1989 (4) TMI 12 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of service charges paid to Messrs. Karam Chand Thapar and Bros. (P.) Ltd. u/s 37(1) of the Income-tax Act, 1961.
2. Applicability of section 57(iii) for the expenditure incurred.
3. Whether the expenditure was wholly and exclusively for the purpose of business.

Summary:

Issue 1: Deductibility of Service Charges u/s 37(1)
The assessee claimed service charges of Rs. 29,250 paid to Messrs. Karam Chand Thapar and Bros. (P.) Ltd. for secretarial, liaison, and registrar services. The Income-tax Officer disallowed the claim, deeming the payment illusory. The Appellate Assistant Commissioner allowed Rs. 6,000 but not the full Rs. 27,000 claimed. The Tribunal, however, held that the payment was not unreasonable and allowed Rs. 27,000 for 12 months, noting that section 40B was not applicable and the expenditure was allowable u/s 37.

Issue 2: Applicability of Section 57(iii)
The Tribunal considered whether the expenditure could be allowed if no business was carried on. The Supreme Court's ruling in CIT v. Rajendra Prasad Moody was cited, emphasizing that expenditure can be deductible u/s 57(iii) if laid out wholly and exclusively for making or earning income, regardless of whether income was actually earned.

Issue 3: Expenditure Wholly and Exclusively for Business
The Tribunal found that the services rendered by Messrs. Karam Chand Thapar and Bros. (P.) Ltd. were necessary for the company's operations, including maintaining accounts, banking, taxation, and liaison activities. The Tribunal concluded that the expenditure was wholly and exclusively for business purposes. The High Court agreed, noting that even if the company did not carry on business, it had to maintain its establishment and comply with statutory obligations, making the expenditure necessary and reasonable.

Conclusion:
The High Court reframed the question to focus on whether the expenditure of Rs. 27,000 was allowable in computing the income for the assessment year 1972-73. It concluded affirmatively, in favor of the assessee, and held that the Tribunal's decision to allow the expenditure was correct. There was no order as to costs.