1979 (8) TMI 54 - HC - Income Tax

Court denies deduction for commission payment to minors as business expense under Indian Income Tax Act.

The court upheld the decision of tax authorities to disallow a commission payment to minors as a deductible business expense under Section 10(2)(xv) of ... Finding Of Fact, High Court Issues Involved:1. Validity of the commission payment to minors as a deductible business expense under Section 10(2)(xv) of the Indian Income Tax Act, 1922.2. Jurisdiction of tax authorities to scrutinize the commercial expediency and legitimacy of the commission payment.3. Interpretation and application of legal precedents regarding business expenses and commercial expediency.Detailed Analysis:1. Validity of the Commission Payment to Minors as a Deductible Business Expense:The primary issue was whether the commission payment of Rs. 68,540 to minors, Sarvashri Pawan Kumar and Subodh Kumar, could be considered an admissible revenue deduction under Section 10(2)(xv) of the Indian Income Tax Act, 1922. The facts established that the minors, through their guardians, had entered into an agreement with the assessee firm for the payment of commission on loans already deposited with the firm. The Income Tax Officer (ITO) disallowed this payment, concluding that it was not made for reasons of commercial expediency or legitimate business needs but was a collusive device to reduce tax liability.2. Jurisdiction of Tax Authorities to Scrutinize the Commercial Expediency:The court examined whether the tax authorities had the jurisdiction to scrutinize the commercial expediency and legitimacy of the commission payment. The court referred to the provision under Section 10(2)(xv), which allows for the deduction of any expenditure 'laid out or expended wholly and exclusively for the purpose of such business.' The court emphasized that the word 'exclusively' refers to the motive, objective, and purpose of the expenditure, granting the tax authorities the jurisdiction to examine the expenditure from this standpoint.3. Interpretation and Application of Legal Precedents:The court reviewed several legal precedents to interpret the provision under Section 10(2)(xv):- Holz Trust v. CIT [1952] 21 ITR 149: The court held that the burden of proving that an expense was laid out wholly and exclusively for business purposes lies on the assessee.- Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 57: The Supreme Court held that the existence of an agreement and actual payment does not bind the ITO to accept the expenditure as wholly and exclusively for business purposes. The ITO is entitled to examine all relevant factors.- Lachminarayan Madan Lal v. CIT [1972] 86 ITR 439: The court held that the mere existence of an agreement and payment does not prevent the ITO from considering whether the expenditure was genuinely for business purposes or a device to minimize tax liability.- Bengal Enamel Works Ltd. v. CIT [1970] 77 ITR 119: The court held that the taxing authority has the jurisdiction to disallow part of the remuneration if influenced by 'extra commercial considerations.'- CIT v. Travancore Sugars and Chemicals Ltd. [1973] 88 ITR 1: The court emphasized the importance of examining the terms of the agreement and the purpose of the transaction to determine commercial expediency.- CIT v. Panipat Woollen & General Mills Co. Ltd. [1976] 103 ITR 66: The court held that commercial expediency must be judged from the point of view of the assessee but must be prudent and reasonable.- Amritlal and Co. Pvt. Ltd. v. CIT [1977] 108 ITR 719: The court held that the ITO must scrutinize an expenditure to ensure it was incurred exclusively for business purposes, taking into account the totality of circumstances.- Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261: The court held that necessity is not a consideration for Section 10(2)(xv), but expenditures traceable to an improper or oblique purpose are not deductible.Conclusion:The court concluded that the tax authorities were justified in scrutinizing the commission payment to the minors and disallowing it as a deductible expense. The payment was not found to be made wholly and exclusively for the purpose of the business but was a device to reduce tax liability. The reference was answered against the assessee, affirming the findings of the ITO, AAC, and the Tribunal.