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1983 Supreme(Mad) 194
High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE RAMANUJAM & THE HONOURABLE MR. JUSTICE FAKKIR MOHAMMED
India Manufacturers (Madras) Private Limited - Appellant
Versus
Commissioner of Income Tax - Respondent
Case No : TC No. 1626 of 1977, Ref. No. 1158 of 1977
Decided On : 29 March 1983
Expenses incurred for extra-commercial considerations are not allowable deductions under the Income Tax Act.
Headnote:
INCOME TAX - Deductions - Commission paid to wife of assessee - Finance commission paid to assessee's sister - Retrenchment compensation paid to employees of service department - Rebates and allowances relating to service department - Whether allowable deductions.
Fact of the Case:
The assessee, a private limited company, claimed deductions for various expenses, including commission paid to the wife of the assessee, finance commission paid to the assessee's sister, retrenchment compensation paid to employees of the service department, and rebates and allowances relating to the service department. The ITO disallowed the deductions, and the Tribunal upheld the disallowance.
Finding of the Court:
The court held that the commission paid to the wife of the assessee was not an allowable deduction as it was a device adopted for dividing the assessee's profits. The court also held that the finance commission paid to the assessee's sister was not an allowable deduction to the extent that it was paid for extra-commercial considerations. The court further held that the retrenchment compensation paid to employees of the service department was not an allowable deduction as the service department was a separate and independent business of the assessee. Finally, the court held that the rebates and allowances relating to the service department were not allowable deductions as the assessee failed to adduce evidence to show that the expenses were incurred.
Issues: 1. Whether the commission paid to the wife of the assessee is an allowable deduction? 2. Whether the finance commission paid to the assessee's sister is an allowable deduction? 3. Whether the retrenchment compensation paid to employees of the service department is an allowable deduction? 4. Whether the rebates and allowances relating to the service department are allowable deductions?
Ratio Decidendi: 1. The commission paid to the wife of the assessee was not an allowable deduction as it was a device adopted for dividing the assessee's profits. 2. The finance commission paid to the assessee's sister was not an allowable deduction to the extent that it was paid for extra-commercial considerations. 3. The retrenchment compensation paid to employees of the service department was not an allowable deduction as the service department was a separate and independent business of the assessee. 4. The rebates and allowances relating to the service department were not allowable deductions as the assessee failed to adduce evidence to show that the expenses were incurred.
Final Decision: All four questions referred to the court were answered in the affirmative and against the assessee. The Revenue was awarded costs from the assessee.
RAMANUJAM J.
The following four questions of law have been referred to this court under s.256(1) of the I.T. Act, 1961, by the Incometax Appellate Tribunal for our opinion 1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 30, 000 paid to Mrs. Sarada Rajam is not an allowable deduction in computing the income of the assessee ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing only a portion of the finance commission paid to Smt. Sujatha Ramakrishnan ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the disallowance of Rs. 7, 500 paid as retrenchment compensation to the employees of the service department ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the rebates and allowances relating to the service department ?
"The facts and circumstances which gave rise to this reference may briefly be stated : The assessee is a private limited company carrying on business as distributors of the products of M/s. Rayala Corporation. In the course of the assessment for the year 1971-72, the assessee claimed sum of Rs. 30, 000 being the agency commission paid to Smt. Sarada Rajam for the alleged use of the rights accrued to her under an agreement dated March 11, 1966, with M/s. Rayala Corporation Private Limited. The ITO, following his own order for the assessment year 1967-68, disallowed the claim and that was confirmed in appeal by the AAC. The identical issue in respect of the very same assessee came up for consideration before this court in T.C. Nos. 1082 to 1085 of 1977 and by a judgment dated February 22, 1983-India Manufacturers (P.) Ltd. v. CIT, this court has held that the payments made to Smt. Sarada Rajam by way of commission at the rate of Rs. 2, 500 per month cannot be said to have been made for business purposes and that the mode of giving such an agency commission was only a devise adopted for dividing the assessee's profits and that as the payments having been made for extra business considerations, the disallowance of the agency commission of Rs. 30, 000 paid to Smt. Sarada Rajam was to be upheld. Following the said decision of this court, question No. 1 is to be answered in the affirmative and against the assesseeIn the Course Of the assessment, the assessee has claimed deduction for the amount of Rs. 24, 000 paid to Smt. Sujatha Ramakrishnan at 3 per cent. of its sales turnover. This finance commission is said to have been paid in respect of a loan of Rs. 75, 000 said to have been taken by the assessee from the said Sujatha Ramakrishnan. In the course of the assessment, the assessee claimed the entire finance commission so paid as an expenditure incurred in connection with the borrowing for the business and as such an allowable one. The ITO allowed interest on the said sum of Rs. 75, 000 borrowed at 12 per cent. per annum which came to Rs. 9, 000 and disallowed the balance of Rs. 15, 000 as an amount spent for extra-commercial considerations. The disallowance by the ITO of the sum of Rs. 15, 000 was upheld by the AAC as also the Tribunal. The assessee contends before us that the entire sum of Rs. 24, 000 paid as finance commission for the borrowing made by the assessee in a sum of Rs. 75, 000 should have been allowed and it is not open to the ITO to restrict the allowance to 12 per cent. interest on Rs. 75, 000 and to treat the balance as an amount spent for non-business considerations. As against a similar disallowance in the year 1970-71, the Tribunal has sustained the disallowance and the assessee filed T.C.P. No. 454 of 1977 to this court seeking a reference on the question of the allowability of the entire amount paid by the assessee to Sujatha Ramakrishnan. This court dismissed the said petition taking the view that it is purely a question of fact as to whether any portio
