Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1962-63 - Assessee-firm paid remuneration at certain percentage of profits of firm in addition to salary to two of its employees - It was found that said employees were related to a partner of assessee-firm - Related to one of its partners - In respect of one employee findings of revenue were that in fact he had rendered services and firm's business was benefited by such services - In respect of another employee there was no evidence to show that he had actually rendered service and contributed in connection with profits of firm - Whether assessee was entitled to deduction of remuneration in respect of employee who had rendered actual service and not in respect of employee who had not rendered service - Held, yes FACTS The assessee was a registered firm consisting of four partners viz., the father and his three sons, and its business was the purchase and sale of yarn. In respect of relevant assessment year, a claim was made by the assessee for deduction of a sum of Rs.2,140 paid as salary and of Rs. 31,355 paid as remuneration to 'S' and 'M'. The above two persons were entitled to remuneration out of the net profits of the firm in addition to the salary drawn by them. The ITO found that the two persons were the sons-in-law of 'P', the father-partner; that 'S' joined the services of the assessee-firm in the assessment year 1960-61; that 'M' came into the picture only in the assessment year 1961-62; that 'S' was paid a salary of Rs.785 in the assessment year 1960-61, and another sum of Rs. 1,200 in the assessment year 1961-62; and that there was no justification for the payment of such a large amount of remuneration to these two persons. In that view, he allowed a sum of Rs. 1,750 as reasonable remuneration to 'S' and a sum of Rs. 1,200 as reasonable remuneration to 'M'. The rest of the claim for deduction was disallowed. The AAC upheld the orders. The Tribunal held that the revenue was justified in taking into account the relationship between the partners and the two persons to whom the remuneration had been paid and in disallowing a portion of the remuneration…

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