1949 (3) TMI 28 - HC - Income Tax

Summary

Issues Involved:
1. Validity of deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Disallowance of the sum for the purpose of Excess Profits Tax.
3. Procedure for reference under Section 66(2) of the Indian Income-tax Act, 1922.

Detailed Analysis:

1. Validity of Deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922:
The primary issue was whether the amount paid by an employer to his employees could be considered a valid deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The court had to determine if the expenditure was "laid out or expended wholly and exclusively for the purpose of the business of the assessee."

The assessee employed two individuals, Jamnadas and Purshottamdas, who were initially paid salaries of Rs. 125 and Rs. 111, respectively. On September 1, 1940, an agreement was made to pay each a commission of 20% on the net profits of the branch, resulting in payments of Rs. 6,000 each in the year of account. The Income-tax Officer allowed only Rs. 1,000 for both employees, disallowing the remaining Rs. 11,000. The Tribunal upheld this disallowance, concluding that only Rs. 1,000 was expended wholly and exclusively for the business.

The court agreed with the principle that the employer should determine the remuneration for employees. However, it emphasized that the Income-tax Officer must decide whether the remuneration was wholly and exclusively for the business. The court noted that various factors could be considered, such as the relationship between the employer and employee, the extent of the business, and the specific services rendered. The Tribunal found no evidence that the employees rendered special services justifying the large sum, and thus, the disallowance was upheld.

2. Disallowance of the Sum for the Purpose of Excess Profits Tax:
The second issue was whether the disallowance of the sum for Excess Profits Tax purposes was justifiable. The assessee argued that the disallowance was made under Rule 12 of Schedule I to the Excess Profits Tax Act, which required the consent of the Commissioner of Excess Profits Tax, and such consent was not obtained.

The court clarified that the Excess Profits Tax Act allows the Excess Profits Tax Officer to disallow deductions permissible under the Income-tax Act. However, since the deduction was disallowed under the Income-tax Act itself, there was no need to consider Rule 12 of Schedule I, and thus, no question of obtaining the Commissioner's permission arose.

3. Procedure for Reference under Section 66(2) of the Indian Income-tax Act, 1922:
The third issue concerned the procedural aspect of the reference under Section 66(2). Initially, the Income-tax Tribunal refused to state a case on the assessee's application. The High Court, upon the assessee's request, directed the Tribunal to state a case with reference to questions formulated by the assessee.

The court emphasized that under Section 66(1), the Tribunal should draw up a statement of the case and refer it to the High Court if a question of law arises. If the Tribunal refuses, the assessee or Commissioner can approach the High Court under Section 66(2), and the High Court can require the Tribunal to state the case. The High Court must indicate the questions of law arising from the Tribunal's order. The Tribunal's role is to formulate the questions based on the High Court's indication and state a case germane to those questions. The High Court can then answer, reframe, or modify the questions as necessary.

The court concluded that the proper procedure involves the High Court indicating the questions of law, and the Tribunal formulating the questions for the case. The questions raised in this case were not well-worded, but the court decided to answer questions Nos. 4 and 5 in the negative.

Conclusion:
The court upheld the disallowance of Rs. 11,000 as the payment was not wholly and exclusively for the business. The disallowance for Excess Profits Tax was justified without needing the Commissioner's consent. The procedural aspect clarified that the High Court should indicate the questions of law, and the Tribunal should formulate the questions for the case.