Beg, J. - (1.)TWO questions have been referred to us by the Income Tax Appellate Tribunal under Section 66(1) of the Indian Income Tax Act (hereinafter referred to as the Act) by means of a consolidated order on three reference applications The first of these questions relates to the assessment year 1950-51, and the same question had arisen out of the assessee's case for the assessment year 1949-50. This question has already been answered by this Court on 29-4-1966 in TTR No 207 of 1962 (All), J.K. Cotton. Spinning and Weaving Mills Co. Ltd. v. Commr. of Income Tax, Lucknow.
(2.)THE assessee is a private limited company, which had employed Sri H. P. Pasari in 1939 as the General Manager of its Mills. It had also employed Shri Madan Lal Singhania in 1936 as Printing Master in its Calico Department. THEre was no written contract of service between either of these two employees and the assessee. Both these employees were involved in a murder case and remained in jail as under-trial prisoners from 23-8-1948 to April 1950. THEy were both acquitted in 1950. In these circumstances, the question arose whether the amount paid towards their salaries and bonuses during the period for which they were in jail as under-trial prisoners was an allowable business expense under Section 10(2)(xv) of the Act This Court held that the payments made to both of these employees, who are closely related to Sri Sohan Lal Singhania, the Director incharge, and Sri P. D. Singhania, the Director of the assessee company, were made due to extra-commercial considerations.
Hence, the whole amount could not be deducted under Section 10(2)(xv) of the Act, but the amounts paid to Sri H. P. Pasari for a period of 291/2 days and to Madan Lal Singha nia for 241/2 days, for which periods these gentlemen could remain on leave on full salary under their terms of service, could be allowed to be deducted. THE first question before us was framed as follows:--

"Whether on the facts and in the circumstances of the case, the payments of salaries and bonuses made to Madan Lal and H. P. Pasari during the period of their jail custody are allowable as deduction under Section 10(2) (xv) of the Income Tax Act and consequently under Business Profits Tax Act?"

THE Tribunal's findings of fact left no room for doubt that the payments to the extent to which they were found by this court, in answering ITR No. 207 of 1962, to be not allowable under Section 10(2)(xv) of the Act were made for reasons outside the scope of commercial expediency. THE allegations of the assessee that the payments had been made in order to prevent leakage of trade secrets and that the employees had continued to give advice and guidance concerning their respective departments during their jail custody, were disbelieved by the Income Tax authorities right upto the Tribunal. We, therefore, see no reason to give any other answer than the one already given by this Court in the above mentioned ITR No 207 of 1962. Consequently, we give the answer in the negative to the above mentioned question and hold that the salaries and bonuses paid to the two employees could not be deducted except for the periods for which they were lawfully entitled to leave under the terms of their service with the assessee company.

The second question referred to us relating to the assessment year 1951-52 is framed as follows:--

Whether on the facts and in the circumstances stated above, the payment of Rs. 2,50,000 to the U.P. Government is allowable as a deduction under Section 10(2)(xv) ?"

The assessee company had revealed for the first time by means of an unsigned and undated letter filed before the Appellate Assistant Commissioner, the following facts: In May, 1946, the Anti-Corruption Police had raided the premises of M/s Kanodia Brothers who used to make purchases of cloth from the Assessee Company. The police seized a number of alleged cash memos of the assessee company's retail shop and a number of other documents. The godown of Laxmi and Company, the Distributing Agents of the Assessee company, was also sealed by the police

As a result of some negotiations with the U. P. Government, a Committee, consisting of the then Home Minister, the Joint Chief Secretary in the U.P. Government and another high Government Official (who subsequently became a Judge of this Court), was constituted to discuss matters with Lala Sohan Lal Singhania, the Director Incharge of the Company. The matters discussed related to: (1) sale of fents i.e cloth pieces under one yard; (2) sale of about 1500 turbans packed in 101/2 bales; (3) nine bales of cloth found in the godown of M/s Laxmi Co; (4) a number of cash memos of the assessee company's retail shop alleged to have been recovered from the premises of Messrs Kanodia Brothers; and (5) fabrication of readymade garments.

The above mentioned unsigned and undated letter contained in expression of what the assessee thought were the views of the above mentioned "high powered" committee. The document summarised the alleged views of the high powered committee as follows:--

"(i) That even though there might be grounds for suspicion or technical breaches, the Government had no water-tight case in respect of any of the above matters.

(ii) That if proceedings were started against the company they would take a lot of public time and require expenditure of a lot of public money.

(iii) That the matter had become stale as more than 2 years had elapsed since the Police raid on the premises of Messrs. Kanodia Brothers.

(iv) That the matter may have to be fought out up to the highest court in the land and would take a number of years.

(v) That if the Government lost the case, it would not reflect any credit on them or their officers and advisers.

(vi) That the company thought that even if the proceedings failed the mere fact of the proceedings having been launched against it, would reflect adversely on its business reputation

(vii) That the officers of the company would not be able to give their whole time and attention to the business of the company and the business of the company would, therefore, suffer

(viii) That the proceedings might be long drawn out and the company might lose lacs of rupees in profit during the period of litigation.

(ix) That a large amount of expenses may have to be incurred over a number of years during which the proceedings might continue from one court to another.

(x) That it might be advisable from a business point of view to purchase peace from the Government in the interest of uninterrupted working of the company.

(xi) That it would be inadvisable to fall foul of the wishes of the Government and not compromise the case."

(3.)THE Income Tax Appellate Tribunal was, quite naturally, mystified and found: "the nature and purpose of the payment of Rs. 2,50,000 is shrouded in mystery.
" It also held that the assessee not having produced its correspondence with the Government was obviously afraid that its production will not serve its interest. THE Tribunal observed: "It passes our comprehension why the company paid such a large sum if really it had a cast-iron case in Its favour as the assessee would have us believe. Preservation of reputation and purchasing of peace are all vague and unsubstantiated, and, if we may say so, mere empty words. We do not know how the reputation was at stake or the peace was endangered."

It held: "THE rigidity of the section requires the assessee to prove that the expenses were wholly and exclusively laid out for the purposes of the business. If the company really believed that the Government had no case, and we refuse to believe it, then it owed it to its shareholders to prove its honesty before parting with such a large sum. At least in one instance it had to admit that there was breach e.g. in regard to the sales offents THE assessee has failed to convince us that this large sum was an expenditure laid out wholly and exclusively for the purposes of business by its failure to prove the true nature of this payment." Finally, the Tribunal came to the conclusion that the payment did not represent "a loss incidental to business."

As the nature of the case taken up initially was not clear to us from the findings of the Tribunal, we looked at the assessment order where we found that the assessee had admitted before the Income Tax Officer that the above mentioned payment was the "composition money" paid to the U.P. Government in connection with a criminal proceeding which the Government proposed to take against the assessee company. Apparently, the assessee company was not willing to reveal very much about the nature of the transaction, and it contented itself by placing its case no higher than that a payment was made for avoiding prosecution for infringement of Control Orders.

In stating the case to us the Tribunal pointed out that its finding was that the assessee had not discharged its onus of proving that the payment of Rs. 2,50,000 was made "wholly and exclusively" for the purpose of business as required by Section 10(2)(xv) of the Act. As we are of the opinion that the Tribunal had not committed any error of law in coming to the conclusion that the assessee had not discharged Its onus of proof, on the facts and circumstances stated above, we could very briefly answer the second question by pointing out that no question of law could arise on the findings of fact properly recorded by the Tribunal after correctly placing the burden on the assessee.