1962 (8) TMI 112 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of the sum of Rs. 50,000 paid to Dr. Jariwala under a compromise agreement in determining the application of Section 23A of the Indian Income-tax Act.
2. Nature of the expenditure: Whether the payment was of a capital nature or revenue nature.
3. Connection of the expenditure with the business of the assessee company.
4. Interpretation and application of Section 23A by the Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal.

Detailed Analysis:

1. Deductibility of the Sum of Rs. 50,000:
The primary issue was whether the payment of Rs. 50,000 to Dr. Jariwala as per a compromise agreement should be deducted when considering the application of Section 23A. The assessee company argued that this payment should be accounted for in determining the smallness of profits available for dividend distribution. The Tribunal agreed with the assessee, stating, "Section 23A is a highly technical anti-avoidance device," and emphasized that commercial profits should be considered for the purposes of Section 23A, not just the assessable income.

2. Nature of the Expenditure:
The Appellate Assistant Commissioner disallowed the deduction of Rs. 50,000 on the grounds that it was a capital expenditure. However, the Tribunal disagreed, stating, "No asset of enduring nature has come in and we are of the opinion that the payment has been properly charged to revenue." The Tribunal concluded that the payment was not of a capital nature but was a genuine business expenditure.

3. Connection with the Business:
Mr. Joshi, representing the revenue, argued that the payment had no connection with the business of the assessee since the managing agency was terminated in 1947, and the payment was made in 1951. The Tribunal, however, found that the payment was made "to get rid of a disturbing element," indicating a connection with the business. The Tribunal's finding was that the payment was "an actual and genuine payment made," suggesting it was connected with the business operations.

4. Interpretation and Application of Section 23A:
The Tribunal interpreted Section 23A to require consideration of commercial profits rather than just assessable income. They noted, "The Income-tax Officer has further to satisfy himself that, having regard to the losses incurred by the company in previous years or to the smallness of profits made, the payment of a dividend or a larger dividend than that declared would be unreasonable." The Tribunal found that the Income-tax Officer had not properly applied Section 23A by failing to account for the Rs. 50,000 payment in determining the smallness of profits.

Conclusion:
The High Court upheld the Tribunal's decision, stating, "Our answer to the question referred to us, therefore, is in the affirmative." The Court found that the Rs. 50,000 payment was a genuine business expenditure and should be deducted when considering the application of Section 23A. The Court also held that the payment was not of a capital nature and was connected with the business of the assessee. The Commissioner was directed to pay the costs of the assessee.