Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessee-HUF was partner of a firm in which 'M' and 'D' were also partners - On death of M firm was reconstituted - 'M' had earlier executed a will whereby his share in firm's capital as well as in its goodwill were bequeathed to his family - Legatees of 'M' who were related to assessee-HUF did not join reconstituted firm, and, instead, under an agreement, were to be paid royalty at 3 per cent of total sale besides interest on capital - On death of D entire business was taken over by assessee - In assessment year in question, assessee claimed deduction of Rs 54,266 as royalty amount paid to legatees under agreement which was found by Tribunal to be almost equal to share of M in goodwill of firm - Tribunal also held that agreement was a device to reduce tax in assessee's hands - Tribunal, therefore, sustained ITO's order allowing only Rs. 7,800 as deduction out of sum claimed by assessee - Whether Tribunal was justified - Held, yes Section 40A(2)(a) of the Income-tax Act, 1961 - Business disallowance - Payments to relatives, etc. - Whether on facts stated under heading 'Business expenditure - Allowability of Tribunal was justified in relying on provisions of section 40A(2)(a) in sustaining impugned disallowance of sum of Rs. 46,466 - Held, yes Section 256 of the Income-tax Act, 1961 - Reference - Question of fact - Whether Tribunal's finding that an agreement is a device to reduce tax burden is a finding of fact - Held, yes Facts The assessee, a HUF, was a partner of a firm in which it had a six annas' share while one 'M' had a six annas' share and one 'D' had a four annas' share. Consequent upon death of M, the firm was reconstituted whereby the assessee had 60 per cent share while 'D' had 40 per cent share. 'M' had executed a will whereby his share in the firm's capital, excepting a sum of Rs. 14,000 and his share of goodwill therein, were bequeathed to his daughter-in-law and grandson. The legatees of 'M' did not join the reconstituted firm but instead an agreement was executed between the two partners and the legatees whereby royalty at 3 per cent of the total sale was to he…

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