- In The Case of CIT V. Tian House Service Ltd. (109TaX82) the board of directors of the assessee company resolved to bear the overseas medical, travel & stay expenditure of a part time advisor, a former employee who was a keyman in that particular group of companies who rendered advice from time to time for the benefit of group companies. Under the terms of his appointment he was paid salary, servant allowance, car, medical reimbursements with outer limits, club fees and entertainment expenses. The Madras High Court in this case referred to the three disjunctive tests laid down by the Apex Court in the case of Gordon Woodroffe Leather Mfg. Co. Ltd. v. CIT (44ITR551) being: –
- that the payment should have been made as a matter of practice which affected the quantum of salary;
- that there was an expectation by the employee of getting a gratuity;
- that the sum of money was expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee.
Applying the three tests the court found the following facts in this case:-
- the payment was not made under any contract;
- the keyman had no expectation nor he sought any such payment and even there was nothing to show that he was in need of it;
- the payment does not amount to facilitate either directly or indirectly in carrying on the business of the assessee company an as much as there was nothing to show that such keymen would have withheld his service, if such payment had not been made to him.
The Court thus held such payment as a gratuitous payment made voluntarily which cannot be regarded as expenditure incurred wholly and exclusively for the purpose of business of the company.
- Before the Supreme Court in the case of Rajasthan State Warehousing Corpn. V. CIT (109TAX145) there was a case of an assessee who in the course of carrying on different ventures derived profits, which were taxable as well as in some cases eligible for general exemption. In this case the assessee derived interest income as well as income from letting out warehouses and administrative charges for procurement of foodgrains being exempt u/s 10(29) of the Act.The revenue attempted to apportion the total expenditure between different sources of income and thus allowed deduction of that portion of expenditure which was referable to taxable income. The Supreme Court held that the moot point is whether income from various ventures is earned in the course of one and indivisible business. The Court laid down the following principles in this regard :-
- if income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective head, whether or not computation under each head results in taxable income;
- if income of an assessee arises under any of the heads of income but from different items, e.g., different house properties or different securities,etc., and income from one or more items alone is taxable whereas income from other item is exempt under the Act, the entire possible expenditure in earning the income from that head is deductible; and
- in computing ‘ profits and gains of business or profession’ when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under section 37 of the Act will depend on : (a) fulfillment of the requirements of that provision noted above; and (b) on the fact whether all the ventures carried on by him constituted one indivisible business or not; if they do, the entire expenditure will be a permissible deduction but if they do not, the principle of apportionment of the expenditure will apply because there will be no nexus between the expenditure attributable to the venture not forming integral part of the business and the expenditure sought to be deducted as the business expenditure of the assessee.