1978 (1) TMI 33 - HC - Income Tax

Account Books, Accrual Of Income, Business Expenditure, Capital Or Revenue Expenditure, Income Tax Act, Managing Agent, Mercantile System

Summary

Issues:
1. Disallowance of sums from salaries paid to director employees.
2. Deductibility of expenditure incurred in procuring proxies from shareholders.

Disallowed Sums from Salaries:
The case involved a consolidated reference under s. 66(1) of the I.T. Act, 1922, by the Income-tax Appellate Tribunal regarding disallowance of sums from salaries paid to director employees of the company for assessment years 1959-60 to 1962-63. The Tribunal disallowed specific amounts from the salaries paid to four directors of the company based on a decision taken in the assessment year 1958-59, deeming the salary increases as extraneous to business. The Tribunal upheld the disallowances for subsequent years as well, despite the assessee's contention that new material justified full deduction of the salaries. The High Court, in a related judgment, found the Tribunal's decision for the earlier year flawed due to non-consideration of evidence and directed reconsideration. The disallowance in the present case was made on the same basis as in 1958-59, leading the High Court to answer the first question in the negative, urging the Tribunal to reevaluate the issue with correct facts for all relevant assessment years.

Deductibility of Expenditure for Procuring Proxies:
The second issue pertained to the deductibility of expenditure incurred by the company in procuring proxies from shareholders for meetings related to the managing agency agreement. The Tribunal had disallowed the expenditure, considering it capital in nature. The High Court analyzed the purpose of the expenditure, noting that it aimed to ensure the continuation of the managing agency agreement by securing shareholder resolutions. In the first instance, the expenditure was to maintain the existing source of income, not acquire a new one, and thus should have been allowed as a revenue expenditure. In the second instance, the expenditure aimed to enhance income from the existing source, making it revenue in nature. Consequently, the High Court answered the second question in favor of the assessee, affirming the deductibility of the expenditures. No costs were awarded in the case.