1994 (2) TMI 132 - AT - Income Tax

Summary

Issues Involved:
1. Whether Shri Vijay rendered services and was compensated commensurate with his services.
2. Whether the expenditure incurred by the assessee was in the normal course of business and was wholly and exclusively incurred for the same.

Issue 1: Whether Shri Vijay rendered services and was compensated commensurate with his services.
The assessee/appellant derives income from the distributorship of Kirloskar Pump, Electric Motor, Oil Engines, and other accessories. The business has been ongoing for several years, with all partners belonging to the Muthey family. Shri Vijay Muthey, son of partner Shri Vasant Muthey, joined the firm on 1-7-1981, initially earning Rs. 1,200 per month. The agreement stipulated a minimum employment period of seven years, with salary increments over time. The Assessing Officer did not challenge the initial salary payment under section 40A(2) of the Act for the assessment year 1983-84. Shri Vijay went abroad for training, with all related expenses covered by the employer, and returned in 1986 to resume active duties. The expenditure incurred on his training and salaries paid during the relevant assessment years were disallowed by the Assessing Officer, who concluded that the payments were made solely due to his relationship with a partner and not for services rendered.

Issue 2: Whether the expenditure incurred by the assessee was in the normal course of business and was wholly and exclusively incurred for the same.
The CIT (Appeals) upheld the disallowance, agreeing that the payments and educational expenses were made because Shri Vijay was a partner's son. The CIT (Appeals) deemed the agreement a "colourable device" to justify the expenses. The assessee's counsel argued that the agreement's bona fides were not challenged and that the expenses were incurred for commercial expediency. The counsel cited several legal precedents, including Eastern Investments Ltd. v. CIT and Shahzada Nand & Sons v. CIT, to support the claim that the expenses were legitimate business expenditures.

Analysis:
The Tribunal noted that the revenue authorities did not challenge the bona fides of the agreement dated 1-7-1981. Thus, the disallowance could only be justified under section 40A(2) if the expenses were not incurred for business purposes. The Tribunal found that Shri Vijay was qualified (B.Com. and Diploma in Business Management) and had served the firm before going abroad. The initial salary payment was accepted as reasonable by the Assessing Officer for the assessment year 1983-84. The Tribunal referenced the Bombay High Court's decision in Sakal Papers (P.) Ltd.'s case, which allowed similar expenses for a closely-held company's director's daughter. The Tribunal also cited Hindustan Hosiery Industries v. First ITO, which allowed expenses for a partner's training abroad as beneficial for the business.

The Tribunal emphasized that the expenditure was incurred voluntarily for commercial expediency and was not personal in nature. The Tribunal referenced the Supreme Court's decision in Sassoon J. David & Co. (P.) Ltd. v. CIT, which held that business expenditures could be incurred voluntarily and without necessity if they promote business and earn profits. The Tribunal also noted that the Assessing Officer and CIT (Appeals) did not argue that the expenses were disproportionate or capital in nature.

Conclusion:
The Tribunal concluded that the expenses incurred on Shri Vijay's education and salary were legitimate business expenditures. The Tribunal directed that all expenses claimed by the assessee for educational facilities and salary payments be allowed in full. The appeals were allowed.