JUDGMENT C.S.P. Singh, J.
1. The Income-tax Appellate Tribunal, Delhi Bench, has referred the following question for our opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in cancelling the penalty levied upon the assessee in terms of the Explanation to Section 271(1)(c) of the Act relating to the assessment year 1968-69?"
2. The penalty related to the assessment year 1968-69. Return of Rs. 16,338 was filed by the assessee but was finalised at Rs. 29,588 by the Income-tax Officer. As the minimum penalty imposable was more than Rs. 1,000 the matter was referred to the Inspecting Assistant Commissioner under Section 274(2) of the Act. The amount of Rs. 29,588 was computed by the Income-tax Officer by adding an amount of Rs. 5,000 to the trading results, and by a further addition of Rs. 8,000 on account of salary payment disallowed to the partners. On appeal the Appellate Assistant Commissioner deleted the addition of Rs. 5,000. Thus, the income computed on appeal was Rs. 24,588. In the penalty proceedings the Inspecting Assistant Commissioner held that inasmuch as the returned income was less than 80 per cent. of the assessed income, the Explanation to Section 271(1)(c) applied, and as it was clearly established that the assessee was guilty of gross and wilful neglect in not adding the salary paid to the partners in the returned income, penalty was exigible under Section 271(1)(c) of the Act. In this view he imposed a penalty of Rs. 8,300. The Tribunal, on appeal, set aside the order of the Appellate Assistant Commissioner on the view that the Explanation to Section 271(1)(c) was not applicable, as even though salary paid to the partners was not allowable yet inasmuch as it had been bona fide spent by the assessee for earning the profits it had to be deducted from the assessee's income. On this conclusion it held that the Explanation to Section 271 was not attracted. It also recorded a finding that the assessee was not guilty of gross or wilful neglect in returning the income which he did.
3. Now, the Explanation to Section 271(1)(c) applies only where the returned income is less than 80 per cent. of the assessed income, but certain deductions have to be made in the assessed income before the Explanation can be applied. All expenditure which is bona fide incurred by an assessee for the purpose of earning the income has to be deducted even though it may have been disallowed by the Income-tax Officer. In the present case the Tribunal has found that there was no evidence on record that the partners to whom salary was paid were not working partners. There is also no finding that the amount of Rs. 8,000 shown in the books to have been paid to the partners as their salary was not in fact paid. Although for the purposes of computing the income, in view of the provisions of the Act, salary paid to a partner may not be allowable, yet the exigencies of business may require the payment of salary to some of the partners who look to the management of the day-to-day affairs of the firm. Thus, the mere disallowability of an expenditure under the Act does not exclude the amount so spent, from being taken into consideration while considering the applicability of the Explanation. As soon as the amount of Rs. 8,000 is deducted from the assessed income, which. on appeal was reduced to Rs, 24,588, the returned income which was Rs. 16,338 was not less than 80 per cent. of the assessed income as calculated for the purpose of the Explanation. The Explanation to Section 271(1)(c) was, therefore, not attracted. The penalty was imposed on the assessee solely on the basis of the Explanation, and on the findings recorded by the Tribunal was rightly cancelled.
4. We accordingly answer the question referred in the affirmative, against the department and in favour of the assessee. The assessee is entitled to his costs which we assess at Rs. 200. Counsel's fee is assessed at the same figure.