Business deduction rules deny jail-custody salary claims, but allow leave salary paid under accrued service rights.

Salaries and bonuses paid to employees during jail custody were not deductible because the Tribunal found they were not incurred wholly and exclusively for business and the claimed commercial expediency was unproven. By contrast, leave salary payable under the employees' service conditions was deductible, since that liability had accrued through employment and was discharged in satisfaction of an earned contractual right. The reference was therefore decided substantially against the assessee, with deduction allowed only to the limited extent of the leave salary entitlement under section 10(2)(xv).

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Issues: Whether salaries and bonuses paid to employees during jail custody were allowable as business deductions under section 10(2)(xv); whether the portion representing leave salary payable under the employees' service conditions was deductible.

Analysis: The payments made during jail custody were found, on the Tribunal's factual findings, not to have been incurred out of commercial expediency or wholly and exclusively for the purpose of business. The asserted business justification, including protection of secrets and alleged advice given during custody, was not established. However, the employees were entitled under their service conditions to leave on full pay for specified periods, and that entitlement had been earned by their employment. Amounts paid in discharge of such accrued contractual rights constituted expenditure for the purposes of the business.

Conclusion: The salaries and bonuses paid during the period of jail custody were not allowable as deductions, but the amounts representing leave salary for the specified entitled periods were allowable as deductions under section 10(2)(xv).

Final Conclusion: The reference was decided substantially against the assessee, with deduction permitted only to the limited extent of leave salary payable under the employees' earned service rights.

Ratio Decidendi: Payments to employees are deductible only when incurred wholly and exclusively for business purposes, but salary paid in satisfaction of an accrued contractual right under the terms of service remains a permissible business deduction.

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