Law:

Section:

Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] - Business expenditure - Allow ability of - Assessment year 1956-57 - Whether once an expenditure has really been incurred wholly and exclusively for purpose of business, it is not for revenue to go into question of reasonableness while construing question of allowance under section 10(2)(xv) of 1922 Act - Held, yes - Cotton purchased by assessee company from managing partner of its managing agency firm at ceiling price fixed - ITO on finding that there was inflation in prices of cotton purchased, disallowed excess price under section 10(2)(xv) of 1922 Act on ground that said sum did not represent actual expenditure incurred by company wholly and exclusively for its business - Cotton purchased from managing director was of higher quality than cotton purchased form others - Order of ITO did not point out that purchase price of cotton had been so manipulated as to show payment of larger price than what was actually paid - Cotton purchases was indispensable for production of yarn and as such had close nexus with business of assessee - Whether on facts, order of ITO was not justified - Held, yes FACTS The assessee company, owner a spinning mill, purchased two varities of cotton from two persons at the rate which represented ceiling price fixed for those varieties of cotton. The cotton belonged to the managing partner of the managing firm of the company but routed through the two persons. The Cotton purchased was of higher quality then purchased form other. The ITO holding that there was inflation in prices of those varieties of cotton disallowed excess price under section 10(2)(xv) of 1922 Act on the ground that the said sum did not represent the actual expenditure incurred by the company wholly and exclusively for its business and, accordingly, made addition to the income disclosed by the assessee, invoking proviso to section 13 of the 1922 Act. The AAC confirmed the finding of the ITO that there was inflation in the price of cotton purchased from the said two persons. He, however, disagreed with the ITO as regards the other defects pointed out by him…

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