TMI Blog1996 (5) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... selling diesel generating sets. The first accounting year of the assessee-company ended on June 30, 1974. Its managing director, Shri Manak Raj Jain, filed the return of income on June 28, 1975, showing a total income at Rs. 3,60,040. On scrutiny of the accounts, the Income-tax Officer noted that during the relevant period, the assessee-company had made payments of Rs. 54,000 as work incentive to its following employees. -------------------------------------------------------------------------------------------------------------------------------------------------- Name of the Work Basic pay Dear Bonus Other allowance/employee incentive allowance perquisites paid -------------------------------------------------------------------------------------------------------------------------------------------------- (Rs.) (Rs.) (Rs.) (Rs.) -------------------------------------------------------------------------------------------------------------------------------------------------- Sh. C. P. Mehta 10,000 1,000 200 226 Free accommodation. Sh. Ashok Suman 10,000 1,000 200 226 -do--. Sh. Shashi Bhargava 10,000 1,000 200 218 -do--. Rakesh Kasliwal 10,000 500 225 253 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided free accommodation to them. After having thus considered the question of allowability of the work incentives paid to the aforementioned persons by the assessee on the ground of business expediency, the Income-tax Officer concluded that the payments made were ex-gratia for non-business considerations. He accordingly disallowed the expenditure of Rs. 54,000. In appeal, the learned Appellate Assistant Commissioner of Income-tax examined the issue in sufficient detail and held that the disallowance of Rs. 54,000 made by the Income-tax Officer was not justified as the expenditure had been wholly and exclusively incurred for business purposes. He accordingly deleted the addition of Rs. 54,000, as had been made by the Income-tax Officer. In second appeal, the Tribunal examined the payments made to the aforementioned persons in sufficient detail and held that the payments to the employees were not made for any business consideration and were ex-gratia payments and such payments had rightly been disallowed by the Income-tax Officer. The order so passed by the Tribunal has given rise to the question set out above. It was urged by Shri S. M. Mehta, learned senior counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental Representative. Now, in so far as the contention of Mr. Mehta is concerned, we are clearly of the opinion that on the facts of the case, as stated to us by the Tribunal, the question referred is required to be answered in the affirmative, i.e., for the Revenue and against the assessee. The general principle underlying section 37(1) of the Act is that an expenditure which is found to have been wholly and exclusively made or laid out by a businessman for purposes of his business is to be allowed. There can hardly be any dispute to the proposition that the businessman is the best judge to determine the business expediency and, therefore, when he claims to have incurred a certain expenditure for business expediency his version should ordinarily be accepted. This principle, however, does not debar the assessing authorities to enquire and investigate is to whether such expenditure was actually incurred by the businessman and if incurred whether the same was incurred wholly and exclusively for business consideration. The doctrine that the businessman is the best judge of business expediency does not affect the right, nay duty, of the assessing authorities to know whether it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the remaining officer by Rs. 750 per month. In the year 1953, the remuneration of each of the directors was increased by Rs. 500 per month and each of the officers by Rs. 250 per month. In the assessment proceedings for the assessment years 1953-54 and 1954-55, the Income-tax Officer disallowed the increase in the remuneration of the directors and officers of the assessee on the ground that the expenditure was not laid out wholly and necessarily for the purposes of the business of the assessee-company. In appeal, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. In second appeal, the Income-tax Appellate Tribunal modified the order of the assessment by observing that "it was not for the Income-tax Officer to run the assessee's business and to fix the salary of every member of the staff". That, however, does not mean that it is open to the assessee to allow unreasonable rise in the salary without a valid reason. The Tribunal directed that salary at the rate of Rs. 4,000 per month in each case be allowed as revenue deduction. On a reference, the Bombay High Court held that the Tribunal acted without evidence in partially disallowing the increase in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses of carrying on the business. On a reference, the High Court answered the question against the assessee. It was on such facts that the Supreme Court, reaffirming the principles laid down in Swadeshi Cotton Mills Co. Ltd. v. CIT (No. 1) [1967] 63 ITR 57 (SC) and CIT v. Walchand and Co. Pvt. Ltd. [1967] 65 ITR 381 (SC) held that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, the reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Income-tax Department. Their Lordships further held that "it is, of course, open to the Appellate Tribunal to come to the conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or it is not laid out wholly and exclusively for the purposes of the business of the assessee and to disallow it ". It may be noted that though in the three cases mentioned above the facts were quite distinguishable from those obtaining in the present case, yet the principle laid down by the apex court was that it is open to the Appellate Tribunal ..... 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