C.I.T., Punjab, Haryana & Ors Vs.
Panipat Woollen & General Mills Co. Ltd. Chandigarh [1976] INSC 1 (2
January 1976)
FAZALALI, SYED MURTAZA FAZALALI, SYED MURTAZA
SARKARIA, RANJIT SINGH
CITATION: 1976 AIR 640 1976 SCR (3) 186 1976
SCC (2) 5
ACT:
income Tax Act (11 of 1922) s. lO(2)
(IV)-Scope of- Payment under agreement between assessee and selling agent to
the latter Whether permissible deductions or amount to division of profits
between the two.
Practice-Power of High Court to go outside
statement of Case submitted by Tribunal.
HEADNOTE:
In 1952, the assessee-company installed a new
plant by raising a loan from the Industrial Finance Corporation, and appointed
a sole selling agent of its product in 1953 the assessee changed the selling
agent, and entered into an agreement with another selling agent. Under the
agreement, the agent was to make advances and finance the assessee.
Under cl. 7(1 ) of the agreement, the agent
was to get a commission at the rate of 11% on the net proceeds of the sales of
all its goods and 50% commission on the net profits of the new plant (the net
profits being ascertained after deducting all the manufacturing costs,
interest, insurance, etc.). The selling agent advanced 2 sums of money in the
assessment years 1956-57 and 1957-58 respectively, and received, during those 2
years, two sums as their 50% commission on the net profits of the new plant.
The assessee claimed, in its returns for those 2 years, that the amounts paid
as commission to the selling agent were expenses incurred to earn profit and
could, therefore, be deducted under s. lO(2)(xv) income Tax Act, 1922; but the
Income Tax officer disallowed the claim. On appeal, the Appellate Assistant
Commissioner held in favour of the assessee, but the Tribunal, on further appeal
held that the agreement between the assessee and the selling agent amounted to
a joint venture for the distribution of profits between the two, after the
profits were ascertained, and upheld the contention of the Revenue that the two
sums were not legal deductions within s. 1O(2)(xv). On reference, the High
Court held in favour of the assessee.
Allowing the appeal to this Court,
HELD: (I)(a) In order to fall within s.
10(2)(xv) the deduction claimed must amount to an expenditure which was laid
out or expended wholly and exclusively for the purpose of the business
profession or vocation; and this depends upon the facts of each case; and [191
G-H] (b) In order to determine the reasonableness of the expenditure, the test
of commercial expediency would have to be adjudged from the point of view of
the businessman and not of the Income Tax Department. [191H-192A] (2) It is
well-settled that the Court, in order to construe an agreement has to look to
the substance or the essence of it rather than to its form. A party cannot
escape the consequences of law merely by describing an agreement in a
particular form, though, in essence and substance, it may be a different
transaction. [l94 G-H] (a) Clause 3 of the agreement requires not only
consultation by the assessee with the selling agent, but also the consent, for
me programme of manufacture of the product. that is, if the agent withholds its
consent, it could veto the programme of manufacture. Such a limitation placed
on the power of the assessee is not in consonance with a pure and simple
contract of agency. [192 F-G] (b) Under cl. 6(1) the selling agent would have
to make a full and complete investment for the working of the new plant to the
fullest possible capacity 187 including wages, power, stores, repairs etc. This
is more in consonance with a partnership than an agency. [193 C-D] (c) Clause
6(ii) provides that the plant should be overhauled before the commencement and
the termination of the agreement. This is also beyond the role of a simple
selling agent. [193 D-E] (d) Sub-clauses (Viii) and (ix) of cl. 6 show that any
damage to the goods in transit would have to be debited to the account of the
new plant and that such accounts would have to be maintained separately. The
object of these sub- clauses is that the selling agent should be in a position
to ascertain the net profits and control the working of the new plant.[193E]
(e) An analysis of the terms of cl. 7(i) shows that the selling agent was agent
to secure most liberal and profitable terms. While it is difficult to lay down
any rule of universal application as to what percentage of profit would be
consistent with the payment in lieu of services, the conduct of the selling
agent, in the present case. in sharing half of the net profits is not consistent
with payments made to agents for services rendered. Taking the totality of the
provisions of c the agreement, the percentage of profits and the manner in
which it is to be determined is more consistent with the position of the
selling agent as a partner than as an agent. 1194 A-Cl (f) In cl. 7 there is
also provision for the selling agent sharing the loss incurred by the assessee,
by deducting 50% of the loss from its remuneration, and for a lump sum
deduction of Rs. 50,000/- towards depreciation etc., for deter mining the net
profit or loss position.
Clause 7(iv) provides for a separate
commission account to be maintained by the selling agent and for payment of
commission every 6 months. Having regard to the terms and conditions of the
agreement, the view taken by the Tribunal that the two sums were not legally
deductible under s.
10(2)(xv) was correct. By contributing to the
investments by controlling the manufacturing programme, by sharing to the
extent of 50 per cent in the net profits ascertained in the manner stipulated
in the agreement, and above all, by agreeing to share SO per cent of the losses
which are to be deducted from the commission of the agent, the selling agent
has actually contributed to a joint venture and became completely equated with
the assessee, and therefore, the agreement between the two is really a sort of
a partnership and has been given the cloak and colour of an agency to conceal
the real intent and purpose of the commercial venture; and it must be construed
as an agreement for division of profits in specified proportions. [194 C-D, F;
195 E-G; 201 E-F] British Sugar Manufacturers
Ltd. v. Harris (Inspector of Taxes), 7 I.T.R. 101, applied.
(3) The decision in Dharamvir's case (43
I.T.R. 7) is distinguishable.
[195, G-H] (a) In that case it was not agreed
between the assessee and the trust, which agreed to advance a loan to him, that
the profits would be ascertained after deducting the net expenses as in the
agreement in the present case. [196 B-C] (b) While the contract was to be
carried on in accordance with the policy settled between the assessee and the
trust, in that case, it did not give any veto power to the trust to torpedo the
contract. In the present case, the agreement gave to the selling agents
controlling power at every stage in the programme of manufacture and even at
the stage of the sale of the products, by requiring the consent of the selling
agent. [196 C-D] (c) Not only was there no provision in Dharamvir's case under
which the trust was to share the loss, but there was an express provision to
the contrary. Therefore, the payment of interest at the rate of 6 per cent on
the loan advanced to the assessee by the trust and a percentage in the profits,
in that case, is quite consistent with a remuneration in lieu of services lent
and would amount to an expenditure incurred by the assessee, wholly and
exclusively for the purpose of the business which was conducted by the
assessee. [196 D-E] (4) In the present case, it is difficult to hold that
commercial expediency dictated the assessee to allow itself to be completely
overshadowed by its selling 188 agent, so as to pay them not only for the
services rendered but allow them to share profits, control the manufacture of
goods and to share the losses. The test of commercial expediency cannot be
reduced to the shape of a ritualistic formula. The test merely means that the
Court will place itself in the position of a businessman and find out whether
the expenses incurred could be said to have been laid out for the purpose of
the business, or whether the transaction was merely a subterfuge for the
purpose of sharing or dividing the profits ascertained in a particular manner.
In the ultimate analysis, the matter would depend on the intention of the
parties as spelt out from the terms for the agreement or the surrounding
circumstances, the nature or character of the trade or venture, the purpose for
which the expenses are incurred and the object which is sought to be achieved
for incurring those expenses. If the expenses incurred amount o a profit of an
enduring nature, they may be treated as capital expenditure; whereas, if the
expenses merely serve to promote or increase the commercial activity, they may
amount to an expenditure which is incurred for the purpose of the business.
[196H-197D] J. K. Woollen Manufacturers v. Commissioner of Income Tax, V.P.
[1969]1 S.C.R. 525, distinguished.
Commissioner of Income Tax, Kerala v.
Travancore Sugar and Chemicals Ltd., 88 I.T.R. 1, 10; Commissioner of income
Tax, Bombay v. Poona Electric Supply Co. Ltd., 49 I.T.R.
913, 924 and Jamshedpur Motor Accessories
Stores v. Commissioner of Income Tax, Bihar & Orissa, 95 I.T.R. 664, 672
referred to.
(5) The High Court is not entitled to go
behind the Statement of the case submitted by the Tribunal. But, in the present
case, in interpreting the agreement, the High Court relied upon what it called
surrounding circumstances, namely, that the assessee was a losing concern from
its inception, that it was in such a bad shape that it had to get rid of its
first selling agent. BECAUSE, it caused considerable embarrassment to the
assessee while the second selling agent was prepared to give the assessee
advantageous terms. that the selling agent had no other connection than a
business connection with the assessee; and that because of the death of one of
the promoters of the assessee, who commanded credit in the money market, the
assessee was not able to raise money from the banks. But, these facts were not
found by the Tribunal nor was there any warrant for any of the assumptions.
[198G-199C] Commissioner of Income Tax, Poona v. Manna Ramji and Company, 86
I.T.R. 29, 37, followed.
(6) The facts found by the Tribunal and those
mentioned in its Statement of the case to the High Court, lead to the inescapable
conclusion that the agreement is nothing but a joint venture to divide the
profits after they are ascertained, and hence, the payments to the selling
agent cannot, in any sense be deemed to be expenses incurred by the assessee
for the purpose of its business or for earning profits.
Pondicherry Railway Co. Ltd. v. Commissioner
of Income Tax madras, A.I.R. 1931 P.C. 165, 170, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 622 & 623 of 1971.
Appeals by special leave from the judgment
and order dated the 20-1-1970 of the Punjab and Haryana High Court at
Chandigarh in I.T. Reference No. 2 of 1965.
B. B. Ahuja and S. P. Nayar, for the
appellants.
A. N. Goyal, for the respondent The Judgment
of the Court was delivered by FAZAL ALI, J.-These are appeals by the Revenue by
special leave against the order of the High Court of Punjab & Haryana dated
189 January 20, 1970 answering the questions referred to the High Court by the
Tribunal in favour of the assessees/respondents and against the Revenue. The
appeal arises in the following circumstances.
M/s. Panipat Woollen & General Mills Co.
Ltd.-hereafter referred to as 'the assessee Company' had two Departments- (1)
for spinning of yarn from raw and waste wool and (2) for spinning of yarn from
imported wool tops. The second Department which carried on the operations of
spinning of yarn from imported wool tops was started sometime in the year 1952.
Weaving operations were, however carried on in both these Departments. One of
the Departments was known as M/s. PaniPat Woollen Mills, Kharar while the other
one was known as M/s. Navin Woollen Mills. It is said that the assessee Company
was running at a constant loss as a result of which in 1952 the assessee
Company decided to instal a plant for manufacture of worsted yarn from imported
wool tops by raising a loan of Rs. 7 lakhs from the Industrial Finance
Corporation. The plant went into production in September 1952. The assessee
Company appointed M/s.
Murlidhar Chiranjilal as the sole selling
agents for the worsted yarn on payment of 2% commission. Subsequently on
December 15, 1953 the assessee Company entered into an agreement with Mis
Saligram Premnath under which the latter were appointed as the sole selling
agents on certain specified conditions, the important of which being that the
agents were to finance the assessee Company to the extent of Rs. 2,50,000/- and
the assessee Company agreed to pay 6% interest on the advances to be made by
the agents and further agreed to pay 2% commission on the net proceeds of sales
of goods in India. Before expiry of this agreement, another agreement was
entered into by the assessee Company with the agents on October 20, 1955 under
which the agents were to get 6% interest on all the advances made by them, 1%
commission on net sales and 50% commission on net sales of the worsted plant. '
What is more was that the agents agreed to a deduction of 50% of the loss
incurred by the assessee Company from their remuneration. There were a number
of other conditions with which we shall deal later. The selling agents M/s.
Saligram Premnath advanced a sum of Rs. 6,26,847/- and Rs. 8,71,873/- and
received Rs. 37,157/- and Rs. 73,787/- as 50% commission on the net profits of
the worsted plant in the course of two years, namely, assessment years 195-57
ending on March 31, 1956 and 1957-58 ending on March, 31, 1957. The assessee
Company accordingly in its return for the year 1956-57 claimed the amount of
Rs. 37,157/- and Rs. 73,787/- for the assessment year 1957-58 as a deduction
under the provisions of s. 10(2) (xv) of the Income-tax Act, 1922. The case of
the assessee was that the two amounts mentioned above being in the nature of
commission paid to the selling agents would be deemed expenses incurred by the
Company in order to earn profits and would, therefore, fall within the ambit of
s. 10(2) (xv) of the Income-tax Act, 1922-hereafter referred to as 'the Act'.
The Income-tax officer, however, disallowed the deduction and held that the
deduction claimed was actually a division of profits after the profits had come
into existence and had been ascertained, and therefore could not he claimed as
a valid deduction under the provisions of the Act.
190 The assessee Company went up in appeal to
the Appellate Assistant Commissioner who accepted the plea of the assessee
Company and held that the payment was a permissible deduction as it was
incurred for the purpose of the assessee's trade in order to facilitate the
business' of the assessee. The Revenue then went up in appeal before the Tribunal
which after considering the facts and the law on the subject upheld the
contention of the Revenue and held that the sums in question were not legal
deductions as contemplated under s. 10(2)(xv) of the Act but amounted to
application of profits after they were earned. The Tribunal further held that
the agreement dated October 20, 1955 amounted to a joint venture for the
distribution of profit, between the assessee Company and the selling agents
after the profits were ascertained. The assessee Company then approached the
Tribunal for making a reference to the High Court and the Tribunal accordingly
referred the following two questions to the High Court for its opinion:
"1. Whether on the facts and in the
circumstances of the case, the Tribunal rightly held that the sums of Rs.
37,157/- and Rs. 73,787/- were chargeable to tax in the hands of the assessee
Company in the assessment years 1956-57 and 1957-58 respectively?
2. Whether on the facts and in the
circumstances of the case, the Tribunal rightly disallowed the assessee
Company`s claim for deduction of the payment of Rs. 37,157/ and Rs. 73,787/-,
under sec. 10(l) and Sec. 10(2)(xv) of the Income-tax Act, 1922, in the
assessment years 1956 57 and 1957-58 respectively?" The High Court by its
judgment dated January 20, 1970, answered both the questions in favour of the
assessee Company and held that the payments in question amounted to a
legitimate deduction under i. 10(2)(xv) of the Act, and the Tribunal was wrong
in disallowing the same. Thereafter the appellant moved the High Court for
grant of leave to appeal to the Supreme Court which having been rejected the
appellant filed a petition for special leave. The special leave having been
granted, the appeal is now before us.
The High Court in reversing the order of the
Tribunal mainly relied on what it described as the surrounding circumstances
under which the alleged payments were made to the selling agents by the
assessee Company as spelt out from the agreement entered into by the assessee
Company with the selling agents. The main point which was argued before the
Tribunal as also before the High Court was that the cumulative effect of the
interpretation of the various clauses of the agreement dated October 20, 1955
unmistakably revealed that in the garb of an agency the parties entered into a
joint venture for distributing the net profits, after being ascertained between
themselves and that is why there was an express provision in the agreement by
which the agents agreed to share the losses to the extent of 50% which were to
be deducted from the remuneration payable to the agents. The Tribunal held that
the agreement amounted to a joint venture resulting in division of net profits
and therefore the amount paid to the agents could not be claimed by the assessee
Company as a deduction under 191 s. 10(2)(xv) of the Act, as it was not
incurred for the purpose of the business or for earning profits. The High Court
held that the mere fact that the agents agreed to share the profits and the
losses would not take the case of the assessee beyond the ambit of s. 10(2)(xv)
of the Act in order to show that the payments made to the agents were not
expenses incurred for the purpose of the business. The High Court laid special
emphasis on the fact that the Revenue could not examine the question of the
commercial expediency of the businessman to incur expenses or earn profits in a
particular manner. The High Court accordingly found that the agreement per se
was a contract of agency and not a joint venture and accordingly the High Court
accepted the plea of the assessee Company.
In support of the appeal Mr. Ahuja, the
learned standing counsel for the Revenue submitted the following two points
before us: C (1) In the first place it was submitted that there being an
express provision in the agreement dated October 20, 1955 by which the agents
agreed to share losses which was a provision peculiar to the present
transaction and was not at all covered by any authority cited before the
Tribunal or the High Court, that itself was proof positive of the fact that the
transaction amounted to a joint venture with a view to division of profits; and
(2) It was argued that the High Court had exceeded its jurisdiction in
travelling beyond the agreed statement of the case framed by the Tribunal and
had relied on certain materials which were not at all found by the Tribunal in
its order nor were those materials mentioned in the statement of the case.
Mr. A. N. Goyal counsel for the assessee
Company has, however. submitted that the view taken by the High Court is
absolutely correct and the facts of the present case are clearly covered by the
decision of this Court in Dharamvir Dhir v. Commissioner of Income-tax Bihar
& Orissa(1). A number of other cases have also been cited at the Bar and we
shall refer to the same after marshalling the facts found in the present case.
Before coming to the facts it may be
necessary to mention that there can be no dispute with respect to the two
important propositions:
(1) that in order to fall within s. 10(2)(xv)
of the Act the deduction claimed must amount to an expenditure which was laid
out or expended wholly and exclusively for the purpose of the business,
profession or vocation. This will naturally depend upon the facts of each case.
(2) that in order to determine the question
of reason ableness of the expenditure, the test of commercial expediency would
have to be adjudged from the point of view of the businessman and not of the
Income-tax Department. With this preface we now proceed to deal with the facts
of the present case on the basis of which the questions of law referred to the
High Court and answered in favour of the assessee Company arise.
To begin with, it is conceded by the learned
standing counsel for the Revenue that the assessee Company was running at a
loss as a result of which it had to raise a lorn of several lakhs of rupees
from the Industrial Finance Corporation. It was perhaps for this reason that
the assessee Company entered into an agreement with the new selling agents M/s
Saligram Premnath who were prepared to give to the assessee Company better and
more profitable terms. The main question to be determined is as to whether or
not the agreement dated October 20, 1955 read as a whole amounts to a joint
venture for the purpose of division of profits. In order to decide this
question it may be necessary to refer to some important portions of the second
agreement which alone is relevant for the purpose of deciding this point. We
might mention, however, that so far as the first agreement is concerned the
terms thereof do not make out a case of joint venture but appear to be in
consonance with the agreement being one of an agency simpliciter. It is the
second agreement that in our opinion appears to change the entire complexion of
the case. This agreement is set out at p. 17 of the Paper Book and consists of
ten main clauses. The agreement was to ensure for a period of two years to
commence from January 1, 1956 or the date on which manufacturing actually
starts under the agreement whichever is later. This is provided in clause 2 of
the agreement. It was further provided that the period of the agency could be
extended further by mutual consent. Clause 3(ii) runs thus:
"Program for the manufacture of goods
will be made from time to time by the Company in consultation and with the
consent of the Agents." It may be noticed that this clause requires not
only consultation with the agents for the programme of manufacture of goods but
a tacit consent of the agents. In other words, if the agents withheld their
consent, they could veto the programme of manufacture. Such a limitation placed
on the power of the assessee Company does not appear to us to be in consonance
with a pure and simple contract of agency. Clause 6 which deals with financial
arrangements may be extracted thus:
"(i) The Agents shall invest full amount
for the working of the Worsted Plant to the full possible capacity beginning
from the purchase of tops to the completion of the yarn sales including wages,
power, stores, and repairs and maintenance etc. Such investments and expenses
incurred on tops, manufacturing, bank charges, transport, insurance and octroi
will be debited to the account of the Company.
193 (ii) Before the beginning of the
arrangements under this Agreement, the Machinery of the Worsted Plant will be
overhauled and similarly before this arrangement ends the Machinery will be
overhauled.
x x x x x (viii) In case of any loss or
damage to the tops or goods in transit or in godowns, the same will be debited
to the account of the Worsted Plant.
(ix) The accounts of the Worsted Plant will
be maintained separately in an office situated near the Worsted Plant and the
Agents will have free access to the account books.
x x x x x Sub-clause (i) clearly contemplates
that the agents would have to make full and complete investment for the working
of the worsted plant to the fullest possible capacity including wages, power,
stores, repairs and maintenance etc. This provision appears to be more in
consonance with the terms of a person who is a partner in a venture rather than
one who is a mere agent. Further more, sub-clause (ii) provides that before the
agreement starts the machinery of the worsted plant would be overhauled and
would be again overhauled before the agreement ends. This provision also has
its own importance and appears to be beyond the role of the selling agents
simpliciter. Sub-clauses (viii) and (ix) extracted above clearly show that the
damage to the tops or goods in transit would have to be debited to the account
of the worsted plant and such accounts would have to be maintained separately.
The obvious object is that the agents should be in a position to ascertain tile
net profits and control the working of the worsted plant. Clause 7 is the most
important clause of this agreement, which, in our opinion, clearly shows that
the agreement in essence and in purport is a sort of a partnership or a joint
venture rather than a contract of agency. Sub-clause (i) of clause 7 p runs
thus:
"7. Commission (i) The Agents shall be
allowed a commission at 1 1/4% (one and a quarter per cent) on the net proceeds
of sales of all goods. Such commission shall be chargeable upon money actually
credited to the Company, and not on out- standing debts, if any. Besides, Agents
will get 50% (fifty per cent) commission on the net profits of the Worsted
Plant. The net profits will be ascertained after deducting all the
manufacturing expenses, interest, insurance, depreciation and selling
commission etc. For allowing annual depreciation in the value of the machinery
and buildings and interest on the value of machinery, buildings and commencing
from the date on which manufacturing actually starts under this Agreement, a
lump sum of Rs. 50,000/- has been agreed to be deducted for determining the net
profits or loss 194 position. In case of net loss, if any, there will be a
deduction of 50% (fifty per cent) of such loss from the Agent's Account."
Analysing the terms of this sub-clause it would appear that the agents have
been able to secure most liberal and profitable terms. To begin with they were
to get a commission at the rate of one and a quarter per cent on the net
proceeds of sales of all goods there can be no objection to this. Secondly, the
agents will get 50% commission on the net profits of the worsted plant. The net
profits would have to be ascertained after deducting all the manufacturing
costs, interest, insurance etc. The conduct of the agents in sharing half of
the net profits does not appear to us to be consistent with the payments made
to the agents for services rendered. It is difficult to lay down any rule of
universal application as to what percentage of profit would be consistent with
the payment in lieu of services but taking the totality of the provisions of
the agreement it seems to us that the percentage of profits and the manner in
which it is to be determined is more consistent with the position of a partner
than that of an Agent. Finally the provision for sharing the loss incurred by
the Company and for a lump sum deduction of Rs. 50,000/- is totally
inconsistent with a contract of agency. Furthermore, sub-clause (iv) of clause
7 provides as under:
"(iv) The commission account will be
maintained separately by the Agents and the commission will be payable to the Agents
by the Company every six months.
In the same way, the amount of Rs. 25,000/-
for six months as provided in sub-clause (i) above, will be paid to the Company
every half-year within ten days.
The profit and loss account of the Worsted
Plant will be made every six months within ten days and the adjustments will be
made accordingly by actual payments, as the case may be, within ten days."
The above sub-clause clearly provides for a separate commission ac count to be
maintained by the agents and the commission to be paid every six months.
Consequently the agents agreed to pay a sum of Rs. 25,000/- for six months
every half year within ten days. We might further mention here that the
provision in the agreement regarding sharing of the loss is absolutely peculiar
to this particular agreement and there is not a single authority, which has, in
spite of such a provision, held that the transaction does not amount to a joint
venture or a division of profits. The provision regarding the consent of the
agents to the sales and the programme of manufacture is also pertinent in order
to determine whether the transaction amount ted to a joint venture in the garb
of a contract of agency. It is well settled that the Court in order to construe
an agreement has to look to the substance or the essence of it rather than to
its form. A party cannot escape the consequences of law merely by describing an
agreement in a particular form though in essence and in substance IT H may be a
different transaction. In these circumstances, therefore, if we construe the
agreement as a sort of a joint venture or a transaction like a partnership
which has been given the form and appearance of a contract of agency, the law
must have its course.
195 Our attention has been drawn by the
learned counsel for the Re venue to a decision in British Sugar Manufacturers
Ltd. v. Harris (Inspector of Taxes)(1), where Greene, M. R. clearly observed
that where a person contributes to some sort of joint adventure which
ultimately results in division of profits, it could not be construed as. a
remuneration for services. In this connection, Greene, M. R. Ob served as
follows:
"It is not cash that passes in exchange
for these profits, it is services; and the badge of such a contract is
remuneration for services, and therefore the first thing that this remuneration
would certainly not be is a share of profits purchased by the employee.
x x x I can conceive of a case where a person
contributes to some sort of joint adventure services, while others contribute
perhaps capital, land, plant, and goods, arranging between themselves (it may
be something short of a partnership) that nobody shall get anything until the
pool of profits is ascertained, and then they shall divide it up between them
in specified proportions. That, it seems to me would be a real agreement for
division of profits, because there would be D' one profit fund only. There
would not be two 'profit' funds to be ascertained for different purposes."
These observations seem to us to cover the facts of the instant case. Having
regard to the terms and conditions of the agreement detailed and analysed
above, there can be no doubt that the agents by contributing to the investments
and by sharing the profits as also the E. losses have actually contributed to a
joint venture and ultimate division of the profits with the principals and the
agreement must be construed as an agreement for division of the profits in
specified pro portions as mentioned therein. It is true that in the aforesaid
case on the facts found the Court held that the transaction did not amount to a
joint venture but it was clearly pointed out in the judgment that there is a
very thin line of distinction between a contract for payment of a share of
profits simpliciter and a payment of remuneration which is deductible in truth
from the profits divisible. We, therefore, find ourselves in complete agreement
with the observations made by Greene, M. R., which aptly apply to the facts of
the present case on the basis of the various clauses of the agreement dated
October 20, 1955. The High Court, however, appears to have relied upon the
decision in Dharamvir Dhir's case (supra). The facts of that case appear to be
clearly distinguishable from those of the present case. What had happened in
Dharamvir Dhir's case was that the assessee was an employee of the firm earning
a particular salary. The employee entered into a coal raising contract with a
coal company and as he did not have the necessary funds he persuaded a public
charitable trust to advance to him sums upto 1 1/2 lakhs on payment of (1) 7
I.T.R.101.
196 interest at 6 per cent. and share
11/16ths of the profits of the business. The assessee agreed that the coal
raising contract would be carried on in accordance with the policy settled
between him and the trust and the trust could withdraw its money at any time.
It is, therefore, clear that in the first place the agent, namely, the trust,
agreed to finance the assessee by giving him a loan of Rs. 1 1/2 lakhs at 6
percent interest. This was undoubtedly permissible. The trust was also b to get
11/16th of the profits of the business. It was, however, not agreed between the
parties that the profits would be ascertained after .
_." deducting the net expenses as
mentioned in the agreement before us. It is true that the contract was to be
carried on in accordance with the policy settled between the assessee and the
trust but that did not give any veto power to the trust to tarpedo the
contract. In the instant case the agreement clearly provided for the consent of
the agents not only at the beginning of the manufacture of the yarn by the
plant to be installed by the assessee Company but at every stage in the pro
gramme of manufacture. Even at the stage of the sale of the products the
consent of the agents was necessary. In other words the agents were given a
complete controlling power so far as the manufacture and sale of the products
of the assessee Company were concerned. No such stipulation is to be found in
Dharamvir Dhir's case (supra).
Finally, not only there was no provision in
Dharamvir Dhir's case under which the trust was to share the losses but there
was an ex press provision to the contrary, namely, that the trust was not
liable for any loss. Thus the mere payment of interest at the rate of 6 per cent.
On the loan advanced to the assessee and a percentage in the profits of the
business would be quite consistent with a remuneration in lieu of services lent
and would certainly amount to an expenditure incurred by the assessee wholly
and exclusively for the purpose of the business which was conducted by the
assessee.
The same, however, " cannot be said of
the present case. It was on the peculiar facts of the Dharamvir Dhir's case
that this Court observed as follows: r "on the facts proved in the present
case the trust agreed to finance the business of the appellant on the terms set
out in the agreement and there is nothing to show that he could have made any
better arrangements or would not have last the contract if he had failed to
enter into the agreement, i.e. the agreement to pay the amounts in dispute. Therefore,
in a commercial sense, the payments were an expenditure wholly and exclusively
laid out for the purpose of the " business." It may be mentioned that
this Court had considered the decision in the British Sugar Manufactures Ltd.'s
case (supra) and had approved of the same.
Great stress was laid by counsel for the
assessee Company on the fact that this Court could not go behind the commercial
expediency which had to be determined from the point of view of a businessman.
Even so whatever be the commercial considerations, it is difficult to hold that
the commercial expediency dictated the assessee Company to allow itself to be
completely overshadowed by its selling agents so as to pay them not only for
the services rendered but also allow them 197 to share profits, control the
manufacture of the goods and the programme thereof and also to share the
losses. The test of commercial expediency cannot be reduced in the shape of a
ritualistic formula, nor can it be put in a water-tight compartment so as to be
confined in a strait jacket. The test merely means that the Court will place
itself in the position of a businessman and find out whether the expenses
incurred could be said to have been laid out for the purpose of the business or
the transaction was merely a subterfuge for the ' purpose of sharing or
dividing the profits ascertained in a particular manner. It seems to us that in
ultimate analysis the matter would . depend on the intention of the parties as
spelt out from the terms of - the agreement or the surrounding circumstances,
the nature or character of the trade or venture, the purpose for which the
expenses are incurred and the object which is sought to be achieved for
incurring those expenses. If the expenses incurred amount to a profit of an
enduring nature they may be treated as capital expenditure, whereas if the
expenses merely serve to promote or increase the commercial activity they may
amount to an expenditure which is incurred for the purpose of the business.
Reliance was also placed by counsel for the
assessee Company on the decision in J. K. Woollen Manufacturers v.
Commissioner of Income Tax, U.P.(1), where
this Court observed as follows:
"The question as to whether an amount
claimed as expenditure was laid out or expended wholly or exclusively for the
purpose of business, profession or vocation as required under Section 10(2)
(xv) of the Income Tax Act. has to be decided on the facts and in the light of
the circumstances of each particular case.
x x x x In our opinion, neither the High
Court nor the Appellate Tribunal has applied the proper legal test in this
case. As pointed out by this Court in C.I.T.
Bombay v. Walchand and Co. Private Ltd.,
1967-65 ITR 381= (AIR 1967 SC 1435) in applying the test of commercial
expediency for determining whether an expenditure was wholly and exclusively
laid out for the purpose of the business, reasonableness of the expenditure has
to be adjudged from the point of r view of the businessman and not of the
Income Tax Department. It is, of course, open to the Appellate Tribunal to come
to a conclusion either that the alleged payment is not real or that it is not
incurred by the assessee in the character of trader or it is not laid out
wholly and exclusively for the purpose of the business of the assessee and to
disallow it. But it is not the function of the Tribunal to determine the
remuneration which in their view should be paid to an employee of the
assessee." It would appear that in the aforesaid case the only question
was regarding the quantum of remuneration to be given to the General , Manager
and this Court observed that the businessman must be given complete freedom to
fix the terms of his employees after taking an (1) [1969] 1. S. C. R. 525 198
overall view of the situation. This was not at all a case where an agreement
like the present one was entered into between the assessee Company and its
agents. On the other hand in Commissioner of Income-tax, Kerala v. Travancore
Sugars and Chemicals Ltd.(l), this Court added` a word of caution that the test
of commercial expediency should not be applied in a mechanical manner and
observed as follows:
"In considering the nature of the
expenditure incurred in the discharge of an obligation under a contract or a
statute or a decree or some similar binding covenant, one must avoid r being
caught in the maze of judicial decisions rendered on different facts and which
always present distinguishing features for a comparison with the facts and
circumstances of the case in hand. Nor would it be conducive for clarity or for
reaching a logical result if we were to concentrate on the facts of the decided
cases with a view to match the colour of that case with that of the case which
requires determination. The surer way of arriving at a just conclusion would be
to first ascertain by reference to the document under which the obligation for
incurring the expenditure is created and thereafter to apply the principle
embalmed in the decisions of those facts. Judicial statements on the facts of a
particular case can never assist courts in the construction , of an agreement
or a statute which was not considered in i those judgments or to ascertain what
the intention of the legislature was. What we must look at is the contract or
the statute or the decree, in relation to its terms, the obligation imposed and
the purpose for which the transaction was , entered into." The learned
counsel for the assessee Company relied on the aforesaid case because the
question whether the transaction amounted to a joint venture appears to have
been raised but it appears that this point had been given up when the case was
sent on remand and was therefore not decided. In these circumstances, the
decision in the aforesaid case does not appear to be of any assistance to the
assessee Company.
The Tribunal had interpreted the agreement
keeping into account J the tests of commercial expediency and we find ourselves
in complete agreement with the view taken by the Tribunal. The High Court on
the other hand relied upon what it called the surrounding circumstances that
the assessee Company was a losing concern from its inception and had to get rid
of the previous selling agents M/s Murlidhar Chiranjilal because they caused
considerable embarrassment to the assessee Company. While the standing counsel
for the Revenue has admitted that the Company was running at some loss there
was no evidence that the Company was in such a bad shape that it had to get rid
of the first selling agents because the selling agents were l causing
embarrassment to it. The High Court then relied on the fact that the first
agency which was entered into with M/s Murlidhar (1)881.T.R.1,10.
199 Chiranjilal in 1953 also resulted in loss
as a result of which the A second agreement dated October 20, 1955 was entered
into. This does not appear to be of much consequence. The High Court then
relied on the fact that the agents had no other connection with the assessee
Company except that of the business connection. The High Court further found that
the promoter of the assessee Company Mr. Desh Bandhu Gupta had a stature which
enabled him to borrow loans from the Banks on personal security and as he died
in an air crash the credit of the Company went down and it was not able to
raise money from the Banks. There is absolutely no warrant for these facts
referred to by the High Court which are neither mentioned in the agreed
statement of the case submitted by the Tribunal to the High Court nor in the
order of the Tribunal. It is well settled that the High Court is not entitled
to go behind the statement of the case. In Commissioner of Income-tax, Poona v.
Manna Ramji and Company(1) this Court observed as follows:
"In this respect we are of the view that
the Tribunal is the final fact Finding authority. It is for the Tribunal to
find facts and it is for the High Court and this Court to lay down the law
applicable to the facts found. Neither the High Court nor this Court has
jurisdiction to go behind or to question the statement of facts made by the Tribunal.
The statement of case is binding on the parties and they are Dot entitled to go
behind the facts of the Tribunal in the statement. When the question referred
to the High Court speaks of 'on the facts and circumstances of the case', it
means on the facts and circumstances found by the Tribunal and not on the facts
and circumstances as may be found by the High Court." In Commissioner of
Income-tax, Bombay v. Poona Electric Supply Co. Ltd.(2) the Bombay High Court
observed as follows:
"It is true that the Electricity act
exercises control on the business of the licensee, but the control that is
exercised by reason of the aforesaid proviso is to compel the assessee to
distribute part of its clear profits if it is found that 'clear profits' are in
excess of the reasonable return as contemplated under the Act. That, in our
opinion, would only amount to apportionment or distribution of the profits
after they have been earned. It cannot, therefore, be said that the amount set
apart for the purpose of distribution amongst the consumers is not chargeable
to tax on the ground that it represents over-charge." This case however
was decided on its own facts and has no application to the facts in the instant
case.
Reliance was also placed by counsel for the
assessee Company on a Division Bench decision of the Patna High Court in
Jamshedpur (1)86I.T.R.29, 37. (2)49 I.T.R.913 924.
14-L390SCI/76 200 Motor Accessories Stores v.
Commissioner of Income-tax, Bihar & Orissa(1) where Untwalia, C.J., as he
then was, observed as follows:
"That position being accepted the matter
as to what amount was payable to Parikh ought to have been adjudged from the
assessee's point of view and not from the department or Tribunal's point of
view. It has to he emphasised that unless there is, a limitation put by the law
on the amount , of expenditure a lesser amount than the amount expended cannot
be allowed merely because the assessing authority c thinks that the assessee
could have managed by paying a
Some other decisions were cited at the Bar
but they have no bearing on the issue and it is not necessary for us to refer
to them. What is, therefore, important to us is that no decision has been cited
before us which takes the view that even though under the contract of agency
the selling agents who agreed to make substantial investments in the assessee
Company and got interest on the loans apart from the commission they also
shared profit to the extent of 50% as also loss to that extent and had complete
controlling power in the manufacturing programme or the sale of the products
and yet the transaction would be one of agency simpliciter and not a joint
Venture. On the facts found by the Tribunal and those mentioned in the
statement of the case as discussed above leads to the inescapable conclusion
that the present contract of agency really amounts to a transaction by which
substantial investments had been made by the selling agents with a. view to
control the manufacturing programme and the agents had also agreed to share the
profits and losses equally. This is, therefore, nothing, but a joint venture to
divide the profits after the same are ascertained and cannot in any sense be
deemed to be expenses incurred by the assessee Company for the purpose of its
business or for that matter for earning profits. In fact in Pondicherry Railway
Co. Ltd. v. Commissioner of Income- tax, Madras(2), Lord Macmillan pointed out
that a payment made to of profits and conditional on profits being earned
cannot be legitimately described as a payment made to earn profits. It assumes
that profits have first come into existence. But profits on their coming into
existence attract tax at that point and the Revenue is not concerned with the
subsequent (1)95 I.T.R.664,672. (2) A.I.R.1931 P.C. 165, 170.
201 application of the profits In this
connection the Privy Council observed as follows.
"It is claimed for the company that when
it makes over to the Colonial Government their half of the net profits it is
making an expenditure incurred solely for the purpose of " earning its own
profits. The Court below has unanimously negatived this contention and in their
Lordships' opinion has rightly done so. A payment out of profits and
conditional on profits being, earned cannot accurately be described as a
payment made to earn profits. It assumes that profits have first come into
existence. But profits on their coming into existence attract tax at that point
and the revenue is not concerned with the subsequent application of the
profits. * * * But the principle laid down by Lord Chancellor Halsbury in
Gresham Life Assurance Society v. Styles (1892) A.C. 309-at p. 315, is of
general application unaffected by the specialities of the English tax system:
'......But when once an individual or a
company has in that proper sense ascertained what are the profits of his
business or his trade, the destination of those profits or the charge which has
been made on those profits by previous agreement or otherwise is perfectly
immaterial. The tax is payable upon the profits realised and the meaning to my
mind is rendered plain by the words payable out of profits'.
Thus in short by controlling the
manufacturing programme, sharing to the extent of 50% in the net profits
ascertained in the manner stipulated in the agreement and above all for sharing
50% of the losses which are to be deducted from the commission of the agents
the agents become completely equated with the proprietors of the firm itself
and therefore the contract of agency is really a sort of a partnership and has
been given the cloak and colour of an agency to conceal the real intent and
purpose the commercial venture.
In view of the decisions referred to above
and the peculiar facts of the present case we are satisfied that the view taken
by the Tribunal that the payments in question were not legally deductible under
s. 10(2)(xv) of the Act was correct. The view taken by the High Court that the
amounts in question were deductible under s. 10(2) (xv) appears to be legally
erroneous cannot be upheld.
For the reasons given above, the appeals are
allowed and the : judgment of the High Court is set aside and that- of the
Tribunal is restored and the two questions referred to the High Court are
answered against the assessee Company and in favour of the Revenue. In view of
the peculiar acts of the present case, we leave the parties to bear their own
costs in this Court.
V.P.S. Appeals allowed.
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