Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Year in which deductible - Assessment year 1968-69 - Whether liability to pay sales tax arises in year in which sales are effected and fact that they may have been paid in a subsequent year is of no consequence - Held, yes - Whether, therefore, where assessee was following mercantitle system of accounting, he could not lay claim for deduction of sales tax liability for earlier previous years during relevant year - Held, yes Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1968-69 - Assessee claimed deduction in respect of remuneration and salary paid to its employees which was based on percentage of profit - ITO disallowed assessee's claim holding that remuneration paid was excessive - On further appeal Tribunal found that assessee had enhanced salaries of employees during relevant previous year by two hundred percent, and keeping in view business requirements of assessee, it was not reasonable on his part to have granted further remuneration by way of giving a percentage of profits earned - It, accordingly, rejected assessee's claim - Whether, on aforesaid considerations, Tribunal could disallow expenditure in question as not being commensurate with reasonable business activities of assessee - Held, yes FACTS The assessee-firm filed its return showing loss. The ITO found on scrutiny of the accounts that certain sum had been debited in the accounts by way of sales tax but that liability did not pertain to the assessment year in question. Apart from this, under the head, 'Remuneration and salary', the assessee debited certain amount as remuneration and salary to its four employees which was based on the percentage of the profit. The ITO disallowed the claim for deduction of sales tax on the ground that it did not pertain to the relevant assessment year. So far as the deduction of remuneration was concerned, that was disallowed as the ITO held that the remuneration paid was excessive, considering the fact that those employees were being paid handsome amounts by way of salary. On appeal, the AAC reduced the addition. So far as the claim for…

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