Law:

Section:

Section 37(1) , read with section 256 of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv), read with section 66 of the Indian Income-tax Act, 1922] - Business expenditure - Allowability of - Assessment year 1950-51 - Whether question as to whether a particular item of expenditure is laid out or expended wholly and exclusively for purpose of business is a mixed question of fact and law and thus it can be referred for opinion of High Court - Held, yes FACTS The respondent-company was carrying on the business of manufacture and export of carpets. It used to obtain yarn from a firm in which the shareholders of the respondent-company were partners. While completing the assessments of the firm the ITO made certain additions under section 42(2), of 1922 Act. The firm then sent a debt note of aforesaid liability claiming extra price for supply of yarn to the respondent for the period 1-4-1946 to 31-3-1949. The respondent admitted the liability and after amending its profit and loss account for 1949-50, the respondent claimed said amount as a deduction under section 10(2)(xv) of 1922 Act in its assessment for the assessment year 1950-51. The claim was finally rejected by the Tribunal on the ground that the liability was accepted by the respondent long after the previous year relevant to the assessment year 1950-51. The respondent thereafter amended its profit and loss account for the accounting years 1952-53 and 1953-54 corresponding to the assessment years 1954-55 and 1955-56 and clamed the amount as a deduction in the assessment year 1954-55. The claim was disallowed by the ITO and it was held that the alleged payment was an ex gratia payment and could not be considered to be a payment arising out of the business transaction. On second appeal, the Tribunal however, held that the debit notes were accepted for reasons for commercial expediency. The claim was accordingly allowed. The reference application made by the revenue was rejected. The application made by the Commissioner under section 66(2) of 1922 Act was also rejected by the High Court. On appeal, to the Supreme Court : HELD It is true that the question whether the assessee is entitled to a…

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