1971 (2) TMI 28 - HC - Income Tax

Assessee's Profits Taxable for 1957, Commission Not Deductible as Business Expense

The High Court held that the assessee's profits for 1957 were taxable for the assessment year 1958-59 under the Finance Act, 1958, not based on a prior ... Amount spent on obtaining stay of recovery of income-tax - Prima facie, stay of recovery of tax has nothing to do with the carrying on of the business of the assessee. nor has it anything to do with its purpose – such expenditure is not an allowable expenditure Issues:1. Whether the assessee's profits for the year 1957 are taxable for the assessment year 1958-59 as per the Finance Act, 1958, or based on a prior agreement.2. Whether a commission paid for borrowing shares to secure stay of tax recovery is deductible in computing the assessee's business profits.Analysis:1. The High Court determined that the profits earned by the assessee in 1957 were assessable for the assessment year 1958-59 based on the Finance Act, 1958, and not as per a previous agreement with the erstwhile Jind State. This decision aligned with a previous judgment in Income-tax Reference No. 20 of 1970, which favored the department over the assessee.2. Regarding the deduction of commission paid for borrowing shares to pledge as security for tax recovery stay, the assessee contended that the commission was a business expense. However, the authorities and the Tribunal rejected this claim. The Tribunal relied on the decision of the Patna High Court and the Calcutta High Court, which supported disallowing such deductions. The High Court analyzed two Supreme Court decisions - India Cements Ltd v. Commissioner of Income-tax and Jeewanlal (1929) Ltd. v. Commissioner of Income-tax. In the India Cements case, the Supreme Court emphasized that expenses must be incurred for the purpose of the business. The Court found that securing a tax recovery stay was not directly related to the business operations of the assessee and, therefore, the commission was not deductible as a business expense. The Court also noted that the Jeewanlal case followed the India Cements decision and did not provide a basis for allowing the deduction in the present case. Consequently, the High Court ruled in favor of the department and denied the deduction of the commission, affirming the decision against the assessee.In conclusion, the High Court answered both questions against the assessee and in favor of the department. The judgment highlighted the importance of expenses being directly related to the business purpose for being considered deductible, as established in relevant Supreme Court decisions.