1975 (7) TMI 23 - HC - Income Tax

Summary

Issues Involved:
1. Disallowance of half of the allowance paid to two directors.
2. Disallowance of additional commission paid to four salesmen.
3. Disallowance of commission paid to two employees under section 10(2)(x).

Detailed Analysis:

1. Disallowance of Half of the Allowance Paid to Two Directors:
The court examined whether the payments of Rs. 7,500 each to two directors, Shri Doshi and Shri Desai, could be disallowed in determining the company's profits for the assessment year 1958-59. The assessee-company claimed these payments as allowable deductions under section 10(2)(xv) of the Income-tax Act, 1922. The Tribunal allowed a deduction of Rs. 3,750 for each director and disallowed the balance. The court noted the lack of a resolution for Shri Doshi and the existence of a resolution for Shri Desai, which sanctioned the payment to meet expenses wholly or necessarily incurred in the performance of duties. The court emphasized that the assessee must establish that the expenditure was incurred wholly and exclusively for business purposes. The Tribunal's decision to allow only half of the claimed amount was upheld, as the assessee failed to provide sufficient details to substantiate the full amount.

2. Disallowance of Additional Commission Paid to Four Salesmen:
The court evaluated the additional commissions paid to four salesmen, namely Shri Dutt, Shri Khopkar, Shri Bhatt, and Shri Adalja. The assessee-company claimed these payments as deductions under section 10(2)(xv). The Tribunal disallowed the additional commissions due to the lack of detailed evidence supporting that the expenses were incurred wholly and exclusively for business purposes. The court referenced the resolutions and circular letters indicating the purpose of these payments but reiterated that the assessee failed to furnish necessary details to satisfy the taxing authorities. The court upheld the Tribunal's disallowance, emphasizing that the purpose of the expenditure must be satisfactorily established by the assessee.

3. Disallowance of Commission Paid to Two Employees Under Section 10(2)(x):
The court considered the commissions paid to two employees, Shri Kamat and Shri Shah, which were claimed as deductions under section 10(2)(x). The Tribunal disallowed these payments, considering them disproportionately high compared to the employees' salaries and not justified by trade practices. The court noted that the resolution sanctioning these payments was passed at the end of the year, suggesting it was an after-thought. The court upheld the Tribunal's decision, stating that the payments did not meet the requirements of section 10(2)(x), which mandates that such payments must be reasonable with reference to the employees' pay, service conditions, and general business practices.

Conclusion:
The court affirmed the Tribunal's decision to disallow half of the allowance paid to the directors, the additional commissions paid to the four salesmen, and the commissions paid to the two employees. The assessee-company failed to provide sufficient evidence to establish that these expenditures were incurred wholly and exclusively for business purposes, as required under sections 10(2)(xv) and 10(2)(x) of the Income-tax Act, 1922. The court answered all three questions in the affirmative, against the assessee, and ordered the assessee to pay the costs of the reference to the revenue.