Accounting records and salary deductions: low profits and subjective reasonableness cannot justify book rejection or salary disallowance.

The proviso to section 13 was held inapplicable where the assessee regularly maintained accounts and the records were sufficient to deduce income; low profit or the absence of a stock register, by itself, did not justify rejection of the books and estimation of profits. For salary deductions, employee remuneration was treated as allowable if genuine and incurred wholly and exclusively for business purposes, and the taxing authority could not reduce it merely on a subjective view of reasonableness. On those principles, the salary disallowances were largely unsustainable, though the allowance component paid to the general manager remained disallowed on concession.

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Issues: (i) Whether the proviso to section 13 of the Indian Income-tax Act could be invoked to reject the assessee's method of accounting and assess the business profits on an estimated basis; and (ii) whether the disallowance of part of the salaries paid to the general manager and the manager-cashier could be justified on the ground of reasonableness.

Issue (i): Whether the proviso to section 13 of the Indian Income-tax Act could be invoked to reject the assessee's method of accounting and assess the business profits on an estimated basis.

Analysis: The proviso to section 13 applies only where no regular method of accounting is employed or where, in the opinion of the income-tax authority, the income, profits and gains cannot properly be deduced from the method regularly employed. A mere low profit rate or absence of a variety-wise or regular stock register is not by itself material for invoking the proviso. The assessment record showed that the assessee had regularly maintained accounts, and the opening stock, purchases and sales were not in dispute. The reasons given for rejection of the books were insufficient, and there was no proper finding or material showing that the profits could not be deduced from the accounts.

Conclusion: The proviso to section 13 was not attracted, and the rejection of the assessee's method of accounting was unjustified.

Issue (ii): Whether the disallowance of part of the salaries paid to the general manager and the manager-cashier could be justified on the ground of reasonableness.

Analysis: Salaries paid to employees fall to be considered under section 10(2)(xv), and not under section 10(2)(x), which is directed to bonus and commission. For salary expenditure, the relevant test is whether the payment was genuine and laid out wholly and exclusively for business purposes. Where the payment is bona fide and for business expediency, the taxing authority cannot substitute its own subjective view of what is reasonable remuneration. On the facts, there was no finding that the salary payments were not genuine or were made for non-business motives in respect of the salary portions disallowed, and the reductions were based only on an impermissible reasonableness standard. The allowance of the amount paid as allowances, however, was not assailable on the assessee's own concession.

Conclusion: The disallowance of Rs. 18,000 out of the salary paid to the general manager and Rs. 3,000 out of the salary paid to the manager-cashier was not sustainable, while the disallowance of Rs. 5,000 paid as allowances to the general manager was justified.

Final Conclusion: The assessee succeeded on the principal accounting question and substantially on the salary deduction question, with only the allowance component remaining disallowed.

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