1971 (8) TMI 64 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of the amount of commission paid to S. R. Dhodi against his share of profit from the Shalimar Cinema? - Held that There is also no force in the contention that the amount paid by the assessee as commission to Dhodi was for the benefit of the firm and not for that of the assessee. As stated above, the assessee had undertaken the responsibility of running the cinema strictly in accordance with the terms and conditions of the liceice and the rules in force. It was to discharge that personal responsibility that the assessee entered into an arrangement with Dhodi. The amount paid to Dhodi was thus for the benefit of the assessee and with a view to enable him to earn his share of the income of the partnership. We, therefore, answer the question, referred to this court, in the affirmative.

Issues Involved:
1. Deduction of commission paid to S. R. Dhodi.
2. Application of Section 67(3) of the Income-tax Act, 1961.
3. Commercial expediency and personal liability of the assessee.
4. Harmonious construction of Section 67(3) and Section 37 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deduction of commission paid to S. R. Dhodi:
The primary issue was whether the assessee was entitled to deduct the commission paid to S. R. Dhodi against his share of profit from the Shalimar Cinema. The assessee, a partner in Shalimar Cinema, had entered into an arrangement with Dhodi, who was his former partner and later became the manager of the cinema. The Income-tax Officer and the Appellate Assistant Commissioner initially disallowed the deduction, considering it an application of income. However, the Income-tax Appellate Tribunal later held that the commission was an expense incurred wholly and exclusively for the purposes of the assessee's business, thus allowing the deduction.

2. Application of Section 67(3) of the Income-tax Act, 1961:
The revenue argued that under Section 67(3) of the Act of 1961, only specific deductions, such as interest paid on capital borrowed for investment in the firm, could be allowed. They contended that no other deductions were permissible. The Tribunal, however, opined that Section 67(3) was not exhaustive and that other deductions permissible under Section 37 of the Act of 1961 could also be allowed.

3. Commercial expediency and personal liability of the assessee:
The court noted that the arrangement between the assessee and Dhodi was due to compelling business circumstances. The assessee, owing to his age, was unable to manage the cinema business alone and thus entered into an agreement with Dhodi to ensure the efficient running of the cinema. The court found that the amount paid to Dhodi was a matter of commercial expediency and was incurred to earn profits from the partnership business. Therefore, the expenditure was not an application of income but a permissible deduction under Section 37 of the Act of 1961.

4. Harmonious construction of Section 67(3) and Section 37 of the Income-tax Act, 1961:
The court emphasized that Section 67(3) should be read in harmony with Section 37. It stated that the absence of any express or implied intention by the legislature to limit deductions only to those mentioned in Section 67(3) meant that deductions under Section 37 were also permissible. The court supported its conclusion with a decision from the Patna High Court in Commissioner of Income-tax v. Atma Ram Modi, which held that Section 67(3) was not exhaustive and that deductions under Section 37 could still be claimed. The Supreme Court's decision in Commissioner of Income-tax v. Ramniklal Kothari, which allowed similar deductions under the Indian Income-tax Act of 1922, was also cited to reinforce this interpretation.

Conclusion:
The court answered the referred question in the affirmative, allowing the deduction of the commission paid to S. R. Dhodi. It concluded that the expenditure was incurred wholly and exclusively for the purposes of the business, thus making it a permissible deduction under Section 37 of the Act of 1961. The court also clarified that Section 67(3) was not exhaustive and should be read in conjunction with Section 37 to allow for such deductions. The parties were directed to bear their own costs.

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