1981 (9) TMI 27 - HC - Income Tax

Summary

Issues Involved:
1. Deduction of entertainment allowance of Rs. 20,000 paid to a director.
2. Entitlement to a bad debt deduction of Rs. 1,78,255 due from Famous Pictures Ltd.
3. Allowance of salary of Rs. 41,928 to Shyamsunder.

Detailed Analysis:

Issue 1: Deduction of Entertainment Allowance
The court addressed whether the assessee was entitled to a deduction of the entertainment allowance of Rs. 20,000 paid to a director. The court referenced a similar item in Income-tax Reference No. 115 of 1972 (CIT v. Govindram Bros. P. Ltd.) and concluded that the circumstances were identical. Consequently, the court's answer to this question was in favor of the assessee, consistent with the previous ruling.

Issue 2: Entitlement to Bad Debt Deduction
The court examined whether the assessee was entitled to a bad debt deduction of Rs. 1,78,255 due from Famous Pictures Ltd. The assessee's business activities included the Famous Cine Laboratory department, which had shown a net loss, including bad debts written off. One significant bad debt was Rs. 1,78,455 from Famous Pictures Ltd. Loan Account, created by transferring a balance from Hindustan Film Syndicate account. The ITO questioned this transfer and disallowed the bad debt claim, considering it a capital loss converted into a trading loss.

Upon appeal, the AAC agreed with the ITO's approach but disagreed on the claim's prematurity. The Income-tax Appellate Tribunal found that the assessee was engaged in money-lending and that the loan was a valid transfer entry from 1951, with interest subsequently charged and assessed. The Tribunal upheld the assessee's claim, leading to the present question.

The court opined that the Tribunal's approach was possible and the conclusion reached was reasonable, given the pertinent facts. Therefore, the court answered this question in favor of the assessee, noting that the view taken by the Tribunal was not perverse.

Issue 3: Allowance of Salary to Shyamsunder
The court analyzed whether the salary of Rs. 41,928 paid to Shyamsunder was allowable. The ITO had questioned the specifics of Shyamsunder's work, qualifications, and experience, finding his academic and business qualifications insufficient to justify the high salary. The ITO concluded that the salary was paid due to Shyamsunder being the son of a director, not for business considerations, and disallowed the deduction.

The AAC concurred with the ITO, noting that the payment was made because Shyamsunder was the director's son. However, the Income-tax Appellate Tribunal upheld the assessee's contention, relying on the earlier year's acceptance of the salary by the Commissioner of Income-tax and the ITO.

The court found that the Tribunal had misread the Commissioner's order and failed to consider the ITO's detailed observations. The court noted that the earlier acceptance of the salary did not mandate its allowance in the current year, especially given the ITO's cogent reasons for disallowance. The court agreed with the ITO's approach and concluded that the Tribunal erred in allowing the salary deduction.

Conclusion:
1. Question No. 1: Answered in the affirmative and in favor of the assessee.
2. Question No. 2: Answered in the affirmative and in favor of the assessee.
3. Question No. 3: The Tribunal erred in allowing the salary of Rs. 41,928 to Shyamsunder. The ITO's view was correct, and the deduction could not be allowed under sections 10(2)(xv) or 10(4A) of the Indian Income-tax Act, 1922.

In the circumstances of the case, the parties will bear their own costs of the reference.