1966 (9) TMI 162 - HC - Income Tax

Summary

Issues Involved:
1. Whether the payments of salaries and bonuses made to employees during their jail custody are allowable as deductions under section 10(2)(xv) of the Income-tax Act.
2. Whether the payment of Rs. 2,50,000 to the U.P. Government is allowable as a deduction under section 10(2)(xv) of the Income-tax Act.

Detailed Analysis:

Issue 1: Deductibility of Salaries and Bonuses Paid During Jail Custody
Facts:
The assessee, a private limited company, employed two individuals, H.P. Pasari and Madan Lal Singhania, who were involved in a murder case and remained in jail from August 23, 1948, to April 1950. They were acquitted in 1950. The company paid their salaries and bonuses during this period.

Legal Question:
"Whether, on the facts and in the circumstances of the case, the payments of salaries and bonuses made to Madan Lal and H.P. Pasari during the period of their jail custody are allowable as deduction under section 10(2)(xv) of the Income-tax Act and consequently under the Business Profits Tax Act?"

Judgment:
The court held that the payments made to these employees, who were closely related to the company's directors, were due to extra-commercial considerations. Therefore, the entire amount could not be deducted under section 10(2)(xv) of the Act. However, amounts paid to H.P. Pasari for 29 1/2 days and to Madan Lal Singhania for 24 1/2 days, for which they could remain on leave with full salary under their terms of service, were allowed to be deducted.

The Tribunal's findings indicated that the payments were made for reasons outside the scope of commercial expediency. The assessee's claims that the payments were to prevent leakage of trade secrets and that the employees continued to give advice during their jail custody were disbelieved by the income-tax authorities up to the Tribunal.

Conclusion:
The court answered the question in the negative, holding that the salaries and bonuses paid during the jail custody period could not be deducted, except for the periods for which the employees were lawfully entitled to leave under their service terms.

Issue 2: Deductibility of Payment to U.P. Government
Facts:
The assessee-company paid Rs. 2,50,000 to the U.P. Government following a raid by the Anti-corruption Police on the premises of M/s. Kanodia Brothers and the sealing of the godown of Laxmi & Company. The payment was made after discussions with a high-powered committee from the U.P. Government.

Legal Question:
"Whether, on the facts and in the circumstances stated above, the payment of Rs. 2,50,000 to the U.P. Government is allowable as a deduction under section 10(2)(xv)?"

Judgment:
The Tribunal found the nature and purpose of the payment "shrouded in mystery" and held that the assessee had not produced correspondence with the Government, implying the payment was not for commercial expediency. The Tribunal concluded that the payment did not represent "a loss incidental to business."

The assessee argued that the payment fell within the principle of commercial expediency, citing cases like Atherton v. British Insulated and Helsby Cables Ltd. and Golder v. Great Boulder Proprietary Gold Mines Ltd. However, the court found that the payment to the Government, ostensibly for "purchasing peace," was too nebulous and remote to be considered wholly and exclusively for business purposes.

The court noted that allowable deductions must be incurred by the assessee in its character as a business or trading concern. Payments to avoid criminal prosecution or to please the Government do not meet this criterion. The court cited previous decisions, including Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax and Commissioner of Income-tax v. H. Hirjee, to support its conclusion.

Conclusion:
The court answered the second question in the negative, holding that the payment of Rs. 2,50,000 to the U.P. Government was not allowable as a deduction under section 10(2)(xv) of the Act. The assessee failed to prove that the payment was wholly and exclusively for business purposes. The court awarded Rs. 250 as costs to the Commissioner of Income-tax and Rs. 250 as counsel's fee.

Additional Remarks by Manchanda J.:
Manchanda J. agreed with the answers and added that the test of commercial expediency should not be pushed too far. He emphasized that the primary purpose of the payment was to save the company or its directors from embarrassment and trouble, not to carry on the business. He cited Pollock M.R.'s warning in Union Cold Storage Company Ltd. v. Jones and Wheatcroft's observations in British Tax Encyclopaedia to support this view.