1967 (9) TMI 28 - HC - Income Tax

Whether the disallowance of Rs. 16,977 from out of the salary paid to T. Mohammed Farooq is justified - amount of which deduction is claimed was not laid out or expended wholly and exclusively for the purpose of the assessee s business, and the disallowance of the sum was quite justified and proper

Summary

Issues:
Disallowance of salary paid to T. Mohammed Farooq.

Analysis:
The judgment pertains to a reference made by the Income-tax Appellate Tribunal regarding the disallowance of Rs. 16,977 from the salary paid to T. Mohammed Farooq. The assessee was engaged in a wholesale business with branches in different locations. The disagreement arose concerning the remuneration paid to Farooq, who was employed as a secretary in the Cochin branch. The Income-tax Officer disallowed a portion of the remuneration, considering Farooq's lack of experience and the nature of his duties. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld the disallowance, concluding that the payment was not wholly and exclusively for business purposes.

The legal issue centered on whether the remuneration paid to Farooq qualified as an allowable deduction under Section 10(2)(xv) of the Income-tax Act. The section allows deductions for expenditures laid out wholly and exclusively for the business. The courts examined the facts and circumstances surrounding the payment to Farooq. They considered his qualifications, duties, and the business impact of his role. The courts relied on precedents, emphasizing that the payment must be genuinely for business purposes to qualify for deduction.

The judgment cited the Supreme Court's view that the determination of whether an amount is deductible under Section 10(2)(xv) is a question of fact. The courts analyzed the evidence, including Farooq's testimony, to ascertain the nature of his role and the reasons behind the remuneration. Despite Farooq's admission of lack of relevant experience and training, the courts found that the payment was not solely for business purposes. Factors such as Farooq's relationship with the assessee and the absence of significant responsibilities supported the conclusion that the payment was not justified as a business expense.

In conclusion, the courts affirmed the disallowance of the salary paid to Farooq, ruling in favor of the department. The judgment highlighted the importance of demonstrating that expenditures are genuinely and wholly for business purposes to qualify for deductions under the Income-tax Act. The decision was based on a thorough analysis of the facts and evidence, emphasizing the need for payments to be commercially justified to be considered allowable deductions.