on the facts of the case?"

T. C. Nos. 678 to 680 of 1984:

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal as right in holding that the assessee was entitled to the deduction of Rs.10, 440, Rs.7, 200 and. Rs.3, 600 being the salary paid to Mrs. Regina Nagesh while computing the income of the assessment years 1973-74, 1974-75 and 1975-76?"

The assessee is a partnership firm engaged in the business of distribution and exploitation of motion pictures, production of cine-films, exploitation of talents of film stars and such other business that business that may be suitably felt from time to time. On April 20, 1971, the assessee entered into an agreement with Shri Nagesh and one of the terms of the said agreement was that the assessee had to provide him a secretary, make-up man and a special attendant. In pursuance of this agreement, the assessee appointed Mrs. Regina Nagesh as his secretary and paid her a salary of Rs.1,520 per month. Tax was deducted at source and the salary received by her was assessed in her hands. However, the Income-tax Officer was of the opinion that the firm itself was only a device by which the income of Shri Nagesh was sought to be diverted, among different, persons and that the income shown by the firm was the income of Shri Nagesh himself and it had to be assessed in his hands. Therefore, the Income-tax Officer proceeded to make an assessment on the firm only as a protective measure and in that assessment he held that in the absence of evidence, the amount paid to Mrs. Regina Nagesh had to be added back in computing the income from the business.

On appeal, the appellate Assistant Commissioner confirmed the disallowance on the ground that there was no evidence to establish that Mrs. Regina Nagesh really did some services to Mr. Nagesh in her capacity as secretary.

On further appeal, the Appellate Tribunal taking into consideration the letter, dated January 20,1976 addressed to the Appellate Assistant Commissioner, held that it cannot be said that no services were actually rendered by the secretary to Mr. Nagesh. The Tribunal, therefore, held that there was no case for disallowance of the salary paid to Mrs. Nagesh as an expenditure in computing the total income of the assessee.

Learned standing counsel for the Department submitted that the agreement, dated April 20,1971, is a device to divert income of Mr. Nagesh among different persons. Therefore, the income shown by the firm is, in reality, the income of Nr. Nagesh and hence it has to be assessed in the hands of Mr. Nagesh. It was further submitted that no evidence was produced by the assessee to show whether any actual service was rendered by Mrs. Regina Nagesh as secretary to her husband, Mr. Nagesh. According to learned standing counsel, when the Tribunal pointed out that the authorities below could have examined the secretary, the Tribunal could have remanded the matter for the purpose of verifying the genuineness of the same. Instead of adopting this method, the Tribunal without any corroborative evidence accepted the letter said have been sent by the assessee to the Appellate Assistant Commissioner, while the Appellate Assistant Commissioner himself found that no evidence was produced before him to prove the service rendered by the secretary to Mr. Nagesh. For these reasons, it was submitted that the Tribunal was not correct in deleting the disallowance made by the authorities below. in the matter of payment of salary by the firm to Mrs. Regina Nagesh.

On the other hand, learned counsel for the assessee while supporting the order passed by the Tribunal submitted that there is an agreement to show that the firm should provide a secretary to Mr. Negesh to attend to his needs Accordingly, the Secretary was appointed and salary was paid. The. agreement was produced before the Income-tax Officer. v A letter explaining as to how services were rendered by the Secretary to Mr. Nagesh was also produced before the Tribunal, which was in fact addressed to the Appellate Assistant Commissioner and the genuineness of the letter was not doubted by the Department. The Tribunal relying upon the letter came to the conclusion. that services were really rendered by the Secretary to Mr. Nagesh and therefore, the salary is allowed as deduction. Inasmuch as the agreement and the letter were not doubted, no further evidence is needed to prove that Mrs. Regina Nagesh was appointed as secretary to Mr. Nagesh and she rendered services to Mr. Nagesh for which the salary was paid.

We have heard both learned standing counsel for the Department and learned counsel for the assessee.

The fact remains that the assessee is a partnership firm The assessee entered into an agreement with Mr. Nagesh, dated April 20,1971. According to the said agreement, the firm should provide a secretary to Mr. Nagesh. The firm is doing business in film production, distribution and exploitation of talents of cine stars. Accordingly. the firm appointed Mrs. Regina Nagesh as the secretary and paid her a salary of Rs.1,520 per month. According to the Department, the agreement is only a device to divert the income of Nagesh so as to avoid higher tax liability. But this was not established by the. Department. According to the Department, the assessee has not produced any evidence to show that Regina Nagesh rendered service to Mr. Nagesh. It is no doubt true that the assessee produced the agreement dated April 20,1971, before the Income-tax Officer, and no further evidence was produced to establish that the Secretary rendered any service to Mr. Nagesh. When the matter came up before the Tribunal, the assessee produced a letter, dated January 20,1976, said to have been addressed to the Appellate Assistant Commissioner. But, according to the Appellate Assistant Commissioner, no evidence was produced to substantiate the plea the services were rendered by Mrs. Regina to Mr. Nagesh. However, the Tribunal considering the statements contained in the letter with regard to the services rendered by Mrs. Regina to her husband, ultimately came to the conclusion that the assessee had established -that Mrs. Regina Nagesh rendered services to Mr. Nagesh. The Department never doubted the genuineness of the letter before the Tribunal. The Tribunal pointed out that if there is a doubt in the mind of the department with regard to the services rendered by the Secretary to Mr. Nagesh, the department could have summoned the Secretary, to ascertain the fact whether any service was rendered by her. The fact remains that the agreement, dated April 20, 1971, and the letter, dated January 20, 1976, were not doubted by the Department. In the assessment for the years 1972-73 and 1975-76, the Appellate Assistant Commissioner himself allowed the salary payment to the Secretary by following the earlier order of the Tribunal. In the said order, the Appellate Assistant Commissioner never made any complaint with regard to the letter said to have been addressed to him by the assessee on January 20,1976. The .Tribunal, being the highest. Fact finding authority, came to the conclusion on the basis of the letter, dated January 20, 1976, that services were really rendered by Mrs. Regina Nagesh to Mr. Nagesh. In such circumstances, we consider that no further interference need be made with the fact findings by the Tribunal on this aspect. When the secretary was appointed in pursuance of the agreement and when there is evidence on record to show that services were rendered by Mrs. Regina Nagesh to Mr. Nagesh, there cannot be any impediment for the allowance of the salary payment made by the firm to the secretary. Inasmuch as the conclusion so arrived at by the Tribunal was on the basis of facts and since we have accepted the order to the Tribunal, we answer the questions referred to us in the affirmative and against the Department. No costs.

M.B.A./3266/FCReference answered.