1973 (4) TMI 23 - HC - Income Tax

Allowability u/s 10(2)(x) - Money borrowed - assessee borrowed for business purposes and agreed to pay 12 1/2 % of the profits instead of interest - When a claim for allowance under s. 10(2)(xv) is made the department has to decide whether the expenditure was incurred voluntarily on the grounds of commercial expediency - reasonableness of these expenditures is to be from the point of view of the businessman and not that of the revenue - Whether the commission paid to employee on sale of trucks in addition to salary is deductible - hold that on the facts and circumstances of the case the Appellate Tribunal was not justified in disallowing commission on sale to the employee Parikh to the extent of Rs. 7, 145 ; the whole of the amount was allowable under section 10(2)(x) of the Act.

Summary

Issues Involved:
1. Justification for disallowing a sum of Rs. 7,117 paid to financiers under section 10(2)(iii) or section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Justification for disallowing commission on sales to an employee to the extent of Rs. 7,145 under section 10(2)(x) of the Indian Income-tax Act, 1922.

Detailed Analysis:

1. Justification for Disallowing Rs. 7,117 Paid to Financiers:
The assessee, a Hindu undivided family, carried on business as a dealer in Tata-Mercedes-Benz Chassis, motor spare parts, etc., with the principal place of business at Jamshedpur and a branch at Cuttack. For the assessment year 1957-58, the Income-tax Officer (ITO) disallowed a sum of Rs. 8,617 out of Rs. 10,117 paid to financiers D. M. Patel and R. M. Patel, who had advanced Rs. 12,500 each to the assessee in 1952. The ITO allowed only 6% interest, amounting to Rs. 1,500, rejecting the claim of 12.5% of net profits as interest payment.

The Appellate Assistant Commissioner (AAC) upheld the ITO's decision, stating that the payments did not benefit the assessee's business and appeared to be ex gratia. The Appellate Tribunal also rejected the assessee's claim, doubting the genuineness of the oral agreement and suggesting that the assessee could have discharged the obligation earlier.

However, the court found that the payments were evidenced by entries in the books of account and had been accepted in previous years. The Tribunal's suggestion that the assessee should have paid off the loan was not within its purview. The court concluded that the payment of Rs. 10,000 to the financiers was not onerous from a commercial point of view and was deductible under section 10(2)(xv) of the Act. Thus, the first question was answered in favor of the assessee.

2. Justification for Disallowing Commission on Sales to an Employee:
The assessee paid a commission of Rs. 8,545 to Sri B.M. Parikh, an employee managing the Cuttack branch, in addition to his salary of Rs. 4,200 per annum. The ITO disallowed the entire commission, citing the absence of a written agreement and lack of business necessity. The AAC upheld this disallowance.

The Tribunal allowed a deduction of Rs. 1,400 as a bonus but disallowed the balance of Rs. 7,145, questioning the genuineness of the oral agreement and the necessity of such commission payments.

The court, however, held that the payment was evidenced by entries in the books of account and was justified to induce Parikh to manage the business efficiently. The Tribunal's partial allowance of Rs. 1,400 contradicted its disallowance of the remaining amount. The court emphasized that the reasonableness of the expenditure should be judged from the assessee's perspective, not the revenue's. Consequently, the second question was also answered in favor of the assessee, allowing the entire commission under section 10(2)(x) of the Act.

Conclusion:
The reference was answered wholly in favor of the assessee, with costs awarded to the assessee and a hearing fee of Rs. 100.