1973 (8) TMI 5 - HC - Income Tax

Expenditure - Whether a portion of higher expenditure incurred wholly and exclusively for the business purposes can be disallowed especially when accounts were not manipulated - Whether Tribunal was right in holding that there was no justification for the revenue authorities to make the addition of Rs. 40, 000 for the assessment year 1957-58 ? - In our view we have to sustain the order of the Tribunal in this case. Question answered in the affirmative

Summary

Issues:
1. Whether the addition of Rs. 40,000 to the income disclosed by the books of account is justified.
2. Whether the entire ceiling price paid for cotton purchased from a director can be considered as an expenditure wholly and exclusively for the business.
3. Whether the revenue authorities can disallow a portion of the expenditure incurred for the purchase of cotton based on the benefit received by the director.

Analysis:
1. The case involved an assessment of a public limited company owning a spinning mill regarding the purchases of cotton at ceiling rates from two persons who were found to be name-lenders for a managing partner. The Income-tax Officer made an addition to the income disclosed by the books of account due to defects found in the accounts. The Appellate Assistant Commissioner confirmed the inflation in cotton prices but disagreed with the additional amount added. The Appellate Tribunal held that no addition was justified as the company had paid the ceiling rates for the cotton purchases, relying on a previous court decision.

2. The revenue contended that even if the full ceiling price was paid for cotton purchased from a director, a part of the amount should be disallowed as it benefited the director personally. However, the court found that the revenue authorities did not conclusively prove that the director received a benefit from the transactions based on the difference in prices paid for cotton. The court emphasized that once an expenditure is wholly and exclusively incurred for the business, the revenue cannot disallow a portion of it based on reasonableness, especially when the full amount was paid at the ceiling rate.

3. The revenue argued that a portion of the expenditure should be disallowed under section 10(2)(xv) as it was used to benefit the director. The court disagreed, stating that the revenue cannot dissect the expenditure genuinely incurred for the business to determine reasonableness. The court highlighted that as long as the expenditure is directly related to the business purpose and wholly and exclusively laid out for that purpose, the revenue cannot question its reasonableness, especially when the full ceiling rate was paid for the cotton purchases.

In conclusion, the court upheld the Tribunal's decision, stating that the revenue cannot disallow a portion of the expenditure genuinely incurred for the business based on perceived benefits to the director. The court emphasized that once an expenditure is proven to be wholly and exclusively for the business purpose, the revenue cannot question its reasonableness.