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Issues Involved:
1. Computation of income under Section 28 of the Income-tax Act, 1961. 2. Applicability of Rule 6DD under Section 40A(3) of the Income-tax Act, 1961. 3. Deductibility of guest expenses as business expenditure. Issue-wise Detailed Analysis: 1. Computation of Income under Section 28: The primary issue was whether the sum of Rs. 2,95,000 should be taken into account in computing the income of the assessee from business under the provisions of Section 28 of the Income-tax Act, 1961. The assessee, a private limited company engaged in the export of tobacco, claimed this amount as a business loss/expenditure. The Income-tax Appellate Tribunal found that the payment of Rs. 2,95,000 was indeed made by the assessee to Shamsuddin, which included a commission and an amount to be remitted to a Singapore party as part of an integrated transaction. The Tribunal ruled that the assessee's income must be deemed to be the full amount received minus Rs. 2,95,000, considering it an integrated transaction. However, the High Court disagreed, holding that the payment made in furtherance of an illegal transaction cannot be deducted. The court emphasized that while an inherently illegal business can have its illegal payments and penalties deducted, a lawful business cannot claim deductions for payments made in violation of the law. The court cited precedents, including the Supreme Court's decision in Haji Aziz and Abdul Shakoor Bros. v. CIT, which established that infraction of law is not a normal incident of business and cannot be treated as business expenditure or loss. 2. Applicability of Rule 6DD under Section 40A(3): If the sum of Rs. 2,95,000 was not to be taken into account under Section 28, the next issue was whether the claim was covered under Rule 6DD, framed under Section 40A(3) of the Income-tax Act. The Tribunal had ruled that the payment did not attract Section 40A(3) as it was covered by sub-rule (j) of Rule 6DD due to exceptional or unavoidable circumstances. However, the High Court held that an illegal payment cannot be brought within the exception in clause (j) of Rule 6DD. Therefore, the court answered this alternative question in the negative, siding with the Department. 3. Deductibility of Guest Expenses: The final issue was whether the sum of Rs. 19,659 incurred as guest expenses was allowable as a deduction. The Tribunal had allowed this deduction, following a previous decision of the court. The High Court agreed with the Tribunal, noting that the expenditure was on providing tea, coffee, and food to customers, which is distinguishable from expenses on amusement or banquets. The court followed its earlier decision in Addl. CIT v. Maddi Venkataratnam & Co. Ltd., and answered this question in the affirmative, in favor of the assessee. Conclusion: The High Court concluded that the sum of Rs. 2,95,000 could not be deducted under Section 28 or under Rule 6DD(j) of the Income-tax Act, as it was made in furtherance of an illegal transaction. However, the sum of Rs. 19,659 spent on guest expenses was deductible. The referred case was ordered accordingly, with no order as to costs.
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