Deductibility of service-payment write-offs and foreign profits tax rejected under income-tax principles

An outright payment made to secure an employee's services was treated as expenditure incurred when paid, not as a reserve to be written off year by year; the annual write-offs were therefore not allowable deductions because they did not represent expense incurred in those later years. Foreign profits tax paid in Ceylon was also stated to be inadmissible under the Indian Income-tax Act, 1922, as section 10(4) excludes tax on business profits from deduction and such tax is not expenditure laid out wholly and exclusively for business. The stated result was that both deductions were denied.

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Issues: (i) Whether the amounts written off annually from the sum of Rs. 1,00,000 paid to secure the services of an employee were allowable deductions in the respective assessment years. (ii) Whether Ceylon profits tax paid by the assessee was deductible in computing its total income under the Indian Income-tax Act, 1922.

Issue (i): Whether the amounts written off annually from the sum of Rs. 1,00,000 paid to secure the services of an employee were allowable deductions in the respective assessment years.

Analysis: The agreement showed that the sum of Rs. 1,00,000 was paid outright on the employee joining service, with interest accruing for his benefit, and that the bank's right to recover any sum under the collateral stipulation arose only on the happening of a future contingency. The bank did not retain the amount as a reserve to be depleted year by year, and the yearly write-off did not correspond to any expenditure incurred in those years. The expenditure, if any, was incurred when the payment was made, and the failure of the contingency meant that no amount ever became recoverable.

Conclusion: The annual amounts written off were not allowable deductions and the issue was decided against the assessee.

Issue (ii): Whether Ceylon profits tax paid by the assessee was deductible in computing its total income under the Indian Income-tax Act, 1922.

Analysis: Section 10(4) of the Indian Income-tax Act, 1922 prohibits allowance of any sum paid on account of tax levied on the profits or gains of a business and displaces reliance on the general deduction provisions. Foreign profits tax does not become deductible merely because it is paid outside India, and it is not expenditure laid out wholly and exclusively for the purpose of business. The tax is a charge on profits and not an admissible business outgoing.

Conclusion: The Ceylon profits tax was not deductible and the issue was decided against the assessee.

Final Conclusion: Both referred questions were answered in favour of the department, and the assessee was held not entitled to the claimed deductions.

Ratio Decidendi: A payment is not deductible as business expenditure where it is an outright capital outlay or where the claimed write-off depends only on a contingent right that never accrued; likewise, profits tax, including foreign profits tax, is not an allowable business deduction under section 10 of the Indian Income-tax Act, 1922.

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