1969 (12) TMI 4 - SC - Income Tax

Business Expenditure - Where an amount paid to an employee pursuant to an agreement is excessive because of extra-commercial considerations the taxing authority has jurisdiction to disallow a part of the amount as expenditure not incurred wholly and exclusively for the purpose of the business - Assessee s appeal is dismissed

Summary

Issues:
Assessment of tax for a public limited company for the years 1951-52, 1952-53, and 1953-54 based on remuneration paid to a technical adviser. Interpretation of section 10(2)(xv) of the Income-tax Act regarding admissible allowances. Disallowance of part of the expenses incurred for remuneration under the Act. Determining whether remuneration was laid out wholly and exclusively for the purpose of the business. Influence of "extra-commercial considerations" on remuneration payments.

Analysis:
The Supreme Court judgment dealt with the assessment of tax for a public limited company manufacturing enamelled-ware for the years 1951-52, 1952-53, and 1953-54 concerning remuneration paid to a technical adviser. The company claimed deductions under section 10(2)(xv) of the Income-tax Act for the remuneration paid. The Income-tax Officer allowed a lower deduction than claimed, which was upheld in subsequent appeals. The Tribunal referred the question of disallowance of expenses for remuneration to the High Court, which ruled in favor of disallowance. The appeals were filed against this decision.

The judgment emphasized that the determination of whether an expenditure was laid out wholly and exclusively for the business must be based on the facts of each case. The resolution fixing remuneration and proof of payment do not preclude scrutiny of the expenditure's purpose. While an agreement to pay and payment may exist, the authorities can still disallow the expenditure if it is not deemed wholly and exclusively for business purposes. The High Court can review legal inferences drawn by the Tribunal in such cases.

In this specific case, the appointment of the technical adviser, Dr. Ganguly, raised concerns due to his lack of training in enamelling and the circumstances surrounding his appointment. The remuneration agreed upon was significantly higher than usual and influenced by "extra-commercial considerations." The authorities found that Dr. Ganguly's appointment and remuneration were not solely based on commercial factors, leading to the disallowance of part of the expenditure.

The judgment highlighted that while employers have the right to determine remuneration based on various factors, including business needs, the taxing authorities can disallow expenditures that do not meet the criteria of being laid out wholly and exclusively for business purposes. In this case, the influence of "extra-commercial considerations" on remuneration payments justified the disallowance of part of the amount claimed. The appeals were dismissed, affirming the disallowance of the claimed deductions.