Law: Income Tax Act, 1922

Section: 10(2)(xv)

Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] - Business expenditure - Allowability of - Assessment year 1954-55 - In respect of certain loan, assessee, in terms of agreement, paid to lender not only interest but also a specified percentage of its mills sale transactions as commission - Assessee claimed deduction in respect thereof - Interest was allowed as deduction, but not commission payment - Whether in absence of any material to show that assessee-company was in need of working funds at time when loan was raised and commission having not been paid for any work done in connection with sale of yarn Tribunal could justifiably reach conclusion that expenditure was not incurred solely and exclusively for purpose of business - Held, yes FACTS The assessee was a public limited company carrying on business of shipping cotton. For the assessment year 1954-55, an agreement was entered into by the assessee with K, said to be a yarn dealer by virtue of which the assessee allegedly obtained a loan of two lakhs of rupees from that dealer. In terms of the agreement, over and above the interest of nine per cent per annum on the loan, the assessee would pay a sum representing two per cent on the mill's prices of the yarn produced and sold by the assessee mill. The agreement made it appear as if all the production of the assessee mill to the extent of rupees three lakhs per month should be supplied to the lender. The assessee was to furnish details of the count, the number of bales, etc., and it was incumbent upon the lender to accept all the goods offered by the borrower. The further clauses of the agreement, however, provided that if only a part of the goods so offered was accepted by the lender, or if the lender desired to have the goods sold by the mill itself, nevertheless, a nominal profit of 2 per cent on the sale of the goods was to go towards the remuneration of the lender. It was agreed that at no point of time was any supply actually made to the lender, all the goods produced being sold locally by the borrower only and the accounts of the lender being credited with this profit of 2 per cent.…

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