1951 (12) TMI 14 - HC - Income Tax

Summary

Issues:
1. Legitimacy of a payment of Rs. 10,000 to a former director as a legitimate business expense.

Analysis:
The case involved a reference under Section 66(1) of the Indian Income-tax Act regarding the legitimacy of a payment of Rs. 10,000 to a former director of a private registered company. The company had gone into voluntary liquidation, and a new public company took over its business. The payment in question was approved by the Board of Directors as a recognition of past services. The Income-tax Officer disallowed this amount as a deduction, leading to the question of whether it was a legitimate business expense. The Tribunal considered three key factors: the absence of obligation to make such payments, no prior practice of such payments, and the company's decision to liquidate. Based on these factors, the Tribunal concluded that the payment was not wholly and exclusively for the business purposes of the company.

The assessee argued that the payment should be considered under Section 10(2)(x) of the Income-tax Act, which allows deductions for bonus or commission to employees if reasonable. However, as the payment was not claimed as such, the Tribunal did not assess its reasonableness. The assessee relied on clause (xv) of Section 10(2) in the application for reference, emphasizing that the payment was made when the company decided to close down, and the recipient had retired earlier. The court noted that the payment must be wholly and exclusively for business purposes, a factual determination. While the assessee contended that exceptional service justifies gratuity payments, the court found that without further justification, the payment made years after the service did not qualify as a legitimate business expense.

Ultimately, the court held that the payment of Rs. 10,000 to the former director was not proven to be a legitimate business expense as it was not wholly and exclusively for the business purposes of the assessee. The opposite party was awarded costs amounting to Rs. 200. The reference was answered accordingly.