1977 (4) TMI 18 - HC - Income Tax

Summary

Issues:
1. Whether the payment to the minor under the agreement is a legitimate business expenditure and an allowable deduction?
2. Whether there was material before the Tribunal to conclude that the payment to the minor was not a diversion of income but an application of income?

Analysis:
The judgment delivered by the High Court of Allahabad involved two key questions referred by the Income-tax Appellate Tribunal. The first issue addressed was whether the payment made to the minor under the agreement dated August 24, 1963, could be considered a legitimate business expenditure and an allowable deduction. The Tribunal disbelieved the assertion that the minor's investment brought good luck to the business, leading to the conclusion that any payment exceeding a reasonable interest on the investment could not be deemed a legitimate business expense. The court held that the payment to the minor was not a legitimate business expenditure except for a reasonable interest on the investment made by the minor.

Moving on to the second issue, the Tribunal questioned whether there was sufficient evidence to support the assertion that the payment to the minor was not a diversion of income but an application of income. The Tribunal's observations indicated skepticism towards the claim that the minor's investment significantly contributed to the business's success. The court emphasized that the burden of proof rested with the assessee, who failed to provide substantial evidence beyond the agreement dated August 24, 1963. Consequently, the court concluded that the payment to the minor was not a diversion of income by an overriding title but merely an application of the assessee's income.

In summary, the High Court of Allahabad ruled that the payment to the minor was not a legitimate business expenditure beyond a reasonable interest on the investment and that there was sufficient material before the Tribunal to establish that the payment to the minor was an application of income rather than a diversion of income. The judgment directed the parties to bear their own costs, bringing closure to the legal proceedings.