TMI Blog1991 (3) TMI 223X X X X Extracts X X X X X X X X Extracts X X X X ..... Damodaraswamy Naidu Brothers. Subsequently, the assessee-company was incorporated on 5-7-1984 for the purpose of taking over the business. Damodaraswamy Naidu and his three brothers were the only shareholders of the assessee-company and they were also the Directors of the company. By a deed dated 16-7-1984 the firm gave on lease the premises and furniture and fittings owned by it to the assessee-company on a rent of Rs. 5,000 per day for the building and Rs. 6,500 per day for the other assets. In terms of that agreement the assessee had paid a sum of Rs. 40,25,000 in the previous year ended 30-6-1985, corresponding to the assessment year 1986-87. The ITO considered that if the rent is estimated at Rs. 5 per sq. ft. for a total plinth are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the basis for this inference of the CIT(A) was incorrect inasmuch as the area of 12,000 s.ft. referred to an annexe building and not open space. It was pointed out that only 4000 s.ft. on Subramaniam Road had been used as a godown and, therefore, the flat rate of Rs. 4 per s.ft. taken for both the annexe building and the godown could not be regarded as excessive. The revenue supported the order of the CIT(A) particularly when no appeal had been filed by the revenue against his order. We find that the working sheet had taken both the annexe building and the building on Subramaniam Road together for estimating the rate of Rs. 4 per s.ft. When it is seen that the other properties were given at a rate of Rs. 5 per s.ft. on the main road a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r was a full time Director of the company and was adequately remunerated. He also rejected the contention of the assessee that the amount having been taxed in the hands of the Directors should not be disallowed in its hands since it would lead to double taxation of the same amount. 6. In the further appeal before us it was contended on behalf of the assessee that the agreement was a genuine agreement conforming to commercial practice, that the expenditure was revenue nature as accepted in the decisions such as CIT v. G.D. Naidu [1987] 165 ITR 63 (Mad.), CIT v. Lahoty Bros. Ltd. [1951] 19 ITR 425 (Cal.), CIT v. Piggot Champan Co. [1949] 17 ITR 317 (Cal.), CIT v. Coal Shipments (P.) Ltd. [1971] 82 ITR 902 (SC), Enpire Jute Co. Ltd. v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The contention of the revenue is that there was no necessity for this agreement cannot be accepted. It must be remembered that before the Directors floated the company, they were carrying on the same business as partners of a firm. In the case of a partnership, if a partner carries on a business of competing nature, he has to account for the profits of the firm and, therefore, it may be considered unusual to have an agreement with the partners to restrain them from engaging in a competitive business. But it was observed by Lord Eldon, L.C. in the case of Morris v. Colman [1812] 18 ves. 437 that,--- " In partnership engagement, a covenant that the partners shall not carry on for their private benefit that particular commercial concern, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue expenditure. 10. The remaining question is whether the expenditure laid out by the assessee could be considered to be excessive or unreasonable. Since we have already held that the agreement was a commercial transaction, the entire amount cannot be disallowed as not for the purposes of the business at all. The power to disallow part of the expenditure as unreasonable or excessive is granted under section 40A(2) and hence the revenue relied on that section. However, in the present case the expenditure resulted in indirectly making a provision of a benefit to the Director which falls within the scope of section 40(c). No doubt the provisions of section 40A(2) would apply to this payment in the absence of section 40(c)(i). But the acc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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