1966 (10) TMI 27 - SC - Income Tax

Interpretation of Tax Law: Deduction for Business Transactions

The court clarified that the application of the law to the facts found in a specific case determines the permissibility of the deduction under section ... Whether, on the facts and circumstances of this case, the amount of ₹ 46,582 was a permissible deduction under section 10(2)(xv) of the Act was a mixed question of fact and law and the High Court was in error in not directing the Tribunal to state a case under section 66(2) of the Act? Held that:- As submitted by learned counsel that the High Court was not right in holding that no question of law arose out of the order of the Tribunal and that the finding of the Tribunal that the payment was made for commercial considerations and not ex gratia was a pure finding of fact which could not be interfered with is to be accepted. The judgment of the High Court dated April 4, 1962, should be set aside. The High Court is directed to ask the Income-tax Appellate Tribunal to state a case on the following question of law and refer it under section 66(2) of the Act : ' Whether, on the facts and circumstances of the case, the sum of ₹ 46,582 was a permissible deduction under section 10(2)(xv) of the Income-tax Act in the assessment year 1954-55 ?' After receipt of the reference the High Court should deal with it in accordance with law. Appeal allowed. Issues:1. Interpretation of section 10(2)(xv) of the Income-tax Act regarding permissible deductions.2. Whether the acceptance of a debit note for a sum of money was a bona fide business transaction or an ex gratia payment.3. Determination of whether a claim for deduction under section 10(2)(xv) was a question of law or a mixed question of fact and law.Detailed Analysis:1. The judgment dealt with the interpretation of section 10(2)(xv) of the Income-tax Act concerning permissible deductions. The appellant contended that the question of whether an expenditure qualifies as a deduction under this provision involves a mixed question of fact and law. The court emphasized that while factual findings are necessary, the ultimate decision on the legal aspect of the deduction is a question of law. Citing precedents, the court clarified that the application of the law to the facts found in a specific case determines the permissibility of the deduction under section 10(2)(xv).2. The case also revolved around the acceptance of a debit note by the respondent for a sum of money from another entity. The Income-tax Officer initially disallowed the amount as an ex gratia payment, but the Appellate Tribunal later deemed it a transaction based on commercial expediency. The Tribunal's decision was challenged, leading to a series of appeals. The court ultimately held that the acceptance of the debit note was a business transaction prompted by commercial expediency, rather than being ex gratia. This determination was crucial in deciding the permissibility of the deduction claimed by the respondent under section 10(2)(xv).3. Another significant issue addressed in the judgment was whether a claim for deduction under section 10(2)(xv) constituted a question of law or a mixed question of fact and law. The appellant argued that the High Court erred in not directing the Tribunal to state a case under section 66(2) of the Act, as the question of permissibility of the deduction involved both factual findings and legal interpretation. The court agreed with the appellant, emphasizing that while the facts of each case are crucial, the final conclusion on the legal aspect of the deduction falls within the realm of law. The court referred to previous cases to support the view that the interpretation of statutory language and the application of law to factual scenarios constitute a mixed question of fact and law in determining deductions under the Income-tax Act.