1978 (12) TMI 37 - HC - Income Tax

Business Expenditure, Commission Paid To Directors, Interest On Arrears, Political Party, Purchase Tax

Summary

Issues:
1. Guarantee commission payment deduction under section 40(c) of the Income-tax Act, 1961.
2. Deductibility of commission on sale of sugar to agents.
3. Allowability of interest payment under the U. P. Sugarcane (Purchase Tax) Act, 1961.
4. Admissibility of contributions to the Congress party and election expenses of company's employee.
5. Calculation of extra shift depreciation allowance for double and triple shift working.

Guarantee Commission Payment Deduction (Issue 1):
The Tribunal referred whether the guarantee commission payment of Rs. 1,49,884 was allowable under section 40(c) of the Income-tax Act, 1961. The Tribunal held that the payment was justified as it was compensation for personal security provided by directors and shareholders against cash credit agreements with the company's bankers. The Tribunal found the payment commercially justified and directed the allowance of the entire guarantee commission. The High Court agreed with the Tribunal's decision, stating that the payment was not excessive, satisfied the tests under section 40(c), and was related to legitimate business needs, thus entitling the assessee to the deduction.

Commission on Sale of Sugar (Issue 2):
The High Court relied on a previous decision to conclude that the payment of commission on the sale of sugar to agents was an admissible deduction. Citing the case of Jaswant Sugar Mills Ltd. v. CIT, the court held that the payment of commission on the sale of sugar was allowable, thereby answering the second question in favor of the assessee.

Interest Payment under U. P. Sugarcane Act (Issue 3):
The Full bench of the court in Saraya Sugar Mills (P.) Ltd. v. CIT had previously ruled that interest paid on arrears of sugarcane purchase tax was not an allowable deduction. Consequently, the court answered the third question in favor of the department, denying the deduction for the interest payment under the U. P. Sugarcane (Purchase Tax) Act, 1961.

Contributions to Political Party and Election Expenses (Issue 4):
Referring to J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. CIT, the court held that without a direct nexus between the contribution and the business of the company, the payment to a political party was not an allowable business expenditure. As there was no established justification for the payment in relation to the business interest of the assessee-company, the court upheld the disallowance of the contributions. Therefore, the fourth question was answered in favor of the department.

Extra Shift Depreciation Allowance (Issue 5):
In J. K. Synthetics Ltd. v. CIT, the court clarified that for double and triple shift working, 100% of the normal depreciation allowance was admissible, based on the actual number of days the factory worked extra shifts. The court held that the calculation should be based on the normal depreciation for a period of 180 days or more, not a hypothetical figure. Consequently, the court answered the fifth question in favor of the assessee, allowing the extra shift depreciation allowance calculation based on the actual working days.

In conclusion, the High Court ruled in favor of the assessee for issues related to guarantee commission payment, commission on sale of sugar, and extra shift depreciation allowance. On the other hand, the court ruled in favor of the department regarding the interest payment under the U. P. Sugarcane Act and contributions to the political party and election expenses.