Law:

Section:

Section 201, read with sections 36(1)(vii) and 37(1) of the Income-tax Act, 1961 [Corresponding to section 18(7) read with sections 10(2)(xi) and 10(xv) of the Indian Income-tax Act, 1922] - Deduction of tax at source - Consequences failure to deduct or pay - Appellant company failed to deduct tax at source from retainer fee paid to foreign company - ITO treated assessee as being in default under section 18(7) and on payment of that amount of tax assessee claimed deduction therefore under either section 10(2)(xi) or (xv), having written off said liability on refusal of non-resident company to reimburse it - Whether payment in question made by appellant could not be regarded as bad debt under section 10(2)(xi), debt being not incidental to its business, because it arose out of non-compliance with provisions of Act and was more a matter of commercial expediency - Held, yes - Whether a payment made under statutory obligation because assessee was in default could not constitute expenditure laid out for purposes of its business within meaning of section 10(2)(xv) and hence, same was not allowable under that section - Held, yes FACTS The assessee was a public limited company having its registered office at Calcutta. Its principal business consisted of manufacturing aluminium ingots, sheets and such other products from aluminium. There was another 'montreal company' which provided the assessee with the technical know-how, engineering services, etc., regarding development of production of the goods. An agreement was entered into on 31-1-1947, between the Montreal company and the assessee. The agreement provided for payment of a retainer fee on an annual basis. There was no condition or stipulation that the fee would be payable by the assessee without deduction of tax under the provisions of the Act. The assessee credited a total fee of Rs. 2,50,808 in favour of the Montreal company for a period of seven years between the accounting year ending 30-9-1944 and 30-9-1950. In 1951, the ITO treated the assessee as being in default under section 18(7) of the Act in respect of the amount of tax which the assessee was liable to deduct from the payments made to the Montreal…

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