Revenue expenditure test: proxy-related spending to preserve an existing income source was allowable, while salary disallowance required reconsideration.

Disallowance of salaries paid to director-employees was not justified on the stated facts, because the earlier basis for the adjustment had already been found unsustainable and the matter required reconsideration on the correct material. Expenditure incurred to procure shareholder proxies for a managed company's meeting was held to be revenue in nature, as it was directed to preserving and continuing an existing managing agency and improving the yield from an existing source of income, not acquiring a new source or capital asset. The reference was thus answered partly against the Revenue and partly in favour of the assessee, with the salary issue remitted for reconsideration and the proxy-related expenditure allowed as a deduction.

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Issues: (i) Whether the disallowance out of salaries paid to director-employees was justified; (ii) Whether expenditure incurred for procuring proxies from shareholders for meetings of the managed company was admissible as revenue deduction.

Issue (i): Whether the disallowance out of salaries paid to director-employees was justified.

Analysis: The Tribunal had sustained the disallowance by following its earlier view for the preceding assessment year. The reference was governed by the same factual basis, and the earlier decision had already been found unsustainable because the material evidence had not been fully considered. Where the very foundation of the disallowance was the same, the matter required reconsideration on the correct facts rather than acceptance of the earlier conclusion.

Conclusion: The disallowance was not justified and the issue was answered against the Revenue and in favour of the assessee for reconsideration by the Tribunal.

Issue (ii): Whether expenditure incurred for procuring proxies from shareholders for meetings of the managed company was admissible as revenue deduction.

Analysis: The expenditure was incurred to secure shareholder approval for reappointment and for a remuneration arrangement relating to the existing managing agency. The legal effect of the governing corporate provision was that the managing agency would otherwise have come to an end, but a timely reappointment preserved the existing source of income. The expenditure was thus directed to protecting and continuing an existing business asset and to improving the yield from an existing source, not to acquiring a new source of income or a new capital asset.

Conclusion: The expenditure was revenue in nature and allowable as a deduction in favour of the assessee.

Final Conclusion: The reference was answered partly against the Revenue and partly in favour of the assessee, with the salary-disallowance issue requiring reconsideration and the proxy-related expenditure held allowable.

Ratio Decidendi: Expenditure incurred to preserve and continue an existing source of income is revenue expenditure, whereas expenditure aimed at acquiring a new source of income or capital asset is capital in nature.

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