Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - A minor represented by his guardian invested a partly sum in business of assessee - Assessee paid to minor fifty per cent profits of business carried on by assessee - Tribunal disbelieved story that minor's investment in assessee's business was to bring good luck to assessee – Whether, on facts, it could be held that payment to minor was not diversion of income by overriding or paramount title, but was merely application by assessee of income earned by him - Held, yes - Whether payment to minor of any amount in excess of reasonable rate of interest on his investment could not be treated as legitimate business expenditure and an allowable deduction - Held, yes FACTS The minor, represented by his guardian, invested a sum in the business carried on by the assessee. The assessee claimed deduction of payment made to the minor of 50 per cent of the profits of the business. The department disallowed the assessee's claim. The Tribunal held that the alleged payment by the assessee to the minor was not by way of consideration for good luck said to have been brought to the assessee's business on account of the minor investing a paltry sum in the assessee's business. The Tribunal accordingly concluded that the payment to the minor was not diversion of income but application of income in view of the charge and liability created by the agreement. On reference: HELD Once the Tribunal disbelieved the story that the minor's investment in the assessee's business was considered to bring good luck to the assessee, it followed that the payment to the minor was not a diversion of income by an overriding or paramount title, but was merely an application by the assessee of the income earned by him. As the Tribunal disbelieved the story of good luck being brought to the assessee's business on account of the minor's investment in the assessee's business, it followed that the payment to the minor of any amount in excess of a reasonable rate of interest on his investment could not be treated as a legitimate business expenditure and an allowable deduction. Note : The case has been decided in favour of the…

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