V. BHARGAVA, C.J. - The question referred for our opinion is :
'Whether, on the facts and in the circumstances of the case, the payments of salaries and bonuses made to Madanlal and H. P. Pasari during the period of their jail custody are allowable as deductions under section 10(2)(xv) ?'
The fats found by the Tribunal on the basis of which this question has to be answered is that both these persons, Madanlal and H. P. Pasari, who were employers of the assessee-company, were accused of an offence of murder and were committed to jail as under-trial prisoners. Subsequently, they were acquitted. During the period that they were in jail they were not carrying out their ordinary duties which were entrusted to them as employees of the company. The company still made payments to both of them of their full salaries for the periods during which they were in jail and they were also allowed bonus. After considering the evidence of the parties, the Tribunal held that the assessee failed to prove that the payments to these persons were made out of any consideration of commercial expediency. The assessee comes forward with the plea that the payment was made because these persons were holding posts of responsibility and it was in the interest of the company to continue to pay them their salaries in order to avoid disclosure of companys secrets by them which would have been probable had no payments been made to them. On the material before it, the Tribunal rejected this plea as not established. There was the further plea that, while they were in jail, they were consulted by the employees of the assessee-company and they gave advice which was another consideration for making these payment. On this aspect of the case also the Tribunals finding is that there is no satisfactory proof that any advice was actually given. On the other hand, the finding was that both these persons were related to the directed-in-charge and another director and that it was this extra-commercial consideration which led to these payments being made to these persons. All these are essential findings of fact recorded by the Tribunal and we have to answer the question referred to us on the basis of these findings of fact. It appears to us that on these findings of fact it would not be possible to hold that this entire sum paid to these two persons while they were in jail was expenditure incurred wholly and exclusively for the purpose of the business.
It appears from the statement of the case and the appellate order of the Tribunal that an alternative case was also put forward claiming that at least part of the salary paid to these persons should be held to be expenditure made out wholly and exclusively for the purpose of the business and this claim was restricted to the amount representing the leave salary of these two persons for the periods for which they were entitled to leave on full salary. On this alternative case the Tribunal only recorded its finding by stating that they agreed with the Appellate Assistant Commissioner. The order of the Appellate Assistant Commissioner shows that the contention before him was that Sri. H. P. Pasari was entitled to leave for 29 1/2 days and Madanlal Singhania for 24 1/2 days. But the amount paid to them representing leave salary for these periods was also disallowed on the grounds that the payment was not made out of any business considerations. In giving this decision it appears to us that a clear error of law was committed. It may be that initially the payments were made by the directors with a different object but it cannot be overlooked that these persons were entitled to leave on full pay for these two periods and, consequently. Even if there were no other considerations, they could have claimed their full salary for these periods. The salary paid to them in respect of these periods must, therefore, be held to represent the amount which they were entitled to claim by virtue of their conditions of service and such payments made to employees in respect of rights earned by them by doing work for an employer must necessarily be held to be expenditure incurred wholly and exclusively for the purpose of the business. In the circumstances, we consider that the Tribunal committed an error in disallowing the amount representing leave salary for these periods as a deduction claimable under section 10(2)(xv).
As a result, the question referred to us is answered in the negative, except with regard to payment of amounts and of Madanlal Singhania for a period of twenty four and half days. Since the question is being answered mainly against the assessee, the assessee shall pay the costs of the department. Fee of counsel is fixed at Rs. 200 (Rs. Two hundred).