1962 (5) TMI 35 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 37,733 paid to the general manager, Shri J.P. Vaish, was an amount laid out or expended wholly and exclusively for the purpose of the business of the assessee.

Detailed Analysis:

1. Background and Facts:
The assessee, a registered firm, leased a woollen mill and appointed Shri J.P. Vaish as the general manager with a remuneration structure involving a fixed salary, commission on net profits, car allowance, and medical expenses. The commission was calculated on net profits after deducting only the minimum lease amount of Rs. 24,000, even when the profits exceeded Rs. 1,00,000.

2. Income-Tax Officer's Findings:
The Income-tax Officer (ITO) questioned the allowability of the commission under section 10(2). He found that:
- The appointment was made by the father of Shri J.P. Vaish, raising concerns about business considerations.
- Shri Vaish lacked significant qualifications and experience.
- The remuneration was not solely actuated by business considerations.
- The commission rate of 25% was excessively high without a maximum limit.
- The ITO allowed only Rs. 5,000 as commission, disallowing Rs. 70,465.

3. Appellate Assistant Commissioner's Decision:
The Appellate Assistant Commissioner (AAC) did not fully agree with the ITO but also did not find the entire commission justified:
- He noted the accounts were signed by proprietors and Mr. Vaish was not related to them.
- He found the commission rate high and not in line with business practices.
- He allowed half of the commission amounting to Rs. 37,732.

4. Income-Tax Appellate Tribunal's Judgment:
The Tribunal considered the commission under section 10(2)(xv):
- It emphasized that the existence of an agreement and payment does not exclude the ITO's discretion to determine if the payment was wholly and exclusively for business purposes.
- It compared the remuneration of the general manager with that of a director post-conversion of the firm into a company, concluding that Rs. 24,000 was reasonable business expenditure.
- The Tribunal upheld the disallowance of Rs. 37,732.

5. Legal Arguments and Interpretation:
The main argument was whether the commission should be considered under section 10(2)(x) or section 10(2)(xv):
- The assessee argued that contractual payments should be considered under section 10(2)(xv).
- The court found that both sections could apply, but the specific provisions of section 10(2)(x) would take precedence over the general provisions of section 10(2)(xv).
- The court noted that at the material time, section 10(2)(xv) did not exclude allowances described in other clauses, allowing for overlapping considerations.

6. Burden of Proof:
The burden of proof was on the assessee to establish that the expenditure was wholly and exclusively for business purposes:
- The court referenced several cases emphasizing that the assessee must justify the expenditure.
- The ITO and Tribunal found the materials provided by the assessee insufficient to prove the entire commission was for business purposes.

7. Conclusion:
The court concluded that the commission paid to Shri J.P. Vaish was not wholly and exclusively for business purposes:
- The Tribunal's finding was based on reasonable business standards and practices.
- The question referred to the court was answered in the negative, against the assessee.
- The department was entitled to costs assessed at Rs. 200.

Separate Judgments:
- M.C. Desai, CJ, concurred with the judgment, emphasizing that clause (x) of section 10(2) specifically governs commissions and takes precedence over the general clause (xv). He noted that the reasonableness of the commission was a key factor in determining its allowability.