1972 (12) TMI 19 - HC - Income Tax

Payment of salary to a partner of managing agency firm who was appointed as manager Legal Expenditures - deductibility - Whether income declared by the assessee can be enhanced on the basis of the excess stock disclosed the bank for obtaining overdraft facilities - Tribunal is justified in accepting the books as correct because the entries therein tallied with the returns submitted by the assessee to the Textile Commissioner and ignoring the stock declarations made by the assessee to the banks - result is that the questions are answered in the affirmative and in favour of the assessee

Issues Involved:
1. Allowability of salaries paid to the manager under section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Whether the salary paid to the manager contravened section 348 of the Companies Act, 1956.
3. Justification of the addition of Rs. 93,456 as income from an undisclosed source.

Detailed Analysis:

1. Allowability of Salaries Paid to the Manager under Section 10(2)(xv) of the Indian Income-tax Act, 1922:
The company claimed allowances for the remuneration paid to the managing agency firm and the salary paid to the manager. The Income-tax Officer disallowed the salary paid to R. Doraiswamy Naidu, a partner in the managing agency firm, on the grounds that it exceeded the 10% limit of net profits stipulated by section 348 of the Companies Act. However, the Appellate Assistant Commissioner reversed this decision, holding that the payment was an allowable deduction under section 10(2)(xv) of the Income-tax Act. The Tribunal upheld this view, stating that the salary was an expenditure incurred wholly and exclusively for the business. The Tribunal concluded that even if the salary payment contravened section 348, it would still be allowable under section 10(2)(xv).

2. Whether the Salary Paid to the Manager Contravened Section 348 of the Companies Act, 1956:
The Tribunal initially held that the salary paid to the manager contravened section 348, which limits the remuneration to 10% of the net profits. However, the court found that the amendment to section 348 in 1960, which treats remuneration received by a partner of a managing agency firm as remuneration paid to the managing agent, was not retrospective. Before the amendment, section 348 did not explicitly include partners of managing agency firms. Therefore, the payment to the manager did not infringe section 348 as it stood before the amendment. The court also noted that section 348 was regulatory and not mandatory, allowing for additional remuneration under special circumstances as per section 352.

3. Justification of the Addition of Rs. 93,456 as Income from an Undisclosed Source:
The Income-tax Officer added Rs. 93,456 as income from an undisclosed source due to discrepancies between the stock book and the stock declarations made to the bank. The Tribunal found that the stock as per the books tallied with the declarations made to the Textile Commissioner, and the discrepancies with the bank declarations were due to inflated stock statements to obtain higher overdraft facilities. The Tribunal concluded that the Income-tax Officer was not justified in adding the sum as undisclosed income, and the court upheld this view, agreeing that the books were accurate and the bank declarations were not reliable.

Conclusion:
The court answered the questions in the affirmative, favoring the assessee. The salaries paid to the manager were allowable under section 10(2)(xv) of the Income-tax Act, and the payment did not contravene section 348 of the Companies Act as it stood before the 1960 amendment. Additionally, the addition of Rs. 93,456 as undisclosed income was unjustified. The assessee was awarded costs.

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