Business existence test: expenditure deductible only if the business actually existed in the year; maintenance costs disallowed.

Whether expenditure for maintaining selling agency staff and office was deductible under Section 10(2)(xv) turned on whether the selling agency business was actually in existence in the accounting year. The HC applied the principle that expenditure is deductible only if incurred wholly and exclusively for a business that was in existence and whose profits are under assessment, and held that statutory prohibition on carrying on the selling agency meant no lawful business existed. Tribunal findings of inactivity, absence of agreements and brokerage supported that factual conclusion. Outcome: the maintenance expenditure was not an admissible deduction.

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Issues: Whether expenditure incurred for maintenance of the selling agency staff and office at Kanpur during the period when the selling agency could not lawfully carry on business was an admissible deduction under Section 10(2)(xv) of the Income-tax Act against the assessee's other income.

Analysis: The Court examined whether the selling agency business was in existence in the relevant accounting year so that its expenses could be deducted under Section 10(2)(xv). While recognising that a business may be dormant yet continue to exist as a going concern, the Court emphasised that for deduction under Section 10(2)(xv) the expenditure must be incurred "for the purpose of the business which was in existence in the accounting year and the profits of which are under assessment." Here, by operation of the Sugar Control Order and the Controller's notification, the assessee could not lawfully carry on the selling agency business in sugar during the relevant period; merely maintaining an office did not establish that the selling agency business was in existence for the purposes of the section. The Tribunal's factual findings about inactivity and absence of agreements and brokerage were relevant, and on the facts the Court found there was no business in existence to which the expenditure could be attributed for deduction.

Conclusion: The expenditure for maintaining the selling agency staff and office during the period when the selling agency could not lawfully carry on business is not an admissible deduction under Section 10(2)(xv) of the Income-tax Act, 1922; the reference is answered in the negative.

Ratio Decidendi: For the purposes of Section 10(2)(xv) of the Income-tax Act, expenditure is deductible only if incurred wholly and exclusively for the purposes of a business that was actually in existence in the accounting year; absence of a lawfully carried on business during the period precludes deduction.

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