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Issues Involved:
1. Applicability of the proviso to Section 13 of the Indian Income-tax Act. 2. Justification of disallowance of salary and allowances under Section 10(2)(x). Detailed Analysis: 1. Applicability of the Proviso to Section 13: The primary issue was whether the proviso to Section 13 of the Indian Income-tax Act was applicable in the absence of a variety-wise stock tally. The Income-tax Officer (ITO) rejected the assessee's books of accounts due to low profits and the absence of a stock register, leading to an addition of Rs. 40,909 for trading deficiency. The Appellate Assistant Commissioner (AAC) reduced this amount but upheld the rejection of the books. The Tribunal also upheld the rejection, citing the absence of a variety-wise stock tally as a reason to attract the proviso to Section 13. Section 13 mandates that income, profits, and gains should be computed according to the method of accounting regularly employed by the assessee unless the ITO finds that the method employed does not properly reflect the income. The court emphasized that the ITO must provide a definite finding that the case falls within the proviso's categories, either by showing that no method of accounting was regularly employed or that the method employed did not properly reflect income. The court referenced several precedents, including Pandit Bros. v. Commissioner of Income-tax and Commissioner of Income-tax v. McMillan & Co., to establish that the ITO's decision must be based on material evidence and not merely on subjective or arbitrary grounds. The court found that the ITO, AAC, and Tribunal did not provide sufficient material evidence to justify the rejection of the assessee's method of accounting. The absence of a stock register and low profits alone were not adequate grounds for invoking the proviso to Section 13. Thus, the court held that the Tribunal was not justified in holding that the proviso to Section 13 was attracted, and the assessment under this proviso could not be sustained. 2. Justification of Disallowance of Salary and Allowances Under Section 10(2)(x): The second issue concerned the disallowance of Rs. 23,000 and Rs. 3,000 out of the salary and allowances paid to the general manager and the manager of the Alleppey office, respectively. The ITO allowed only a portion of the claimed amounts, considering the payments excessive and influenced by personal relationships. The AAC increased the allowable amounts but still disallowed significant portions, deeming them unreasonable. The court noted that the question of the deduction of salaries paid to employees is governed by Section 10(2)(xv), not Section 10(2)(x). Section 10(2)(xv) allows deductions for any expenditure laid out wholly and exclusively for business purposes, whereas Section 10(2)(x) pertains to bonuses and commissions, with specific standards of reasonableness. The court emphasized that the reasonableness of salaries should be judged from a businessman's perspective, considering commercial expediency and not the subjective standards of the Income-tax authorities. The court found no evidence suggesting that the payments were influenced by motives other than business considerations. The AAC and Tribunal did not provide sufficient reasons or material evidence to justify the disallowances based on reasonableness. Therefore, the court held that the disallowance of Rs. 18,000 out of the general manager's salary and Rs. 3,000 out of the manager's salary could not be justified under Section 10(2)(x). However, the disallowance of Rs. 5,000 paid to the general manager as allowances was justified under Section 10(2)(x). Conclusion: The court answered the two questions in favor of the assessee, holding that the proviso to Section 13 was not attracted and the disallowances of salaries were not justified under Section 10(2)(x). The Department was ordered to pay the costs of the assessee, including an advocate's fee of Rs. 200.
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