Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1979-80 - Assessee-company took over running business of 'H' by sale deed - As per sale deed apart from sale consideration assessee had to pay annual overriding charges to wife of transferee on basis of net profits earned by assessee - Overriding charges paid as per sale deed by assessee during relevant assessment year were disallowed by ITO on ground that it was neither allowable as overriding charge nor admissible as revenue expenditure - Whether since payment of amount as overriding charges was an integral part of sale deed by which going concern was transferred to assessee and obligation to pay said amount was attached to very source of income, payment of overriding charges was diversion of income and, hence, deductible from income of assessee - Held, yes FACTS The assessee-company took over the running business of 'H' by a sale deed. The said sale deed contained a condition that over and above the consideration fixed, the company would be liable to pay to 'J', the wife of 'H', by way of annual overriding charge at the rate of 20 per cent of the net profits earned by the company in every year subject to a maximum limit of Rs. 20,000 per year. During the relevant assessment year apart from salary and bonus 'J' was paid an amount as overriding charges. For the allowance of overriding charges paid, the assessee relied on the sale deed. The ITO disallowed the said amount on the ground that payment made was neither allowable as an overriding charge nor was it admissible as a revenue expenditure. The Commissioner (Appeals) as also the Tribunal rejected the assessee's claim on ground that 'J' was neither the owner of the property transferred nor was a party to the agreement of transfer. On reference : HELD The overriding charge which had been created in favour of 'J' was an integral part of the sale deed by which the going concern was transferred to the assessee. [Para 4] The obligation in the instant case was attached to the very source of the income. The source of the income was the going concern transferred to the assessee by the sale deed. The said sale deed…

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