Law:

Section:

Section 37(1) of the Income-tax Act, 1961 read with section 360 of the Companies Act, 1956 – Business expenditure – Allowability of – Assessment year 1964-65 – Managed company had appointed ‘B' as an employee – When assessee-company took over managing agency of managed company, ‘B' became an associate within meaning of section 360 of 1956 Act – Permission of Central Government for employment of associate expired and assessee-company paid to managed company amount to cover salary paid to ‘B' by managed company thereafter – Tribunal found that said sum was spent by assessee-company for purpose of its business – Whether payment made by assessee company was not illegal and was allowable as business expenditure – Held, yes FACTS The assessee-company was floated with the object of acquiring the managing agency of the managed company. One ‘B' was appointed by the managed company as an employee with effect from 1-7-1960. When the assessee-company took over the managing agency of the managed company, the said ‘B' became an associate within the meaning of that expression used in section 360 of the 1956 Act. The managed company, obtained permission from the Central Government for payment of remuneration of ‘B' for the years 1961 and 1962. However, it failed to secure the sanction of the Central Government for the continuation of the employment of ‘B' with effect from 22-2-1963, and, therefore, the managed company withdrew a resolution from its extraordinary general meeting regarding the continuation of his appointment. The assessee-company, however, on 25-2-1964, passed a special resolution in its extraordinary general meeting appointing ‘B' as its employee from 27-2-1963, to 31-10-1963. In the said meeting another resolution was passed by the assessee-company to pay the managed company the sums that were payable by ‘B' to the managed company which were paid to him by the managed company in contravention of section 360 of the 1956 Act. In terms of that resolution, the assessee-company paid certain amount as his salary for working under the assessee-company for the subsequent period. The ITO disallowed the deduction claimed by the assessee in respect of this total amount…

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