1960 (4) TMI 68 - HC - Income Tax

High Court allows partner rebates as deductible expenses under commercial expediency, ruling in favor of assessee firm.

HARIHAR COTTON PRESSING FACTORY Versus COMMISSIONER OF INCOME-TAX, BOMBAY NORTH

The High Court held that the rebates granted to the partners were admissible deductions under section 10(2)(xv) and were not affected by section 10(4)(b). ... - Issues Involved:1. Whether the sum of Rs. 9,689/Rs. 40,388 representing rebate granted to four out of five partners of the assessee firm is an admissible deduction in computing the profits for the assessment year 1953-54/1954-55 having regard to the provisions of section 10(2)(xv) read with section 10(4)(b) of the Indian Income-tax Act, 1922.2. Whether the amount of Rs. 9,689/Rs. 40,388 can at all fall under section 10(2)(xv) particularly because it is paid out of income already earned and is not paid in order to earn it.Issue-wise Detailed Analysis:1. Admissibility of Deductions under Section 10(2)(xv) Read with Section 10(4)(b)The Tribunal had to consider whether the rebates granted to four out of five partners were admissible deductions under section 10(2)(xv) of the Indian Income-tax Act, 1922, which allows for any expenditure laid out or expended wholly and exclusively for the purpose of such business. However, section 10(4)(b) prohibits any allowance in respect of any payment by way of interest, salary, commission, or remuneration made by a firm to any partner of the firm.The Tribunal found that the rebates were amounts given to partners by way of reduction in pressing charges. The Tribunal rejected the Department's argument that these amounts were merely appropriations of income after it had been earned. The Tribunal also determined that the rebates were granted on grounds of commercial expediency, a finding that was not contested by the Revenue.The High Court agreed with the Tribunal's conclusion that the rebates were not appropriations of income but rather fell under the heading of 'commercial expediency,' making them admissible deductions under section 10(2)(xv). The Court also concluded that these rebates did not constitute 'commission' within the meaning of section 10(4)(b). The term 'commission' is understood as an allowance for services rendered, often calculated as a percentage on price or value. In contrast, a rebate is a remission or payment back and is of the nature of a deduction from the gross amount.The Court held that the rebates were genuine and bona fide, and as such, they were not hit by the prohibition imposed by section 10(4)(b). Therefore, the rebates were admissible deductions in computing the profits of the assessee firm.2. Rebate as Income Already EarnedThe second issue involved whether the rebates could be considered as payments made out of income already earned and thus not falling under section 10(2)(xv). The Tribunal had initially found that the rebates were not appropriations of income but were given on the grounds of commercial expediency.The High Court noted that the Tribunal had relied on its own experience and found that it was a normal practice to give such rebates. The Court emphasized that it would be beyond its advisory jurisdiction to sit in appeal over the Tribunal's finding of fact regarding the general practice of giving rebates.The Court concluded that the rebates were given as a matter of commercial expediency and were thus allowable expenses under section 10(2)(xv). The rebates were not considered as payments made out of income already earned but were part of the business expenses necessary for maintaining business relations and securing future business.Conclusion:The High Court held that the rebates granted to the partners were admissible deductions under section 10(2)(xv) and were not hit by the provisions of section 10(4)(b). The amounts of Rs. 9,689 and Rs. 40,388 were considered as rebates given on grounds of commercial expediency and not as appropriations of income already earned. The reference was answered in favor of the assessee firm, and the Commissioner was directed to pay the costs of the assessee firm.