1961 (1) TMI 71 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 6,800 is an admissible expense under Section 10(2)(xv) of the Indian Income-tax Act.
2. Whether the sum of Rs. 6,800 is an admissible expense on accepted principles of commercial accountancy under Section 10(1) of the Indian Income-tax Act.

Detailed Analysis:

1. Admissibility under Section 10(2)(xv):

The assessee, a firm dealing in raw wool and yarn, claimed a deduction of Rs. 6,800 as an expense under Section 10(2)(xv) of the Indian Income-tax Act. The Income-tax Officer and the Appellate Assistant Commissioner regarded the transactions between the assessee and S.B. and Co. as "pseudo transactions," not genuine sales or purchases. They concluded that the Rs. 6,800 represented the cost of acquiring shipping rights, which is not an allowable business expense under Section 10(2)(xv).

The Tribunal, agreeing with the Department, held that the payment was for the acquisition of quota rights, which was not permissible by law. Consequently, the payment was deemed illegal and could not be allowed as an expense under Section 10(2)(xv). The Tribunal relied on the Bombay High Court decision in Commissioner of Income-tax v. Haji Aziz Abdul Sakoor Bros, which held that unlawful expenditures are not deductible under Section 10(2)(xv).

The Tribunal further noted that the transactions were contrived to circumvent the provisions of the Exports (Control) Order, 1954, which mandates that the goods for export must be the property of the licensee at the time of export. The Tribunal concluded that the expenses incurred in contravention of the law could not be considered as laid out wholly and exclusively for the purpose of the business.

2. Admissibility under Section 10(1):

The assessee alternatively claimed that the Rs. 6,800 should be considered in computing profits under the accepted principles of commercial accountancy under Section 10(1) of the Indian Income-tax Act. The Tribunal rejected this claim, stating that any payment of an unlawful nature could not be considered under any provision of Section 10.

The Tribunal observed that if the law as laid down in the Bombay case ([1955] 28 I.T.R. 266 (Bom.)) is correct, then it follows that amounts which could be considered as proper outgoings and set off against gross receipts must be of the same nature as the expenditure falling under Section 10(2)(xv). Therefore, what is not admissible under Section 10(2)(xv) cannot be an admissible outgoing in arriving at the profits within the meaning of Section 10(1).

The Tribunal concluded that expenses directly and proximately connected with an act that is an infringement of the law cannot be allowed as deductions under the income-tax law. The learned counsel for the assessee failed to assail this view either on principle or authority.

Conclusion:

The High Court answered the question referred to it in the negative, holding that the sum of Rs. 6,800 is not an admissible expense either under the provisions of Section 10(2)(xv) of the Indian Income-tax Act or on accepted principles of commercial accountancy under Section 10(1) of the Indian Income-tax Act. The parties were left to bear their own costs in the court.