Employee's Salary Deduction Allowed under Income-tax Act

The case involved the assessment of salary paid to an employee for the assessment years 1977-78 and 1978-79 under section 57(iii) of the Income-tax Act, 1961. For the assessment year 1977-78, the controversy regarding the salary paid became moot after the assessee's plea was accepted post-assessment reopening. In the assessment year 1978-79, the Tribunal's disallowance of the claimed deduction for salary paid was overturned. The High Court judgment allowed various expenses, including salary, as deductible if incurred for earning income, resulting in the assessee being entitled to the deduction claimed under section 57(iii). The judgment favored the assessee, ruling against the Revenue without costs.

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Issues involved: Assessment of salary paid to an employee for the assessment years 1977-78 and 1978-79 under section 57(iii) of the Income-tax Act, 1961.

Assessment Year 1977-78:
The assessee-company had discontinued its transport business and was involved in managing its assets, selling land plots, and earning income from rent and interest. A controversy arose regarding the salary paid to an employee, leading to a question on the validity of proceedings under section 147(b). However, the issue became infructuous as the assessee's plea was accepted after assessment reopening, rendering the question moot.

Assessment Year 1978-79:
The deduction claimed for salary paid to employees, specifically Rs. 7,500, was disallowed by the Tribunal on the grounds that it was not directly related to the earning of interest. The Tribunal's narrow view was challenged, citing a judgment from the High Court of Allahabad which allowed various expenses, including salary, as deductible if incurred for the purpose of making or earning income. Consequently, the Tribunal's decision was overturned, and the assessee was held entitled to the deduction claimed under section 57(iii). The judgment favored the assessee and ruled against the Revenue, with no order as to costs.

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