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Issues Involved:
1. Competence of the Income-tax Officer to examine the commercial footing of payments under Section 10(2)(ix) of the Income-tax Act. 2. Allowability of deductions not specified under any clause of Section 10(2) in computing taxable profits or gains. Issue-wise Detailed Analysis: 1. Competence of the Income-tax Officer to Examine the Commercial Footing of Payments: The primary issue presented was whether the Income-tax Officer (ITO) had the competence to scrutinize the commercial footing of payments made by the assessee under Section 10(2)(ix) of the Income-tax Act. The assessee, a private limited company, had debited remuneration paid to its three directors, who were also the sole shareholders, as business expenses. The ITO added these amounts back to the taxable profits, arguing that the payments were essentially a distribution of profits disguised as remuneration. The Assistant Commissioner, upon appeal, directed an inquiry into the market value of similar services if rendered by a stranger. Based on this inquiry, he reduced the allowable remuneration, thus decreasing the company's income. The assessee contended that the directors were entitled to their remuneration as per the Articles of Association and that the payments were legitimate. The court held that the ITO was within his rights to examine whether the payments were bona fide and made on a commercial basis. The court referenced the case of Rama Krishna Ramnath Firm of Tirora v. Commissioner of Income-tax, which established that payments to partners for services rendered could be legitimate deductions, but sums appropriated as profits would not qualify. The court emphasized that determining whether payments were bona fide was a factual question, not a legal one. 2. Allowability of Deductions Not Specified Under Any Clause of Section 10(2): The second issue was whether expenditures not falling under any specific clause of Section 10(2) could be allowed as deductions in computing taxable profits. The Commissioner of Income-tax argued that only items explicitly mentioned in Section 10(2) could be deducted. The court agreed, stating that while ordinary commercial methods might be used to compute profits, only those expenditures specified in Section 10(2) were allowable deductions. The court referenced the case of Electric & Dental Stores v. Commissioner of Income-tax, which held that salary payments to partners could be deducted if they were bona fide and not a device to evade tax. The court concluded that the Assistant Commissioner and the Commissioner of Income-tax had correctly assessed the admissibility of the deductions. Conclusion: The court affirmed that the ITO had the authority to scrutinize the commercial footing of payments and that only expenditures specified in Section 10(2) could be allowed as deductions. The judgment emphasized that these determinations were factual questions, not legal ones, and upheld the decisions of the Assistant Commissioner and the Commissioner of Income-tax. The court found no necessity for the Commissioner to refer the questions to the court, as they were matters of fact. The judgment reinforced the principle that tax authorities could look beyond audited accounts to ascertain the true nature of payments.
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