Law:

Section:

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 years 1945-46 and 1946-47 - Assessee-company was exporting cloth to Ceylon but it had no Ceylon import licence - For exporting in year of account, one 'K' helped assessee in obtaining licence on understanding that assessee would pay him half of profits on exports to Ceylon - In pursuance of that agreement, assessee made certain payments during relevant assessment years - Whether in form and substance, payment in question was merely a division of ascertained profits - Held, yes - Whether, therefore, assessee's claim for deduction under section 10(2)(xv) of 1922 Act in respect of aforesaid payment, was to be rejected - Held, yes FACTS The assessee was a registered firm, which in the years of account carried on a business of exporting cloth to Ceylon. The assessee was sending goods to that country even in the preceding years, but had no Ceylon import licence before the assessment year 1944-45. For exporting in the years of account, one 'K' was said to have helped the assessee in obtaining a licence on the understanding that the assessee would pay him half of the profits on the exports of Ceylon. In pursuance of that agreement, the assessee made payment. The ITO disallowed these payments as capital expenditure and both the appellate authorities confirmed that decision. On reference: HELD Under section 10(2)(xv) of 1922 Act, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of such business, profession or vocation can be excluded. It was for the assessee applicant to show that the expenditure he incurred by payment to 'K' in the two years of assessment was expenditure which was not only not in the nature of capital expenditure but was expenditure 'laid out or expended wholly and exclusively for the purposes of such business.' The agreement between 'K' and the assessee was oral. The terms thereof were not clear; but it was conceded before the Income-tax authorities including the Tribunal…

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