1. The Income-tax Appellate Tribunal, Indorc Bench, Indore, has made this reference under Section 256(1) of the I.T. Act, 1961, seeking our opinion on the following question. It appears that there is some typing error in the question referred to us and the proper question should be:
'Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the amount of Rs. 26,728 paid by the applicant-firm on account of Mr. J. Pol was not for its business purposes and, therefore, not allowable as business expenditure ?'
2. The assessee-company. engaged the services of one Shri J. Pol, a Polish technician for the maintenance of some machinery imported by it. He stayed in India from October 21, 1966, to May 20, 1971. For some time the company deducted tax from his salary and ensured that he filed his income-tax returns. However, for the assessment years 1966-67 to 1972-73 the salary of the employee was treated as exempt from tax and accordingly the tax deducted at source, was refunded. When Mr. Pol was about to leave India, he wanted a clearance certificate from the income-tax authorities for which the authorities insisted upon a guarantee in favour of the Govt. of India for payment of any tax that may be actually found due. The assessee-company gave the guarantee and Mr. Pol went away. Later the ITO reopened his assessments and concluded that a wrong exemption had been granted to him under Section 10(6)(vii) of the I.T. Act. Ultimately he created a demand of Rs. 26,728 which had to be paid by the assessee and which was eventually claimed as a deduction from its business income.
3. This claim was disallowed by the ITO and the AAC. The assessee went up in appeal before the Income-tax Appellate Tribunal which was of the opinion that the following basic facts required further investigation :
1. The manner in which the liability came to be fastened upon the assessee-company and efforts made by the company to recover the amount from Mr. Pol.
2. The contract of service before the Tribunal was of 7th May, 1968, although the technician had come to India in October, 1966. Therefore, there might be some other correspondence in this behalf. And
3. The guarantee deed executed by the company was not available and the AAC had failed to attach any heed to the fact that the assessee-company had deducted the taxes from the salary of Mr. Pol.
4. After remand the ITO considered the particulars on which investigation was directed by the Appellate Tribunal. After considering the same the ITO rejected the assessee's contention and held that a sum of Rs. 26,728 which was paid by the assessee-company in terms of the guarantee given by it was not deductible as business expenditure and the same was added to the income of the assessee. This finding was confirmed by the AAC. The assessee preferred a second appeal to the Tribunal and that appeal was also dismissed.
5. It was frankly conceded by Shri Chitale, learned counsel for the assessee before us, that the salary paid to Mr. Pol was not exempt under Section 10(6)(vii) of the I.T. Act, 1961. The question, therefore, which falls for consideration is, whether, the amount paid by the company in pursuance of the guarantee given by it was a business expenditure allowable under Section 37 of the I.T. Act. An assessee is permitted to deduct expenses laid out or expended wholly and exclusively for the purposes of his business, in the computation of the income chargeable under the head 'Profits and gains of business'. Admittedly, it was not the business of the company to give a guarantee for the income-tax of its employee or of others and, therefore, on the face of it, the payment of tax by the company on behalf of its employee, Mr. Pol, was not 'laid out or expended wholly and exclusively for the purposes of its business'. In CIT v. Birla Bros. P. Ltd. : 77ITR751(SC) , the assessee had stood guarantee for a loan of Rs. 6,00,000 which was advanced by a bank to the selling agent of one of the companies managed by the assessee. The selling agent failed to repay the loan and the amount had to be paid by the assessee pursuant to the guarantee and thereafter it treated the selling agent as its debtor for the amount. Later, the assessee wrote off the sum as the selling agent went into liquidation. The assessee claimed allowance of this sum as bad debt under Section 10(2)(xi) of the Indian I.T. Act, 1922. Neither the memorandum of association of the respondent nor the managing agency agreementcontained any provision whereby it could be said that the guaranteeing of the loan to the selling agent was done in the course of the managing agency business. Nor was there even material to show that the managed company was under any legal obligation to finance the selling agent or to guarantee any loans to the selling agent. On these facts the Supreme Court held that (headnote):
'The sum of Rs. 5,60,199 was not allowable as a bad debt under Section 10(2)(xi). The guaranteeing of the loan could not be said to have indirectly facilitated the carrying on of the respondent's business. Nor could it be said that it was in the larger interests of the respondent's business that the guarantee was given.'
6. Learned counsel for the assessee invited our attention to the observations of the court at p. 755 of the report that 'if the assessee has made a payment not voluntarily but to discharge a legal obligation which arose from his business he would be entitled to have the amount deducted as bad debt under Section 10(2)(xi)', and argued that in the instant case the assessee had discharged a legal obligation for safe return of its expert employee and for that purpose it had to furnish guarantee in respect of the income-tax payable by the said employee. Shri Chitale, however, did not give proper importance to the words 'which arose from his business', in the aforesaid observations. In the instant case this obligation did not arise from the business because the assessee-company did not carry on the business of furnishing guarantees for tax, etc., of its employees.
7. In Indian Aluminium Co. Ltd. v. CIT : 79ITR514(SC) the Supreme Court, while dealing with a similar matter, held as follows :
' that the amount which the assessee was bound to deduct from the payment made to the Montreal company under Section 18(3B) and which it failed to recover from that company could not be regarded as a bad debt under Section 10(2)(xi) of the Act and the payment made under a statutory obligation because the assessee was in default could not constitute expenditure laid out for the purpose of the assessee's business within the meaning of Section 10(2)(xv).'
8. It was not disputed that the salary of Mr. Pol was not exempt from income-tax and, therefore, under Section 192 of the I.T. Act the assessee company was bound to deduct tax at source and pay the same within the prescribed time under Section 200 of the Act. The fact that the assessee-company did not do so made it a deemed assessee in default in respeet of the tax under Section 201 of the I.T. Act and it was a person responsible to pay the tax of its employee. This amount of tax could not be allowed as deduction under Section 37 of the Act. For this reason also the claim of the assessee for allowance of Rs. 26,728 as business expenditure was not tenable.
9. Thus, we are of the view that, on the facts and circumstances of the case, the Tribunal was right in holding that the amount of Rs. 26,728 paid by the applicant-company on account of Mr. Pol was not for its business purposes and, therefore, not allowable as business expenditure.
10. The reference is answered against the assessee. Costs of this reference will be borne by the assessee Counsel's fee Rs. 150.