Business expenditure deduction and stock discrepancy: salary for actual services was allowed, and the unexplained income addition was deleted.

Salary paid to a manager who was also a partner of the managing agency firm was held not to be disallowable under section 348 of the Companies Act, 1956 on the facts, because pre-amendment section 348 did not treat every partner as the managing agent and the 1960 amendment was prospective. The payment was also deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922, as remuneration for actual business services that was reasonable and wholly for business purposes. On the stock discrepancy issue, the Tribunal accepted the account books and the returns filed before the Textile Commissioner over inflated bank declarations used for overdraft facilities, so the addition as income from undisclosed source was deleted.

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Issues: (i) Whether the salary paid to the manager, who was also a partner of the managing agency firm, was disallowable as remuneration to the managing agent under section 348 of the Companies Act, 1956 and therefore not deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922. (ii) Whether the addition of Rs. 93,456 as income from undisclosed source was sustainable on the basis of the stock discrepancy between the books and the bank declarations.

Issue (i): Whether the salary paid to the manager, who was also a partner of the managing agency firm, was disallowable as remuneration to the managing agent under section 348 of the Companies Act, 1956 and therefore not deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The pre-amendment section 348 did not treat every partner of a managing agency firm as the managing agent for all purposes. The definition of managing agent in section 2(25) was read as confining that status to the firm or entity entitled to manage the company, and not to each partner individually. The 1960 amendment to section 348 was treated as prospective and not merely declaratory. Independently, expenditure incurred for services actually rendered to the business and found to be reasonable and business-oriented remained deductible under section 10(2)(xv), even if there was a possible inconsistency with the Companies Act, since the payment was not a penalty for infraction of law.

Conclusion: The salary was not hit by section 348 on the facts, and in any event remained an allowable business deduction under section 10(2)(xv). The finding is in favour of the assessee.

Issue (ii): Whether the addition of Rs. 93,456 as income from undisclosed source was sustainable on the basis of the stock discrepancy between the books and the bank declarations.

Analysis: The books of account tallied with the returns filed before the Textile Commissioner, and the apparent variation arose from inflated declarations made to the bank for obtaining overdraft facilities. The Tribunal was entitled to prefer the account books and reject the bank declarations as the true reflection of stock position.

Conclusion: The addition was rightly deleted. The finding is in favour of the assessee.

Final Conclusion: The reference questions were answered against the revenue, and the assessee succeeded on both the allowance of salary expenditure and the deletion of the undisclosed income addition.

Ratio Decidendi: Where remuneration is paid for actual business services and is found to be wholly and exclusively incurred for the purposes of the business, it is deductible under the income-tax law even if a separate corporate law restriction is alleged, unless the payment is shown to be a statutory penalty or an absolute prohibition clearly bars it.

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