Translate
Text Highlighter

Bookmark

PDF

Share

Report a problem
AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • — Mr. G. C. Sharma with Mr. B. R. Dewan and Mr. V. Kumaria, Advocates.
  • — Mr. R. L. Aggarwal, Sr. Advocate with Mr. S. P. Aggarwal, Advocate.
Judges
  • Mr. Justice Hardayal Hardy
  • Mr. Justice V.S. Deshpande
Acts
Are you a practicing lawyer?
Enhance your digital presence and reach by creating a Casemine profile.
Upload pleading to use the new AI search
Click here to upload
Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • — Mr. G. C. Sharma with Mr. B. R. Dewan and Mr. V. Kumaria, Advocates.
  • — Mr. R. L. Aggarwal, Sr. Advocate with Mr. S. P. Aggarwal, Advocate.
Judges
  • Mr. Justice Hardayal Hardy
  • Mr. Justice V.S. Deshpande
Acts
See more information ...
Smart Summary

Summary of the Legal Opinion — Hardayal Hardy, J.

Factual and Procedural Background

The assessee is a private limited company and the assessment year in question is 1962-63 (relevant accounting period: year ended 30 September 1961). Motilal Sanghi, a former Chairman of the company, died in July 1961 in Delhi while on an inspection tour of the company's business. The company chartered a plane to transport his dead body to Jodhpur at a cost of Rs. 6,900, and claimed that sum as a deduction under Section 37 of the Income-tax Act, 1961 ("the Act"). The Income-tax Officer disallowed the claim; the Appellate Assistant Commissioner upheld the disallowance. The Income-tax Appellate Tribunal (Delhi Bench ‘C’) allowed the claim, relying on a passage in Andrew Yule and Co. v. Commissioner of Income-tax, Calcutta (49 I.T.R. 57). On application by the Commissioner, Question No. 1 was referred to the Court under Section 256(1) of the Act. The assessee sought further questions be referred, and the Tribunal recast matters so that two questions were ultimately referred to the Court.

The second issue that reached the Court concerned a house allowance claimed by the assessee on behalf of Shri S. K. Sanghi (a director). The assessee claimed Rs. 10,893 as house allowance; the Tribunal disallowed Rs. 5,493 as excessive, having earlier in respect of the previous assessment year considered Rs. 450 per month reasonable as against a Rs. 900 per month payment.

Legal Issues Presented

  1. Whether on the facts and in the circumstances of the case the expenditure of Rs. 6,900/- incurred by the assessee was incidental to the business carried on by it and allowable?
  2. Whether on the facts and in the circumstances of the case, disallowance of a sum of Rs. 5,493/- out of the assessee's claim of Rs. 10,893/- paid as rent for the house, provided rent free to Shri S. K. Sanghi, Director is justified in law?

Arguments of the Parties

Revenue's Arguments

  • The Appellate Assistant Commissioner took the view that if Motilal Sanghi had been alive his travelling expenses would have been business expenses, but that the deceased's relatives were responsible for carrying the body back and the company's liability ceased on death.
  • The Revenue argued that the company should not be liable to carry the dead body to the deceased's native place and that the expenditure was not incidental to the business; it also suggested the company debited the expense only because the other directors were family members of the deceased.
  • In relation to the house allowance, the Tribunal (representing Revenue's position on appeal) considered the Rs.900 per month to be excessive and relied on its prior view (for the earlier year) that Rs.450 per month was reasonable.

Assessee's Arguments

  • The assessee argued the Rs.6,900 spent on chartering a plane to take the dead body to Jodhpur was incidental to the carrying on of the company's business and therefore deductible under Section 37.
  • With respect to the house allowance, the assessee contended that the Tribunal could not reduce the claimed payment by mere ipse dixit; if the director himself paid rent at Rs.900 per month, the Tribunal should not reduce the allowance unless there were specific findings that the work done, the company's income, or other relevant considerations made that amount unreasonable.
  • The assessee relied on precedent (Natesan and Co. (Private) Limited v. Commissioner of Income-tax, Madras) concerning remuneration to a director to support the contention that the Tribunal should not substitute its unsupported view for the actual arrangements made.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Andrew Yule and Co. v. Commissioner of Income-tax, Calcutta (49 I.T.R. 57) Authority cited by the Tribunal to support that expenditure to transfer a dead body back to the place from which the deceased had come while on company business could be permissible expenditure. The Tribunal relied upon a passage in this judgment to allow the Rs.6,900 claim; the Court noted the Tribunal's reliance but analysed the issue more fully through other authorities and statutory interpretation.
Commissioner of Income-tax, Kerala v. Malayalam Plantations Ltd. (53 ITR 140) Established that the phrase "for the purpose of the business" (analogous to Section 37 of the Income-tax Act, 1961) has a wide scope and may include many acts incidental to carrying on the business, though its limits are implicit. The Court invoked this decision to interpret Section 37 broadly, emphasizing that expenditures incidental to carrying on the business fall within its scope, subject to the requirement that expenditure be incurred in the capacity of carrying on business.
Commissioner of Income-Tax, Bombay v. Walchand and Co. Pvt. Ltd. (65 ITR 381) Held that the test of commercial expediency and reasonableness of expenditure is to be judged from the businessman’s point of view, not the Revenue's. The Court relied on this principle to assess reasonableness of the Rs.6,900 expenditure and rejected a narrow Revenue-oriented view; commercial practicability for the assessee was the touchstone.
Natesan and Co. (Private) Limited v. Commissioner of Income-tax, Madras (51 ITR 386) Authority concerning assessments of remuneration paid to a director; cited by the assessee to argue that the Tribunal should not reduce legitimate payments without substantive basis. The Court noted the assessee's reliance on this authority but found that in the present case the Tribunal had applied its mind (relying on its prior consideration) and its decision to disallow part of the house allowance was not unreasonable.

Court's Reasoning and Analysis

The Court undertook a step-by-step analysis confined to the material before it:

  1. On the Rs.6,900 expenditure: The Court observed that Motilal Sanghi had come to Delhi for company business and that had he remained alive the company would have been liable to meet his travelling expenses to and from Jodhpur. The Court found that there were board minutes authorizing the company to bear the transport charges for chartering the plane to carry the body back, although no company rules or articles were placed on record.
  2. The Court rejected the Appellate Assistant Commissioner’s approach that the company's liability ceased on the death of the director and that the relatives should have borne the cost; the Court viewed that as too narrow an interpretation of "for the purpose of the business."
  3. The Court relied on the Supreme Court decision in Commissioner of Income-tax, Kerala v. Malayalam Plantations Ltd. to interpret "for the purpose of the business" under Section 37 expansively: the expression covers a wide range of acts incidental to carrying on the business, but subject to the implicit limitation that the expenditure must be incurred for carrying on the business and by someone acting in that capacity.
  4. The Court further relied on Commissioner of Income-Tax, Bombay v. Walchand and Co. to state that reasonableness and commercial expediency must be judged from the assessee's point of view (the businessman) rather than the Revenue's narrower perspective.
  5. Applying those principles, and noting that the Revenue had not contended the charter cost was excessive or that there were less expensive means to transfer the body, the Court concluded that because the travel (had the deceased lived) would have been business travel and the company would have been liable, the company's liability to transport the body was incidental to the carrying on of the company's business. Consequently, the Rs.6,900 was allowable under Section 37.
  6. On the house allowance dispute: The Tribunal had previously considered the reasonableness of a Rs.900 monthly rent and had reduced it to Rs.450 per month in relation to an earlier assessment year. The Tribunal in the present assessment year applied that conclusion and disallowed Rs.5,493 as excessive. The assessee argued this was mere ipse dixit and impermissible.
  7. The Court observed the assessee had not challenged the earlier Tribunal decision and that the company's income for the year under reference was substantially similar. The Court concluded the Tribunal had applied its mind to the nature of the business and the necessity for remuneration and that the reduction could not be characterized as unreasonable. Therefore the Tribunal's disallowance was upheld.

Holding and Implications

Holding:

  • Question No. 1: Answered in favour of the assessee and against the Revenue — the Rs.6,900 spent on chartering a plane to take the dead body of Motilal Sanghi to Jodhpur was an expenditure incidental to the carrying on of the company's business and was an allowable deduction under Section 37.
  • Question No. 2: Answered in favour of the Revenue and against the assessee — the Tribunal's disallowance of Rs.5,493 out of the claimed Rs.10,893 as house allowance for Shri S. K. Sanghi was justified.

Implications:

  • Direct consequences for the parties: the company is entitled to deduct the Rs.6,900 expenditure; the company's claim for house allowance is to be reduced by Rs.5,493 as previously determined by the Tribunal. The Court made no order as to costs, noting both sides had partially succeeded.
  • The Court relied on existing authorities to interpret Section 37 and did not purport to lay down any novel legal principle beyond applying settled tests (scope of "for the purpose of the business", and commercial expediency/reasonableness from the assessee's viewpoint). Therefore, no new precedent or broad novel rule is asserted beyond the application of cited precedents to the facts before the Court.

Reference answered accordingly.

Show full summary ...

    The Commissioner Of Income-Tax Petitioner v. M/S Supreme Motors Pvt. Ltd.

    Hardayal Hardy, J.:— The following two questions have been referred to this Court under Section 256 (1) of the Income-tax Act 1961 which will hereafter be described as the Act, by an order dated 11-2-1966 made by the Income-tax Appellate Tribunal (Delhi Bench ‘C’): —

    “1. Whether on the facts and in the circumstances of the case the expenditure of Rs. 6,900/- incurred by the assessee was incidental to the business carried on by it and allowable?
    “2. Whether on the facts and in the circumstances of the case, disallowance of a sum of Rs. 5493/- out of the assessee's claim of Rs. 10,893/- paid as rent for the house, provided rent free to Shri S. K. Sanghi, Director is justified in law?”
    The assessee is a private limited company and the assessment year is 1962-63, the relevant accounting period being the year ended 30th September 1961.
    The facts are simple and there is no doubt about them. Motilal Sanghi, a former Chairman of the assessee company, died in July 1961 and his dead body was taken to Jodhpur by a specially chartered plane from where he had come to Delhi on a tour of inspection of the company's business. A sum of Rs. 6900/- was charged on that account and was claimed as a deduction under Section 37 of the Act. The Income-tax Officer disallowed the sum holding the expense as not incidental to the business. When the matter came up before the Appellate Assistant Commissioner he held that the expense could not be treated as an expenditure for carrying on the business of the company or for the purpose of the business of the company and consequently disallowed the same.
    The assessee took up the matter to the Tribunal. On a passage in the judgment of Calcutta High Court in Andrew Yule and Co. v. Commissioner of Income-tax, Calcutta (49 I.T.R 57) (1), the Tribunal held that since Motilal Sanghi had died while on an inspection tour of the company it was permissible expenditure to have his body transferred back to the place from where he had come. As such the Tribunal was of the view that it was an expenditure incidental to the carrying on of the business and hence allowed the assessee's claim.
    On an application by the Commissioner of Income-tax question No. 1 was referred to this Court. Although this was an application by the Commissioner the assessee wanted the Tribunal to refer three other questions of law which according to it, had arisen out of the Tribunal's order. One of the questions formulated by the assessee was as follows: —
    “Whether on the facts and in the circumstances of the case the sum of Rs. 5493/- out of Rs. 10,893/- paid as house allowance to Shri S. K. Sanghi, Director, in accordance with the terms and conditions of his contract of service with the company was rightly disallowed?”
    The Tribunal however held that out of the three questions formulated by the assessee it was question No. 2 which could actually be referred to the Court. The question was however recast and as a result both the questions are now before us.
    The assessee has not placed on record any rules or bye-laws of the company nor has our attention been invited to any regulation in the Articles of Association providing for payment of any charges to the Chairman of the company for arriving at Delhi in connection with the business of the company. Only a copy of the minutes of the meeting of the Board of Directors of the company held on 21-7-1961 wherein besides paying homage to the memory of the deceased, a resolution stating that transport charges of Rs. 6900/- payable to Messrs Indian Air-lines Corporation for chartering one plane to on 22-7-1961 to take the dead body of Shri Motilal Sangni who expired on 21-7-1961 at Delhi due to heart failure while he was on an inspection tour of the company, should be borne by the company, has been placed on record. But it appears from the order of the Appellate Assistant Commissioner that if Motilal Sanghi was alive his travelling expenses could be treated as business expenses of the company. It therefore follows that there were some regulations which provided for payment of travelling expenses to the Chairman of the company if and when he happened to come to Delhi on an inspection tour of the company's business. If the deceased was residing at Jodhpur and he happened to come to Delhi on company's business while he was alive it would have been the liability of the company to meet his travelling expenses from Jodhpur to Delhi and from Delhi to Jodhpur. He would thus have been entitled to travelling expenses both ways. The question therefore is whether his death made such a difference to the situation that the liability of the company ceased and his body could not be sent back to the place from where he had come. According to the Appellant Assistant Commissioner, the carrying of his body to his native place, was the responsibility of his relatives and that the only reason for debiting these expenses to the travelling expense account of the company was that the other Directors were the brother, son and nephew of the deceased.
    We do not think this is a correct approach to the problem. It was held by the Supreme Court in Commissioner of Income-tax, Kerala v. Malayalam Plantations Ltd. (53 ITR 140 (2) that the expression “for the purpose of the business” as used in Section 2 (10) (xv) of the Income-tax Act, 1922 which is analogous to Section 37 of the new Act is wider in scope than the expression “for the purpose of earning profits.” Various illustrations have been given in that judgment and it is said that the range of this expression is wide. It may take in not only the day to day running of the business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title.; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of the business; it may comprehend many other acts incidental to the carrying on of the business.
    The Supreme Court however said that however wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business.
    It is not the case of the Revenue that the expenses on chartering a plane were excessive and that there could be other methods of taking the dead body of the deceased to Jodhpur. The question considered by the Tribunal and also referred to this Court is whether the expenditure of Rs. 6900/- incurred by the assessee was incidental to the business carried on by the assessee-company. In the case of Commissioner of Income-Tax, Bombay v. Walchand and Co. Private Limited (65 ITR 381 (3) the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure was held to be adjudged from the point of view of the businessman and not of the Revenue.
    The deceased had come to Delhi for the business of the company. When he would have gone back from Delhi to Jodhpur it would have again been on the business of the company for it was the liability of the company to meet his travelling expenses and to take him back to Jodhpur. In either event the visit of the deceased to Delhi and his return journey to Jodhpur would have been for the purposes of the business of the assessee. The expenditure incurred by the assessee would have been for the carrying on of the business. It was argued on behalf of the Revenue that the moment the deceased died his interest in the business of the assessee came to an end and his dead body could not have been sent back to Jodhpur by the assessee for carrying on its business. It is too narrow a view of the expression “for the purpose of the business”. By his death the deceased may have lost all interest in the business of the company but the business of the company was still being carried on and the expenditure incurred by the assessee for carrying the dead body of the deceased being the liability of the company which was incidental to the business of the company, this liability had to be discharged. The expenditure was therefore incidental to the carrying on of the business of the company and its commercial capacity has to be adjudged from the point of view of the assessee itself and not by the Revenue.
    Question No. 1 is therefore answered in favour of the assessee and against the Revenue. The amount spent by the assessee was an allowable deduction.
    As regards question No. 2 the assessee had claimed a sum of Rs. 10,893/- as house allowance paid to Shri S. K. Sanghi Director of the assessee-company, in accordance with the terms and conditions of his contract of service. Out of this amount a sum of Rs. 5493/- was disallowed by the Tribunal. Shri S. K. Sanghi who was drawing a salary of Rs. 1750/- p.m and was also living in his own house at Indore, was transferred to Delhi where his salary was increased to Rs. 2000/- p.m from 1st September 1959 with free furnished residence and conveyance. He took up a house in Delhi for which he was paid by the assessee-company a sum of Rs. 900 per mensem by way of rent. In the assessment year 1961-62 the Tribunal held that the allowance of Rs. 900/- per mensem was rather excessive and that on an estimate a sum of Rs. 450/- per mensem was considered reasonable. In connection with the assessment year 1962-63 with which we are concerned in this case the Tribunal relied upon its previous order, followed the same decision and thus disallowed the balance of Rs. 5493/-.
    The argument advanced by the learned counsel for the assessee is that it was not open to the Tribunal to use its own ipse dixit. If the Director himself had been paying rent at the rate of Rs. 900/- p.m unless it was found that the actual work done by him did not permit that amount or the quantum of income earned by the company did not allow such expenditure or there were certain other allied considerations on which an opinion could be formed whether or not the payment was reasonable or excessive, the Tribunal was not right in reducing the expenditure.
    Reliance was placed on a decision of Madras High Court in Natesan and Co. (Private) Limited v. Commissioner of Income-tax, Madras (51 ITR 386) (5) where the court was concerned with the question of remuneration paid to a director of the company.
    It appears to us that in the present case the assessee was not dissatisfied with the order made by the Tribunal for the assessment year 1961-62. The income of the assessee for the year under reference is more or less the same. The Tribunal having applied its mind to the nature of the business of the company and the necessity to pay remuneration to the director, it cannot be said that there was no application of mind. In the circumstances, the decision of the Tribunal cannot be treated as unreasonable. The question is therefore answered in favour of Revenue and against the assessee.
    The reference is answered accordingly, but since both the sides have succeeded partly there will be no order as to costs.
    Reference answered accordingly.
    Use AI to get other relevant cases.
    Try AI Pro free for 7 days Upgrade to AI Pro

    Comments

    The Commissioner Of Income-Tax Petitioner v. M/S Supreme Motors Pvt. Ltd.
    (May 24, 1971)