Law: Income Tax Act, 1922

Section: 10(2)

Income-tax Act (XI of 1922), S. 10 (2) (xv) - Business expenditure-Salary paid to employee-Power of Income-tax authorities to consider reasonableness of amount paid.   Though it would be open to the taxing authority to find upon other facts and circumstances that only a part of the amount claimed should be allowed as business expenditure, yet if an amount is paid out of purely commercial considerations, it should be allowed as business expenditure ; it is not open to the taxing authority to adopt a subjective standard of reasonableness to disallowing the amounts.   There was an agreement between the assess a and his employee by which the employee was entitled to get 1/3 of the profits or suitable salary. In the earlier years the employee was getting 1/3 of the profits but in 1124 M. E. there was loss and the employee chose the alternative right and a sum of Rs. 3,000 was fixed as salary. In 1125 M E. the assessee paid Rs. 36,000 to the employee as salary and claimed this amount as a deduction. The Income tax Officer allowed only Rs. 20,00. The Appellate Assistant Commissioner allowed the whole amount on the basis of the agreement The Tribunal reversed the order of Appellate Assistant Commissioner and held that only 1/3 of the profits should be allowed as business expenditure as in the previous years. On a reference to the High Court ;   Held, that the Tribunal's decision was wrong because it relied upon what was done in the previous years and failed to note that subsequently the employee chose the alternative right of getting a fixed salary, and there were no reasonable grounds for disallowing the amount claimed.   Newtone Studios Ltd. v. Commissioner of Income-tax (1955) 28 I T R 378 applied.   STATEMENT OF CASE   By this application under section 66 (1), the assessee requires the Appellate Tribunal to refer certain questions of law said to arise out of the Tribunal's order in I. T. A. No. 5811 of 1957-58 dated May 27, 1958, to the High Court of Kerala at Ernakulam. Inasmuch as, in our opinion, a question of law does arise out of the Tribunal's order, we accordingly state a case, agreed to by both the parties, and…