1968 (9) TMI 13 - SC - Income Tax

Burden of proving that services were rendered by the managing agents for earning the remuneration lay upon the company - sum of Rs. 18,90,000 was allowable revenue expenditure under section 10(2)(xv) - Assessee s appeal dismissed

Summary

Issues Involved:

1. Whether the expenditure of Rs. 19,03,300 was incurred wholly and exclusively for the purpose of the company's business under section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Whether the High Court had jurisdiction to call for a second statement of case on questions not included in the original applications under section 66(1) and (2) of the Indian Income-tax Act, 1922.

Issue-Wise Detailed Analysis:

1. Expenditure for the Purpose of Business:

The company claimed an allowance of Rs. 18,90,000 paid as compensation for the termination of the managing agency and Rs. 13,300 incurred as arbitration expenses under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax Officer disallowed the claim, stating the expenditure was not connected with the business and was capital expenditure. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld this decision. The Tribunal found that the managing agents rendered no service to the company and that the disputes between the two groups of partners did not affect the company's business. The High Court agreed, noting that the expenditure was not made wholly and exclusively for the company's business but was by way of distribution of profits or for some improper or oblique purpose outside the course of business management.

2. Jurisdiction of the High Court:

The High Court initially directed the Tribunal to submit a second statement of case on additional questions not included in the original applications under section 66(1) and (2). However, the Supreme Court held that the High Court was incompetent to call for a statement of case on questions of fact or questions not incorporated in the application under section 66(1). The power under section 66(4) may be exercised to call for a supplementary statement only when the court is not satisfied that the statements are sufficient to determine the question raised. It does not confer a power to raise additional questions or call for a statement on questions not referred by the Tribunal. The Supreme Court concluded that the High Court's procedure in calling for an additional statement was irregular.

Conclusion:

The Supreme Court dismissed the appeal, holding that the expenditure of Rs. 19,03,300 was not incurred wholly and exclusively for the purpose of the company's business and was, therefore, not allowable under section 10(2)(xv) of the Indian Income-tax Act, 1922. The High Court's decision to decline formal answers to additional questions was also upheld. The appeal was dismissed with costs.