TMI Blog2003 (9) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... rt was delivered by M. KATJU J.-This is an income-tax reference under section 256(1) of the Income-tax Act, 1961, in which the following questions have been referred to us for our opinion. "(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs. 9,812 is not admissible deduction for the purpose of computing the total income of the assessee for the assessment year 1979-80? (ii) Whether, on the facts and circumstances of the case, the assessee is an 'industrial company' under section 2(7) of the Finance Act, 1979?" Heard learned counsel for the parties. The relevant assessment year is 1979-80. The assessee is a private limited company which was incorporated on October 6, 1977. By a sale deed dated November 12, 1977, the assessee took over the running business of M/s. Jit and Pal X-Ray Bhuri Wave and Diagnostic Laboratory, which was being run under the sole proprietorship of Dr. Harnam Singh. The consideration fixed was Rs. 96,192, which is mentioned in the sale deed. The previous year for the assessment year 1979-80 ended on July 31, 1978. In the deed of sale itself it was written that over and above the sum of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r words, apart from the amount Rs. 96,191.73 paise which had to be paid to the vendor, the vendee had also to pay 20 per cent. of its net profit subject to a maximum of Rs. 20,000 to Mrs. Jagjit Kaur. Hence, in our opinion, clause 4 of the sale deed is also part of the consideration of the sale to the assessee. We may now consider the legal position. The question whether an amount paid is application of income or diversion by an overriding title is a vexed question in income-tax law. There is a plethora of case law, on this question, e.g., in Kanga and Palkhivala's The Law and Practice of Income Tax, eighth edition, pages 131 to 137, Law of Income Tax by Acharya Shuklendra, second edition, pages 451 to 468, D.M. Harish on Income Tax, volume I, pages 727 to 734, etc. The principles on this point laid down by various decisions may appear to be simple, but their application to the facts of a particular case is often difficult. It is not necessary for us to deal with the entire case law on this question and we may only refer to the relevant decisions, which to our mind are applicable to the facts of the present case. In Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135, the Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [1987] 166 ITR 867 (Cal), etc. As held by the Supreme Court in Provat Kumar MiUer v. CIT [1961] 41 ITR 624, the fundamental principle is that an application of income is an allocation of one's own income after it accrues or has arisen, although such application may be under a contract or obligation, whereas diversion of income is that which diverts away or deflects before it accrues to or reaches the assessee, and it is received by him only for the benefit of the person who is entitled to the income under an overriding charge or title. As explained by the Supreme Court in Motilal Chhadami Lal Jain v. CIT [1991] 190 ITR 1, what has to be seen is the nature of obligation by reason of which the income becomes payable to a person other than the one receiving it. Where the obligation flows out of an antecedent and independent title it effectively slices away a part of the corpus of the right to receive the entire income and thus it would be a case of diversion. Hence as pointed out by the Supreme Court in CIT v. Imperial Chemical Industries (India) (P.) Ltd. [1969] 74 ITR 17, where there is an obligation to apply an income in a particular way before it is received by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have referred to above. The fact that Smt. Jagjit Kaur was not the owner of the property and was not a party to the transfer agreement is in our opinion wholly irrelevant. The question as stated by us above is whether an obligation was put on the source of the assessee's income and we have answered that question in the affirmative. Even otherwise we are of the opinion that the amount paid to Mrs. Jagjit Kaur should be deducted as a revenue expenditure. In para. 5 of its order, the Tribunal has rejected the claim of the assessee as revenue expenditure on the ground that the payment was excessive. We do not agree. We have already held in Income-tax Reference No. 290 of 1983--Abbas Wazir (P.) Ltd. v. CIT [2004] 265 ITR 77 (All) decided on September 2, 2003, that it is not for the Income-tax Officer to decide the salary of an employee of a company. The matter has to be considered from the point of view of commercial expediency and a prudent businessman. We have held in that decision that it is for the company to decide what salary shall be paid to its employees, and the Income-tax Officer cannot dictate in this matter. Whether the salary was reasonable or not has to be considered fro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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