1. In this reference the two questions which are referred to us under s. 256(1) of the I.T. Act, 1961, are as follows :
"1. Whether, on the facts and in the circumstances of the case, the amount of Rs. 9,000 out of the remuneration of Rs. 18,000 paid to Shri S. A. Patel could be disallowed in view of the provisions of section 40(c) of the Income-tax Act, 1961.
2. Whether, on the facts and in the circumstances of the case, the assessee was entitled to relief under section 84 ?"
2. In order to understand the rival contentions a few facts may be stated :
The assessee is a limited company, manufacturing a popular educational toy called "view-masters". We are concerned in this reference with the assessment year 1063-64, the corresponding provisions year being the calendar year 1962.
3. The managing director of the assessee-company, one S. A. Patel, was paid the total remuneration of Rs. 18,000 by the company. Of this remuneration, the ITO disallowed Rs. 9,000 in the following circumstances. The company was incorporated on September 16, 1960, and initially it was incorporated as a private limited company. 49% of its shares were held by Sawyer's Inc., U.S.A., and the remaining shares were held by Shri Patel and his friends. On March 28, 1961, and, therefore, was deemed to be a subsidiary of a public limited company and the remuneration paid by it to the managing director came to be governed by s. 309 of the Companies Act, 1956. The remuneration of the managing director, S. A. Patel, was Rs. 1,500 per month; he was also drawing a salary of Rs. 750 per month from the connected concern, viz., M/s. patel India (private) Ltd. Necessary reference was made to the Government for sanction of remuneration paid to the managing director, and in reply in this reference, the Company Law Board by its letter dated May 30, 1964, directed that the managing director, S. A. Patel, should be given remuneration at the rate of Rs. 1,500 per month, but subject to the condition that the amount will be reduced by to extent of the remuneration received by him from M/s. Patel India (Private) Ltd., which was the sole selling distributor of the assessee-company. As remuneration at the higher rate, had already been paid to the managing director, the assessee took up the matter again with the Company Law Board, and by its letter dated October 22, 1964, the Company Law Board allowed the assessee-company to waive recovery of the amount of Rs. 28,500 which was excess remuneration paid to the said managing director. For the year 1962- 63 the ITO disallowed the remuneration of Rs. 6,750, being the excess remuneration paid to the said managing director, S. A. Patel, by the assessee-company for the period from March 28, 1961, to the end o f the accounting period. The assessee, thereafter, went in appeal to the AAC, who allowed the full remuneration on the ground that there was no illegality by the Company Law Board. In the meantime, the ITO also completed the assessment of the assessee for the assessment year 1963-64, and in this year also, following his earlier order, he disallowed the amount of Rs. 9,000 being the excess as worked out between the remuneration actually paid and the remuneration which could be paid in accordance with the permission granted by the company Law Board by its letter dated May 30, 1964. When the matter was carried in appeal to the AAC, he confirmed the disallowance for the assessment year on the ground that payment to the extent of Rs. 9,000 was not justified in the light of the legitimate needs of the company, services rendered by S. A. Patel and the benefit accruing through those services to the company. The reasons given by the AAC are indicated in para. 2 of his order, which para., has been reproduced in para. 4 of the statement of case. One of the factors which seems to have weighed with the AAC was that the managing director, S. A. Patel, was still concerned with M/s. Patel India (Private) Ltd., as a director and as such he was looking after the purchases from foreign countries of photographic goods and cine raw materials. It was found by the AAC that there was no reduction in his responsibilities and duties towards M/s. Patel India (Private) Ltd. The AAC considered the subsequent permission of the company Law Board given to the assessee-company to waive the excess remuneration as irrelevant and not germane to the matter under consideration.
4. The assessee, thereafter, carried the matter to the Income-tax Appellate Tribunal, were it was urged on its behalf that the managing director was a well qualified person, that he was a graduate in industrial engineering and business administration, that he received his training at the University of Michigan, after which he had received practical training in the factories of Sawyer's Inc. of Portland, U.S.A., and Geavart Limited of U.S.A. It was pointed out that a new item of manufacture was started by the assessee-company under the supervision and control of the managing director, and for all these reasons the remuneration actually paid to the managing director was commercially justified. On behalf of the department the arguments which found favour with the ITO and the AAC were repeated. The Tribunal upheld the contentions of the company and allowed its appeal. It considered the technical qualifications of the managing director and the new activities undertaken by the company. It was of the view that once the correct position was realised, the remuneration demanded by the managing director and paid to him by the assessee-company could not be said to be unjustified either by reference to the needs of the company or by reference to the services rendered by the managing director to the company or by the benefit accruing to the assessee-company as a result of those services. In its view, therefore, the entire remuneration paid was on account of commercial considerations and the disallowance made by the ITO and sustained by the AAC was not justified. It is this decision of the Tribunal which the Commissioner complains of in this reference and which is involved in question No. 1 referred to above.
5. Mr. Joshi drew our attention to the provisions contained in s. 40(c) of the I.T. Act, 1961, and submitted that the ITO and the AAC were right in the view that they took that the portion of the remuneration disallowed was excessive or unreasonable having regard to the legitimate business needs of the company. We find that the Tribunal has considered the several pertinent aspects in its well-reasoned order and has come to a contrary conclusion. Unless that conclusion is totally unwarranted or based on irrelevant material or considerations, the same should be left undisturbed. There is no warrant for characterising the conclusion of the Tribunal as improper or bases on irrelevant material or irrelevant considerations and the view taken by the Tribunal that the remuneration was not excessive or unreasonable in the circumstances of the case appears to be the proper view. Accordingly, question No. 1 will be required to be answered in favour of the assessee.
6. This brings us to a consideration of the two aspects which are involved in question No. 2. The assessee-company had claimed relief under s. 84 for the assessment year in question. According to this section, the assessee- company was entitled to exemption from income-tax to the extent of 60% of the capital employed in the new industrial undertaking provided it satisfied certain conditions. Two of these conditions are material for our purposes. The first of these was that the undertaking should not have been formed by the transfer to a new business of a building, machinery or plant previously used for any purpose. This requirement is provided for in s. 84(2)(ii). The other condition which is required to be satisfied is that the industrial undertaking, since it was one which manufactures or produces articles, should employ ten or more workers if the manufacturing process was carried out with the aid of power.
7. Now, the assessee-company had imported machinery valued at Rs. 1,80,000. Prior to the commencement of the total manufacture of "view masters" in India, viz., of both the outer shell (of the implement) and the photographic material (reels), the sister concern of the assessee, viz., Patel India (Private) Ltd., was, manufacturing the moulds for the outer shell (case) for which purpose it had imported worth Rs. 46,272. The assessee-company had taken on hire the moulding machines from M/s. Patel India (Private) Ltd., and it had agreed to pay hire charges to M/s. Patel India (Private) Ltd., for the user of those moulding machines. The ITO took the view that the machinery used in the manufacture of "view masters" was not wholly owned by the assessee-company but was partially the property of its sister concern, viz., M/s. Patel India (Private) Ltd., which machinery the assessee had taken on hire. Similarly, he found that the building taken as factory and the office premises also belonged to the said sister concern. The ITO also found that the assessee did not employ ten persons or more in its manufacturing activity. He scrutinised the wage register and upon such scrutiny found that only seven workers were employed in the business. There was another person who was working as labour supervisor. According to the ITO, his salary could not be considered to be pertaining to the manufacturing process. The ITO thus found that only seven persons were regularly employed who were actively engaged in the manufacturing activity. On both the grounds, therefore, the ITO held that two conditions to be found is s. 84(2)(ii) and s. 84(2)(iv) respectively were not satisfied and, therefore, the assessee was held disentitled to the benefit of s. 84.
8. The matter was carried in appeal to the AAC. The AAC upheld the findings of the ITO on both the counts. He held in the first place that the condition imposes by s. 84(2)(ii) had not been fulfilled. As far as the condition in addition to the eight regular employees the assessee-company employed casual labour as and when required and on an average three workers were employed. The assessee-company submitted that the three casual workers should also be taken into account which would raise to eleven the total number of workers employed by the appellant. The AAC dealt with this contention of the assessee in the following words :
"The average of three workers employed on casual basis has, however, been determined by the appellant on the assumption that the casual workers are employed for a month as a whole even when they are number of workers employed on actual basis is determined with reference to the actual number of days for which they are employed, it was conceded, the number of workers employed might be less than ten."
9. According to the AAC, therefore, even if the casual workers were considered, the assessee-company could not be said to have fulfilled the condition prescribed by s. 84(2)(iv). He confirmed, therefore, the finding of the ITO that relief under s. 84 and s. 101 was not warranted in the case of the assessee.
10. The assessee carried the matter in appeal to the Tribunal. As far as the requirement of s. 84(2)(ii) was concerned, the Tribunal found that the proportion of the machinery transferred to the assessee-company by M/s. Patel India (Private) Ltd. (actually taken on hire by the assessee from its sister concern) formed very small fraction of the complex of machinery utilised b y the assessee-company for its undertaking. Bearing that aspect in mind, the Tribunal opined that the machinery obtained from M/s. Patel India (Private) Ltd., could not be said to have contributed to the formation of the new undertaking. The Tribunal was of the view, therefore, that the assessee could be said to have satisfied the condition imposes by s. 84(2)(ii).
11. Mr. Joshi very fairly pointed out that this aspect has been considered in two decisions of this High Court, viz., CIT v. Asbestos, Magnesia & Friction Materials Ltd.  106 ITR 286 and CIT v. Kopran Chemical Co. Ltd.  112 ITR 893, and in view of these decisions, which we are required to follow, it would not be possible to urge as far as this court was concerned that the view taken by the Tribunal as far as s. 84(2)(ii) was concerned was based on any improper construction or application of the statutory provisions. He, however, submitted that the view taken by the Tribunal on the satisfaction by the assessee-company of the condition prescribed by s. 84(2)(iv) was totally improper, and he submitted that the view taken by the ITO and subsequently confirmed by the AAC was the proper view of these provisions.
12. We have already set out the submissions made on behalf of the assessee and view of the AAC on these submissions as far as the requirement contained in s. 84(2)(iv) was concerned. Before the Tribunal, the difference in the language employed in s. 84(2)(iv) and s. 80H was pointed out and it was submitted that it was sufficient if ten or more workers have been employed be the new undertaking some time in the course of the year. The Tribunal accepted the construction on the statutory provision put forward on behalf of the assessee and since it was not in dispute that for some days in the assessment year ten workers were employed, it held that the assessee could not be said to be disqualified on the ground that it had not carried out the requirement of or fulfilled the condition prescribed by s. 84(2)(iv). Mr. Joshi submitted that this conclusion of the Tribunal was entirely improper and that it was not sufficient that on one or a few days in the assessment year the assessee can employ ten or more workers and qualify for the relief under s. 84. According to his submission, it had to be shown by the assessee-company that it had a normal complement of ten or more employees engaged in its manufacturing process throughout the period for which relief under s. 84 was claimed although he fairly conceded that the assessee may not be disqualified from obtaining such relief if for some occasional short period the number fell below the number prescribed by s. 84(2)(iv). Mir. Jagtiani, on behalf of the assessee, strongly supported the conclusion of the Tribunal and drew our attention to the marked difference in the language of s. 84(2)(iv) as compared with the phraseology employed in ss. 80H(2)(iv) and 80H(2)(v). Our attention was also drawn to the phraseology employed in the second proviso to s. 37(4). It was submitted that in s. 80H and in the second proviso to s. 37(4) the legislature had deliberately used the words "throughout the previous year" and absence of similar language in s. 84(2)(iv) must be regarded as intentional and deliberate and the language of s. 84(2)(iv) clearly supported the interpretation put thereon by the Tribunal, viz., that it was sufficient if for some days or a few days assessee-company had employed ten or more workers. For the purpose of understanding the rival arguments it is necessary to set out the statutory provisions under consideration.
13. Section 84(2)(iv) provides as follow :
"84. Income of newly established industrial undertakings or hotels -
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :-
(iv) in a case where the industrial undertaking manufactures of produces articles it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.'
14. The words which we are required to consider and construe are underlined.
15. In view of the arguments urged at the bar on behalf of the assessee, we may also draw attention to the language employed in s. 80H. It will b e sufficient, however, to extract the provisions contained in s. 80H(2)(iv) only as there is a similarity between the language employed in ss. 80(2)(iv) and 80H(2)(v). Section 80H(2)(iv) reads as follows :
"80H. Deduction in case of new industrial undertakings employing displaced persons. etc. - (1).
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :-
(iv) it employs, on every working day throughout the previous year, forty or more workers in a manufacturing process (whether carried on with or without the aid of power)."
16. We may now go back to the provisions contained in s. 37(4) ; these may be set out :
"37. (4) Notwithstanding anything contained in sub-section (1) or sub-section (3) -
(i) no allowance shall be made in respect of any expenditure incurred by the assessee after the February 28, 1970, on the maintenance of any residential accommodation in the nature of a guest house (such residential accommodation being hereafter in this sub-section referred to as 'guest house')
(ii) in relation to the assessment year commencing on the April 1, 1971, or any subsequent assessment year, no allowance shall be made in respect of depreciation of any building uses as a guest house or depreciation of any assets in a guest house;......"
17. The material portion of the second proviso to s. 37(4) reads as follows :
"Provided further that nothing in this sub-section shall apply in relation to any guest house maintained as a holiday home if such guest house -
(a) is maintained by an assessee who has throughout the previous year employed not less than one hundred whole-time employees in a business or profession carried on by him;......"
18. It is true that in the second proviso to s. 37(4) and in s. 80H(2)(iv) and (v) the legislature has specifically employed the expression "throughout the previous year". On the other hand, in s. 84(2)(iv) there is no reference to the year or employment throughout the year, but the requirement postulated is that the industrial undertaking employs ten or more workers in a manufacturing process.
19. Mrs. Jagtiani appearing on behalf of the assessee also drew our attention to s. 25A of the Industrial Disputes Act, 1947, and to the definition of "factory" to be found in s. 2(m) of the Factories Act, 1948. Section 25A of the Industrial Disputes Act, 1947, speaks of an average of fifty workmen to be employed in an industrial establishment in a calendar month. The definition of "factory" under the Factories Act provides for certain premises being considered as a factory when the number of workmen on any day of the preceding twelve months exceeds ten or twenty, as the case may be (depending upon whether power is used or not). However, as far as the latter provisions, viz., the Industrial Disputes Act and the Factories Act are concerned, there is specific phraseology utilised which is absent in the statutory provision we are required to consider, and, hence, these two enactments would appear to be almost of no assistance to us. Under the Factories Act, if the number of workmen exceeds the prescribed number even for one single day, the premises are required to consider, as a factory. Similarly, under the Industrial Disputes Act, s. 25A permits a method of calculating the number of workmen by an averaging process. It would not be fair not proper to read any such provision in s. 84(2)(iv). We find that even the adoption of the principle or method of averaging, which the ITO found attractive, appears to be unwarranted.
20. We have the case here of a fairly simple and straightforward language of the statutory provision which requires the following question to be posed whilst considering the claim of the assessee to relief under s. 84. In the case of such an assessee, who claims for relief under s. 84, one of the conditions is that it must have employed ten or more workers in its manufacturing process. Now, the industrial undertaking in respect of which relief is claimed may have functioned for the whole of the assessment year or for a part of the assessment year. But the question which has to be posed and the condition which has to be satisfied by such assessee is : Whether during the period for which the relief is claimed by it as a new industrial undertaking has it employed ten or more workers in its manufacturing process (which is the process of the undertaking in respect of which relief is claimed as a new undertaking) ? Can the element of continuity and of permanence embodied and visualised in the verb "employs" be satisfied if on a stray occasion, or on a few days during that period the quota of employees engaged in the manufacturing process is ten or more ? The condition appears to us to be imposed to enable the assessee who establish new undertaking to get relief provided they satisfy certain requirements, and the specific requirement is aimed at making a small dent in the huge army of unemployed persons which exists in our country. The requirement then is that the assessee which has established a new industrial undertaking must employ ten persons or more in the manufacturing process. It appears to us that the view taken by the Tribunal that it is sufficient that the assessee employs such number of persons for some days in the assessment year under consideration, is too facile a view and one which cannot be easily accepted. It is true that the words "throughout the year" which are employed in s. 80H and in the second proviso to s. 37(4) are absent in s. 84(2)(iv) but from th non-user of such language the conclusion which the Tribunal has indicated would not appear to us to be warranted. It is possible to conceive of a number of different situations. In a given case, the number of workers employed in the manufacturing process may be taken or more on just one or a few days only. There may be another case in which the number of workers engaged in the manufacturing process is ten or more substantially throughout the period for which relief is claimed. In these two cases, it is fairly easy to determine whether or not the assessee is entitled to relief under s. 84 (provided other requirements are satisfied). In the former case, it is clear that the condition prescribed by s. 84(2)(iv) has not been complied with and the assessee must be denied relief; in the latter case, however, in the absence of the words "throughout the year" the assessee must be deemed to have substantially complied with the requirement of s. 84(2)(iv) and cannot be denied relied merely because on a few occasions in the relevant being considered the quota of workers employed in the manufacturing process falls below ten. In between these two cases, however, there may exist several different situations and whether or not the condition can be said to have been complied with or violated would depend upon various circumstances which may be indicated. First and foremost consideration will have to be afforded to the number of days on which the quota of workers employed in the manufacturing process is ten or more. If on a fair appraisal it could be said that the assessee employed the prescribed number of workers sub- stantially throughout the period for which relief is claimed, then the condition prescribed in s. 84(2)(iv) must be held to have been complied with. There may be a borderline case involving some difficulty. But merely because of such difficulty it is not possible to subscribe to the view which found favour with the Tribunal that even if ten workers or more were employed for some days or a few days (whatever be the precise meaning of this phrase), it was sufficient compliance with s. 84(2)(iv). What has to be emphasised is that the assessee must have substantially complied with this condition during the period for which relief is claimed and not complied with it only for one or a few days or some days only. It appears to us that as far as compliance by the assessee with the condition prescribed in s. 84(2)(iv) was concerned, the Tribunal found in favour of the assessee on the basis of the wrong test it evolved and the claim of the assessee, as far as this head is concerned, will be required to be considered on the basis of what we have indicated earlier in this judgment.
21. It may be pointed out as and by way of clarification that the phraseology employed in s. 84(2)(iv) is clear, viz., that it is the number of workers employed in the manufacturing process alone which is required to be considered; and if in the new undertaking there is a workman employed but who cannot be said to be concerned with the manufacturing process, he will b e required to be ignored from consideration for satisfying the requirement prescribed by s. 84(2)(iv). It appears to be the case of the assessee that throughout the period it had seven regular workers engaged in the manufacturing process and on some occasions three or more casual workers, depending upon their requirements. An argument was advanced at the bar that averaging should be done. We find no warrant in the provision under consideration for adoption of any process of averaging. An example would make the position clear. Suppose a period of seven days is under consideration for adoption of any process of averaging. An example would make the position clear. Suppose a period of seven days is under consideration, and on the first three of the seven days there are twelve worker employed in the manufacturing process and in the last four of the seven days only nine workers are employed. If the process of averaging was permissible, the conclusion would be that an average of more than ten workers have been employed throughout the seven days whereas ten or more workers were actually employed on only three out of the seven days. This is not the proper manner of applying the provision. The correct view for the period of seven days would be to hold that the condition has been complied with for the first three days only and not complied with for the remaining four days.
22. An argument was advances at the bar which may be indicated with our view thereon to repel such arguments being advanced before the Tribunal. Thus was that on certain days the assessee was not able to employ the three casual labourers who were required but not available on the day. It has not been prescribed anywhere that a particular undertaking employs regular and casual labourers in a particular ratio or quota. If a particular manufacturing concern does not wish to employ on a regular basis ten or more workers, then, in our opinion, it must take the risk of violating this condition on such days as casual labourers are not available to make up the prescribed number. It may be pointed out further at this juncture that the provisions talk of employment of workers and not of their actual working. It may be that a particular employer had ten or more workers on his muster roll, a few of whom may not report for work on a particular day. This is not the case of the assessee before us, and we are not required to consider any such case and the question whether such employer can be said to have satisfied the requirement prescribed in s. 84(2)(iv) does not arise in this reference.
23. To sum up :
(1) Under s. 84(2)(iv) it is not required that the new undertaking has employed ten or more workers throughout the entire period for which relief is claimed under s. 84.
(2) This, however, does not mean that it is sufficient if ten or more workers have been employed for a few or some of the days of this period. A fair reading of the provisions would require that in order to qualify for relief under s. 84 and satisfy the requirement under s. 84(2)(iv) the undertaking must have employed ten or more workers substantially during the period for which relief is claimed. This is essentially a question of arriving at a proper conclusion form the facts ascertained and there can be no hard and fast rule whether this requirement is satisfied if ten workers or more are employed for 50 per cent. of this period or 66 per cent. of this period or 75 per cent. of this period.
(3) It is only the workers employed in connection with the manufacturing process that would be required to be considered.
(4) Section 84 uses the phrase "employed", and if, therefore, the normal complement of workers regularly employed is ten or more throughout the period the undertaking can be said to have satisfied the requirement.
(5) The undertaking is not required to have ten or more regular workers and it may be said to have satisfied that requirement if the aggregate actual number of workers engaged in the manufacturing process, both regular and normal, is ten is number. However, where the undertaking employs less than ten regular workers, it cannot be heard to say that on any particular day it wanted to employ additional casual workers to enhance the figure to ten or more, but that it could not do so by reason of non-avilability of casual labourers. If it chooses to have less than ten regular workers on its muster roll, it runs the risk of not satisfying the requirement on such days on which the necessary number of casual workers is not available.
24. In our opinion, the second question will be required to be answered bearing in mind these considerations. We agree with the Tribunal that the condition prescribed by s. 84(2)(ii) has been complied with. The Tribunal, however, will be required to reconsider the position in connection with the compliance or nor-complionce by the assessee of the provisions of s. 84(2)(iv).
25. Accordingly, the questions referred to us are answered as follows :
Question No. 1. - In the negative and in favour of the assessee.
Question No. 2. - In the view that we have taken, we are of opinion that the assessee was not disentitled to relief under s. 84 on the ground that the condition prescribed by s. 84(2)(ii) had not been complied with. However, as far as the second condition which was considered by the Tribunal is concerned, viz., that contained in s. 84(2)(iv), we are of the opinion that the Tribunal has not applied the proper tests and that the test applied and the conclusion arrived at on the basis of such improper test applied by the Tribunal, therefore, will be required to be indicated as incorrect as far as s. 84(2)(iv) is concerned. The Tribunal will consider the availability of relief under s. 84 on the basis of the proper approach which we have indicated earlier in this judgment.
26. The parties are directed to bear their own costs of the reference.