M.A.A.KHAN,J. - (1.) AS directed by this Court under S. 256(2) of the IT Act, 1961 (for short the Act) the Tribunal, Jaipur Bench, Jaipur has referred the following question to this Court for its opinion. "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 54,000 paid to the staff was not on account of work incentive and was further justified in disallowing the said amount as having not been expended wholly and exclusively for the purpose of business of the company ?"
(2.) THE relevant facts, giving rise to the above mentioned question, are these : The assessee company was incorporated on 17th April, 1971. It took over the business of the firm M/s Asiatics Jaipur as a going concern w.e.f. 17th May, 1974. The said firm had been deriving income mainly from assembling, manufacturing and selling diesel generating sets. The first accounting year of the assessee company ended on 30th June, 1974. Its managing director, Shri Manak Raj Jain, filed the return of income on 28th June, 1975 showing total income at Rs. 3,60,040. On scrutiny of the accounts the ITO noted that during the relevant period the assessee company had made payments of Rs. 54,000 as work incentive to its following employees : The ITO required the assessee company to inform him whether there was any scheme in the assessee company for payment of work incentive to its employees and similar payments had ever been made by its predecessor firm to the aforesaid persons or whether the payments in question were ex gratia. He further required the assessee company to prove that the payments in question had been made wholly and exclusively to promote its business interests. The assessee company informed the ITO that the payments on account of work incentive was made to the employees as per decision of the board of directors and that similar work incentive was given to the employees in the subsequent year. In substance, the assessee company explained that the payments in question were made by it to its employees out of business expediency and wholly and exclusively for business purposes.
(3.) THE ITO did not accept the contention of the assessee company and pointed out that the employees to whom the incentives were given were already in the employment of the assessee's predecessor firm. He further pointed out that the sales of M/s Asiatics Jaipur amounted to about Rs. 1.80 crores in the preceding year but no payment as work incentive was ever made by the said firm to any of its employees in any year. He further pointed out that the work incentive was not given to all the employees of the company and also that no evidence was brought on record to show that the increase in sales in the year under consideration or in the following year was entirely due to the efforts made by the aforementioned employees. In this respect the ITO pointed out that the assessee had made payments of Rs. 64,000 to various parties during the year and such parties had helped it in obtaining orders for its products from various parties. The increase in sales in the next year was partly due to increase in the prices of raw material. The ITO took note of the fact Name of the employee Work incentive paid Basic pay Rs D.A. Rs Bonus Rs Other Allowance/ perquisites Rs C.P. Mehta 10,000 1,000 200 226 Free . . . . . Accommodation Ashok Suman 10,000 1,000 200 226 do Shashi Bhargava 10,000 1,000 200 218 do Rakesh Kasliwal 10,000 500 225 253 do Shyam Lal 8,000 700 245 204 do S.K. Jain 6,000 413 206 216 Rs. 72 that in addition to the salaries paid to its aforementioned employees the assessee company had also paid substantial amount towards D.A., bonus and provided free accommodation to them. After having thus considered the question of allowability of the work incentives paid to the aforementioned persons by the assessee on the ground of business expediency, the ITO concluded that the payments made were ex gratia for non business considerations. He accordingly disallowed the expenditure of Rs. 54,000. ;