The Commissioner of Income-Tax, Bombay
Vs. Chandulal Keshavlal & Co., Petlad [1960] INSC 24 (17 February 1960)
GAJENDRAGADKAR, P.B.
SARKAR, A.K.
SUBBARAO, K.
CITATION: 1960 AIR 738 1960 SCR (3) 130
CITATOR INFO :
R 1961 SC 668 (8,12) R 1961 SC1028 (7,8) F
1973 SC2486 (4,8) R 1979 SC1441 (21)
ACT:
income-tax-Managing Agent relinquishing part
of commission due from managed company-Whether amount relinquished is
deductible as expenditure expended wholly and exclusively for Purpose of his
business-Finding, if one of fact-Indian Income-tax Act, 1922 (XI Of 1922), S.
1O(2) (XV).
HEADNOTE:
The assessee was the Managing Agent of a
company and for the accounting year 950 its total commission was Rs. 3,09,114.
At the oral request of the Directors of the
Company made during the accounting year the assessee agreed to accept Rs. 1,00,000
only as its commission and relinquished the balance. The Income-tax Officer and
the Appellate Assistant Commissioner hold that the sum of Rs. 3,09,114 had
accrued to the respondent as commission and that the whole amount was taxable.
On appeal the Appellate Tribunal held that out of the accrued commission the
amount relinquished, i.e. Rs. 2,09,114, was allowable expenditure under S.
10(2) (XV) Of the Income-tax Act. The Tribunal found that: (i) the financial
condition of the managed company was unsatisfactory, (ii) in the past also the
assessee had been remitting part or whole of its commission when the profits of
the managed company were unsatisfactory, (iii) in the year of account the
profits of the Company would have been Rs. 3,63,078 if the whole commission was
deducted, which would be the lowest since 1940, (iv) it was not a bounty by the
respondent to the managed company, (v) the business of the respondent was so
linked up with the managed company that if the latter was put on a sounder
position the assessee would also get a larger commission in future, and (vi)
the respondent had accepted Rs. 1,00,000 at the instance of the managed company.
The appellant contended that S. 10(2)(xv) applied only when the expenditure was
incurred directly for the purpose of the business of the assessee and not when
it affected his business only indirectly as a result of the benefit to the
managed company.
Held, that the finding of the Tribunal that
the amount which was claimed as a deductible allowance under S. 1O(2)(XV) was
laid out wholly and exclusively for the purpose of the assessee's business was
one of fact and as there was evidence to support it, it could not be interfered
with. In deciding whether the payment was a deductible expenditure the question
of commercial expediency and the principles of ordinary commercial trading had
to be taken into consideration. If the payment of expenditure was incurred for
the purpose of the trade or business of the assessee it did not matter that the
payment enured to the benefit of a third party also. Another test was whether
the transaction was properly entered into as a part of the assessee's
legitimate 39 commercial undertaking in order to facilitate the carrying on of
its business. But if the expense was incurred for fostering the business of
another only or was made by way of distribution of profits or was wholly
gratuitous or for some improper or oblique purpose outside the course of
business then the expense was not deductible.
Tata Sons Ltd v. The Commissioner of
Income-tax, Bombay, (1950) I.T.R. 46o, Union Cold Storage Company Ltd. v.
jones, 8 T.C. 725 and Odhams Press Ltd. v. Cook, 23 T.C. 233, referred to.
Usher's Wiltsltire Brewery Ltd. v. Bruce, 6
T.C. 399, Easterr Investments Ltd. v. The Commissioner of Income-tax, West
Bengal. [1951] S.C.R. 594 and Atherton v. British Insulated & Helsby Cables
Ltd, 1o T.C. 156, relied on
CIVIL APPELLATE JURISDICTION': Civil Appeal
No. 167 of 1958.
Appeal by special leave from the judgment and
order dated the February 15, 1955 of the Bombay High Court in Income-tax
Reference No. 29 of 1953.
C. K. Daphtary, Solicitor General of India,
-B. Ganapathi Iyer and -D. Gupta, for the appellant.
N.A. Palkhivala and I. N. Shro for
respondent. 1960.
February 17 The Judgment of the Court was
delivered by KAPUR J.-This is an appeal by special leave against the judgment
and order of the High Court of Bombay. It arises out of a reference by the
Income. tax Appellate Tribunal under s. 66(1) of the Indian Income-tax Act
(hereinafter termed the Act.) The appellant in this appeal is the Commissioner
of Income-tax and the respondent is a partnership firm which, by an agreement
dated September 23, 1935, was appointed the Managing Agent of the Keshav Mills
Ltd., Petlad. For the sake of convenience the respondent firm will, in this
judgment, be termed the Managing Agent and the Keshav Mills Ltd., the Managed
Company. By cl. 4 of this agreement the' Managing Agent was to get a commission
of 4% on the sale proceeds of the cloth, yarn or other goods manufactured and
sold by the company and 15% on the amount of bills for charges of ginning and
pressing and dyeing or bleaching and on the amount of labour bills and other
work done in the running of the factory. The commission was exclusive of other
charges such as adat interest, discount, brokerage etc.
40 The amount of commission was to be
credited in the account of the Managing Agent every six months and it was
entitled to interest at the rate of six per cent. per annum on the amount so
credited. There were other conditions in the Agency Agreement which are not
necessary for the purposes of this case. The total commission for the
accounting year 1950 was a sum of Rs. 3,09,114. Sometime during the accounting
year, at the oral request of the Board of Directors of the Managed Company, the
Managing Agent agreed to accept a sum of Rs. 1,00,000 only as its commission
which was credited to the account of the Managing Agent in the books of the
company at the end of the year 1950. The Income-tax Officer and the Appellate
Assistant Commissioner held that the amount which accrued as commission to the
Managing Agent was Rs. 3,09,114 and that amount was taxable.
An appeal was taken to the Income-tax
Appellate Tribunal by the Managing Agent. By an order dated February 26, 1953,
the Appellate Tribunal held that the amount which accrued to the Managing Agent
as commission was Rs. 3,09,114 but it accepted Rs. 1,00,000 as taxable income
and Rs. 2,09,114 was held to be an allowable expenditure within s. 10(2)(xv) of
the Act and it was therefore allowed. The Tribunal in its order said that in
the past also the Managing Agent had, in the interest of the Managed Company,
waived a portion of the Commission and then made the following observation:
" The Tribunal has also held that if the
Managing Agency Commission or a part thereof is foregone in the interest of the
Managed Company, it would be allowed as an expenditure under Section 10(2)(xv)
of the Act. We allow the amount foregone under Section 10(2)(xv)." Against
this order, at the instance of the appellant, a case was stated to the Bombay
High Court for its opinion on the following two questions:
(i)Whether on the facts and in the
circumstances of the case, the sum of Rs. 2,09,114 was assessable in the hands
of the assessee as its income.
(ii) If the answer to question (i) is in the
affirmative whether the said sum is an allowable 41 deduction from the
assessee's income under Section 10(2)(xv) of the Act.
The judgment of the High Court shows that it
was inclined to decide the questions in favour of the appellant, but at the
instance of the Managing Agent the Appellate Tribunal was directed to submit a
supplementary Statement.
No fresh evidence was led before the Tribunal
but it appears that some emphasis was laid on a letter of the Managing Agent
dated September 18, 1951, sent to the Income-tax Officer. In this letter the
Managing, Agent had stated that the only commission which accrued to it was a
sum of Rs.
1,00,000 and nothing had been foregone from
out of the commission or relinquished. It is also stated that the amount of Rs.
1,00,000 accrued because of the variation of the terms of the Managing Agency
Agreement. Reference was also made in the letter to the Balance Sheet of the
Managed Company ending December 31, 1950, showing that the paid up capital was
rupees 30 lacs, depreciation fund rupees 14 lacs, totalling rupees 44 lacs. As
against this sum the Block Account showed a debit of over rupees 48 lacs and it
was with the object of strengthening the financial position of the Managed
Company and in its interest that the Chairman of the Board of Directors had
requested and the Managing Agent had agreed to aceept rupees 1 lac as
commission. The Income-tax Appellate Tribunal submitted a, supplementary
Statement of Case dated May 3, 1954, in which it said (1) that there was no
oblique motive in accepting Rs. 1,00,000 instead of rupees 3 lacs odd as
commission and that the remission was bona fide. It was also remarked that it
was not even faintly suggested by the Department that what was given up by the
Managing Agent from the commission was done with some dishonest motive; (2) the
amount foregone by the Managing Agent was an expenditure incurred wholly and
exclusively for the purpose of the business of the Managing Agent; (3) that
when the appeal was decided by the Appellate Tribunal it did not have the
slightest doubt in its mind that the commission was foregone for business
considerations; and (4) that the 6 42 amount was given up or expended for
reasons of commercial expediency. A very significant Paragraph in the
supplementary Statement of the Case was paragraph 4 which stated:.
" It was assumed that what was in the
interest of the managed company was in the interest of the managing agent.
file interests of the managing agent and the
managed company are, so to say, linked up. If the managed company is put on a
sounder position, not only the shareholders of the managed company benefit, but
also the managing agent, inasmuch as the managing agent would get a larger
commission in future." The basic facts which arise out of the Statement of
the Case and the documents which were produced by the Managing Agent are: (1)
the rather unsatisfactory financial position of the Managed Company as shown by
the Balance Sheet; (2) in the past also the Managing Agent had been remitting a
part or whole of the commission whenever the profits of the Managed Company
were unsatisfactory; (3) in the year of account the profits of the managed
company as per profit and loss account were Rs. 5,72,192. This was after paying
to the Managing Agent a commission of Rs. 1,00,000 and if the whole of the
accrued commission had been deducted then the profits would have been Rs.
3,63,078 which would be the lowest amount since 1940 -and the amount of
commission would have been the highest; (4) it was not a bounty by the Managing
Agent to the Managed Company; (5) the business of the Managing Agent was so
linked up with the Managed Company that if the latter was put on a sounder
position the Managing Agent would also get a larger commission in future;
and (6) the Managing Agent had accepted Rs.
1,00,000 at the instance of the Chairman of the Board of Directors of the
Managed Company. This was the material on which the Tribunal gave a finding in
its suppementary Statement I that what was given up by the assessee was an
expenditure for the purpose of the assessee's business'. On this statement the
High Court by its judgment dated February 15, 1955, held 43 the finding of the
Appellate Tribunal to be one of fact. It said :
" Now this is a finding of fact and
unless it can be suggested that there was no evidence to support the finding of
fact we are concluded by this finding of fact." Therefore the question in
regard to s. 10(2)(xv) was answered in favour of the Managing Agent. It is
against this judgment and order that the. appellant has come in appeal to this
Court by special leave.
For the appellant it was argued that there
was no evidence in support of the finding that the amount of about rupees 2
lacs which was foregone by the Managing Agent was wholly and exclusively laid
out for the purpose of the Managing Agent's business and emphasis was laid on
the finding of the Appellate Tribunal in its order dated February 26, 1953,
that in the past the -Commission had been given up by the Managing Agent in the
interest of the Managed Company and that if the Managing Agent's commission or
part thereof was foregone in the interest of the Managed Company it was not an
allowable expenditure under s. 10(2)(xv). It was also argued that there was no
evidence in support of the finding that the amount was expended for the benefit
of the Managing Agent and that even if as -a result of the amount being
foregone the Managing Agent was helped because it benefited the Managed
Company, then s. 10(2)(xv) would not be attracted; in other words the question
had to be looked at from the point of view of the direct concern of the
Managing Agent and not of remoter or indirect result which may flow as a result
of the benefit to the Managed Company and in each case the question on each set
of facts is whether the benefit is to the assessee i. e., the Managing Agent or
to someone else.
In his argument the learned Solicitor General
referred to t & following cases:
Tata Sons Ltd. v. The Commissioner of
Income-tax, Bombay (1). There the assessee was the Managing Agent of another
company and was entitled to receive commission on the net profits of the Managed
Com- (1) [1950] 18 I.T.R. 460.
44 pany. During the relevant year the
assessee voluntarily paid a sum of money towards the bonus which the Managed
Company paid to some of its officers and claimed it as a deductible expenditure
under s. 10(2)(xv) of the Act. This deduction was allowed on the ground that
the object of the payment from the point of view of commercial principles was
to increase the profits of the Managed Company and thereby the Commission of
the Managing Agent. It was argued-there also that the payment was entirely
gratuitous but that contention was repelled, because the object of the payment
from the point of view of commercial principles was to increase the efficiency
of the Managed Company and thereby to increase the profits of the Managed
Company and the commission of the Managing Agent. And thus there was an
important nexus between the Managed Company and the Managing Agent. It was also
held that the question whether money was wholly expended or laid out for the
purpose of the business of the assessee company must be determined upon
principles of ordinary commercial trading.
The second case was Union Cold Storage
Company Ltd. v. Jones (1). There a British company transferred its foreign cold
storage business carried on by it directly or through subsidiary companies to
an American Company for a term of years in consideration of certain annual
payments to the subsidiary companies and of a guarantee of any sum.
necessary to meet its fixed charges and
maintain its dividends. The property remained the property of the British
Company but it was placed under the sole control of and was used by the
American Company for its own business.
There was no demise or lease to the American
Company and no rent was payable but the American Company was to keep it in
proper repair and working order. The British Company paid fire insurance
premiums in respect of the premises machinery etc., and claimed deductions for
the sums so paid out of its profits and for wear and tear of the machinery and
plant of the transferred business. It was held that the insurance premiums did
not (1) 8 T.C. 725.
45 represent money wholly and exclusively
laid out for the purpose of trade of the assessee company as the machinery and
plant were not used for those purposes and the deductions claimed were
therefore not admissible. It was argued in that case that by the agreement the
assessee company had secured not only the right to receive upto the sum
specified but also that the American company would have an incentive to send
business to the assessee company in order that its profits should reach that
specified figure and therefore the expenditure was deductible. But it was held
that in order to be so deductible it had to be for the benefit of the trade
which immediately concerned the assessee company. It was also held that if it
was of such a nature then the deduction was prima facie a proper one even
though it might inure to the benefit Of a third party and the matter bad to be
tested from the point of view of the assessee company.
The learned Solicitor General relied upon a
passage in the judgment at p. 741 :
"............ they (the Commissioners)
find that there was a reflex result of this Agreement which inured to the
benefit of the Appellant Company but I think in terms they indicate -that that
result was not a direct result but a reflex result. In their reasons in which
they came to their con- clusion they say the arrangements with regard to the
stores and machinery and plant were not of an ordinary nature and they did not
extend the Appellant Company's market. They also say that the machinery and
plant in question is used primarily for the purposes of the trade of the
National Company. With those findings before us I think it is quite clear as a
matter of fact that the facts so found differentiate this case wholly from
Usher's case." From this it was sought to be argued that what one is to
look at is the direct result to the assessee and not remoter or indirect
results. , What the court found in that case was that insurance premiums were
paid by the British Company as owners and not in the course of business and
that the assets were used not for its business but for the business of another.
46 The real test laid down after reference to
Usher's Wiltshire Brewery Ltd. v. Bruce(1) was that deduction may be allowed in
cases where the payment or expenditure is incurred for the purpose of the trade
of the subject making the return and it does not matter that this payment may
inure to the benefit of a third party.
Another case relied on was Eastern
Investments Ltd. v. The Commissioner of Income-tax, West Bengal (2) where a
private limited company had a share capital of rupees 250 lacs of which shares
of the value of rupees 50 lacs were held by A and the remaining by his
nominees. The company was in need of money ,and with the consent of A it
resolved to reduce the share capital by rupees 50 lacks by the company taking
over rupees 50 lacs worth of shares and issuing to A debentures of the face
value of rupees 50 lacs carrying interest at 5%. The Income-tax Appellate
-Tribunal and the High Court held that the interest on debentures was not an
allowable expenditure under s. 12(2) of the Act. This Court, on appeal, was of
the opinion that the transaction was of a commercial nature from the point of
view of the assessee company and on a review of all the facts it came to the
conclusion that the transaction was voluntarily entered into id order
indirectly to facilitate the carrying on of the business of the company and so
made on the ground -of commercial expediency. The argument .-,hat the
debentures were held by the shareholder was rejected on the ground that it made
no difference whether the debentures were held by the shareholder or by an
outsider. The test laid down by this case therefore was that in the absence of
fraud or an oblique motive and if a transaction is of a nature which is entered
into in the course of business of the assessee and is commercially expedient
then it does become a deductible allowance. If as a result of the transaction
the assessee benefits it is immaterial that a third party also benefits
thereby. At page 599, Bose J., observed;
"In the absence of s suggestion of a
fraud this is not relevant at all for giving effect to the provi- (1) 6
T.C.399.
(2) [1951) S.C.R. 594.
47 sions of section 12(2) of the Income-tax
Act. Most commercial transactions are entered into for the mutual benefit of
both sides, or at any rate each side hopes to gain something for itself. The
test for present purposes is not whether the other party benefited, nor indeed
whether this was a prudent transaction which resulted in ultimate gain to the
appellant, but whether it was properly entered into 'as a part of the
appellant's legitimate commercial undertaking in order indirectly to facilitate
the carrying on of its business." In Odhams Press Ltd. v. Cook(1) the
assessee company had acquired all the shares in a subsidiary company and
printed and published a periodical for the subsidiary company. The subsidiary
company made a loss during the accounting year and the assessee company wrote
off that amount of loss from the amounts due to it from the subsidiary company
and claimed a deduction of that loss from its profits on trading account or as
money laid out or expended for the purpose of its trade. The Special
Commissioners found that the sum was not written off wholly or exclusively for
the purpose of their trade or business and therefore it was an inadmissible
deduction. This question was held to be one of fact and that there was evidence
to justify that conclusion.
Viscount Caldecote L.C., said that the trade
or the business of one Company even though it may affect very closely the trade
or business of another was not the same thing as that other's trade or
business. In computing the profits and gains of the assessee, it is his trade
that is to be regarded. At page 1 10, Viscount Maugham observed:
"My Lords, the question thus put answers
itself. There were beyond dispute, the two relationships, between the Company
and the Coming Fashions Ltd., already referred to. The allowance of the pound
2927 5s. 8d. to Coming Fashions Ltd., might have been I laid out or expended
for the purpose of the trade' of Coming Fashions Ltd., or to some extent for
both purposes and it is plain that these facts alone were sufficient to show
that there was evidence (1) 23 T. C. 233.
48 to justify the conclusion of the
Commissioner that the sum written off was not written off wholly and
exclusively for the purpose of the trade or business of the Appellants."
The connection between the assessee company and the subsidiary company, apart
from the holding of shares, was that the assessee company id printing for the
subsidiary company. The effect of the transaction was debiting of another
entity's loss to the assessee company but there was no direct connection
between the profits of the assessee company with that of the amount claimed.
The real point in that case was that the amount was not wholly and exclusively
written off for the purpose of the assessee company.
Viscount Maugham said:
"Is there any real ground for contending
on the evidence that one reason for writing off the. sum was not to enable
Coming Fashions Ltd., to continue to carry on its business as compiler and
vendor of I Every woman's'?" The cases we have discussed above show that
it Is a question of fact in each case whether the amount which is claimed as a
deductible allowance under s. 10(2)(xv) of the Income Tax Act, was laid out
wholly and exclusively for the purpose of such business and if the fact-finding
tribunal comes to the conclusion on evidence which would justify that
conclusion it being for them to find the evidence and to give the finding then
it will become an admissible deduction. The decision of such questions is for
the Income-tax Appellate Tribunal and the decision must be sustained if there
is evidence upon which the Tribunal could have arrived at such a conclusion.
Another fact that emerges from these cases is
that if the expense is incurred for fostering ;the business of another only or
was made by way of distribution of profits or was wholly gratuitous or for some
improper or oblique purpose outside the course of business then the -expense is
not deductible. In deciding whether a payment of money is a deductible
expenditure one has 'to take into consideration questions of commercial
expediency and the principles of ordinary commercial trading. If the payment or
expenditure 49 is incurred for the purpose of the trade of the assessee it does
not matter that the payment may inure to the benefit of a third party (Usher's
Wiltshire Brewery Ltd. v. Bruce(1) ).
Another test is whether the transaction is
properly entered into as a part of the assessee's legitimate commercial
undertaking in order to facilitate the carrying on of its business; and it is immaterial
that a third party also benefits thereby (Eastern Investments Ltd. v. The
Commissioner of Income-tax, West Bengal (2) ). But in every case it is a
question of fact whether the expenditure was expended wholly and exclusively
for the purpose of trade or business of the assessee. In the present case the
finding is that it was laid out for the purpose of the assessee's business and
there is evidence to support this finding. Mr. Palkhivala referred in this
connection to Atherton v. British Insulated & Helsby Cables Ltd. (3) where,
at page 191, Viscount Cave L. C., observed:
"It was made clear in the above cited
cases of Ushers Wiltshire Brewery v. Bruce (1) and Smith v. Incorporated
Council of Law Reportinq (4) that a sum of money expended, not of necessity and
with a view to a direct and immediate benefit to the trade, but voluntarily and
on the grounds of commercial expediency and in order indirectly to facilitate
the carrying on of the business may yet be expended wholly and exclusively for
the purpose of the traded it appear's to me that the findings of the
Commissioners in the present case bring the payment in question within that
description.
They found (in words which I have already
quoted) that the payment was made for the sound commercial purpose of enabling
the Company to retain the services of existing and future members of their
staff and of increasing the efficiency of the staff ; and after referring to
the contention of the Crown that the sum of pound 31,784 was not money wholly
and exclusively laid out for the purposes of the trade under the Rule above
referred to, they found that the deduction was admissible-thus in effect,
although (1) 6 T.C. 399 (2) [1951] S.C.R. 594 (3) 10 T.C. 155 (4) 6 T.C. 477 7
50 not in terms, negative the Crown's contention. I think that there was ample
material to support the findings of the Commissioners, and accordingly that
this prohibition does not apply." Thus in cases like the present one in
order to justify deduction the sum must be Riven up for reasons of commercial
expediency; it may be voluntary, but so long as it is incurred for the
assessee's benefit the deduction would be claimable.
The Income-tax Appellate Tribunal has found
in favour of the Managing Agent that the amount was expended for reasons of
commercial expediency, it was not given as a bounty but to strengthen the
Managed Company and if the financial position of the Managed Company became
strong the Managing Agent would benefit thereby. That finding is one of fact.
On that finding the Income-tax Appellate Tribunal rightly came to the
conclusion that it was a deductible expense under s. 10(2)(xv).
In our opinion the judgment of the High Court
was right and we would dismiss this appeal with costs.
Appeal dismissed.
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