Business expenditure deductibility: payments to family members must be bona fide with nexus to profits or deduction denied.

Deductibility of payments to family members under the income-tax provision turns on whether the sums were expended wholly and exclusively for business purposes; the legal test emphasises commercial expediency and a demonstrable nexus between payments and partnership profits. The enquiry is fact based for tax authorities, considering existence of services, comparative profit and salary evidence, and whether payments are a device to reduce tax. On the presented facts the authorities found absence of nexus and excessive payments, supporting rejection of the claimed deduction.

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Issues: Whether the Hindu undivided family (assessee), being a partner in the partnership Hiralal Gulzarilal, is entitled under Section 10(2)(xv) of the Income-tax Act to deduction of Rs. 3,850 as remuneration paid to two coparceners (Gulzarilal and Madanlal) for services alleged to have been rendered to the partnership.

Analysis: The statutory test under Section 10(2)(xv) requires that payments claimed as deduction be expended wholly and exclusively for the purposes of the business; whether this test is satisfied is primarily a question of fact for the income-tax authorities. Relevant factors include existence of service rendered, commercial expediency, the quantum of payment relative to the business, relationship between payor and payee, and whether the payment is a device to reduce tax. Where findings of the income-tax authorities, affirmed on appeal, establish absence of services rendered or absence of nexus between the payments and profits of the partnership, those findings support rejection of the deduction. In the present case the authorities found, on evidential material including comparative profit and salary totals, that payments to the two coparceners lacked nexus with the partnership profits and were excessive, indicating they were made to reduce tax rather than as bona fide remuneration.

Conclusion: The claim for deduction of Rs. 3,850 under Section 10(2)(xv) is rejected; the question of law is answered against the assessee and in favour of the Income-tax Department.

Ratio Decidendi: A payment to a family member claimed as a business deduction under Section 10(2)(xv) is allowable only if, on the factual matrix, it is a bona fide payment wholly and exclusively for business purposes (commercial expediency and nexus to profits); absence of such nexus and supporting factual findings negate the deduction.

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