PETITIONER: ALUMINIUM CORPORATION OF INDIA LTD. Vs. RESPONDENT: COMMISSIONER OF INCOME-TAX, WEST BENGAL DATE OF JUDGMENT29/08/1972 BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. REDDY, P. JAGANMOHAN KHANNA, HANS RAJ CITATION: 1973 AIR 520 1973 SCR (1)1097 CITATOR INFO : RF 1975 SC 5 (23) RF 1986 SC 98 (18) R 1986 SC1483 (4) ACT: Income Tax Act 1922 s. 10(2) (xv) & 66-Expenditure laid out wholly and exclusively for business-Commission payable to selling agents in a case where sales are not actually effected through selling agents-Construction of agreement- Expenditure on such Commission whether allowable as a deduction-Question of fact decided by Tribunal-High Court's power to interfere in reference proceedings under s. 66. HEADNOTE: Under clause (6) of the agreement between the assessee company and its Selling Agent, discount was to be allowed to the Selling Agents not only on sales effected through the said Agents or sub-agents but also on sales effected directly by the principal. Under clause (8) the Agents were responsible for the payment if the price due from the purchasers immediately after-the goods left the Principal's works or godown. Such payment bad to be made on presentation of necessary papers or documents by the assessee, not later than a fortnight after the goods were despatched. In default of payment the assessee was entitled to charge interest until realisation at the rate of six per cent per annum on the balance for the time being outstanding. Under cl. (9) of the agreement, the Agents were also responsible for due fulfilment of all contracts made by them whether for ready or forward sales and also for the consequences of any breach of contract by any customer and for all losses and damages arising therefrom to the assessee provided there was no default on the part of the assessee in manufacturing or giving delivery of any goods required or sold under any contract in compliance with the terms of the agreement. The commission paid by the assessee to the Selling Agents was allowed by the income tax authorities as deductible expenditure for some years. In respect of the assessment year 1955-56 however the assessees claim for such deduction was disallowed. The Income Tax Officer held that the payment had not been made on business considerations. The Appellate Assistant Commissioner further held that the agreement had not been acted upon. The Tribunal however did not agree with the view that the payment had been, made for extra-commercial considerations, or that the agreement had not been acted upon. The High Court in reference held that the expenditure in question was not expended for the purpose of the asses was business within the meaning of s. 10(2)(xv) of the income-tax Act, 1922 inasmuch as in the accounting year all sales were directly effected by the assessee and no sale was effected by the Selling Agents. In appeal to this Court by certificate, HELD : (i) The jurisdiction of the High Court under s. 66 is only an advisory jurisdiction. That being so it can only Pronounce its opinion on the questions referred to it. It cannot sit as an appellate court over the decision of the Tribunal., [1099C] In the present case the High Court overlooked the effect of cls. 6, 8 and 9 of the agreement. it also overlooked the significance of the fact that in the earlier years the commission paid to the Selling Agents had been considered is I deductible expenditure. It also did not take notice 1098 of the contention of the assessee that though the sales were directly effected by the assessee they were all convassed by the Selling Agents. [1102E-F] The Tribunal after taking into consideration the various terms of the agreement as well as the significance of the deduction given in the earlier assessment years came to the conclusion that the Income-tax Officer and the Appellate Assistant Commissioner erred in, their opinion that the expenditure was not incurred for any commercial expediency or that the agreement was not in force in; the relevant accounting year. The Tribunal had given good reasons in support of its conclussion. The primary facts found by, the Tribunal and the factual inference drawn thereform was, not open to review by the High Court. [1103F] The appeal must accordingly be allowed. Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income- tax, U.P.. 63 I.T.R. 57, distinguished on facts. Commissioner of Income-tax, Bombay v. Walchand & Co. Private Ltd., 65 I.T.R. 381, and J.K. Woollen Manufacturers v. Commissioner of Income-tax U.P., 72 I.T.R. 612, applied. JUDGMENT:
CIVIL APPELLATE JURISDICTION : C.A. No. 394 of 1969.
Appeal by certificate from the judgment and order dated Feb-
ruary 12, 1968 of the Calcutta High Court in Income-tax
Reference No. 57 of 1964.
A.K. Sen, Leila Seth, 0. P. Khaitan and B. P. Maheshwari,
for the appellant.
S.K. Wiyar, R. N. Sachthey and S. P. Nayar, for the
respondent.
The Judgment of the Court was delivered by
Hegde, J. This is an assessee’s appeal by certificate under
S. 66A(2) of the Indian Income-tax Act, 1922 (to be
hereinafter referred to as the Act). The Income-tax
Appellate Tribunal. Calcutta ‘B’ Bench as per the
directions given by the High Court in an application under
S. 66(2) submitted the following question for ascertaining
the Opinion of the High Court.
“Whether on the facts and in the circumstances
of the case, the Tribunal was right in holding
that the sum of Rs. 1,56,806/- was wholly and
exclusively laid out for the purpose of
business and as such allowable as a business
expenditure.”
The High Court has answered that question in the negative
and in favour of the Revenue. The correctness of the
decision of the High Court is challenged before us by the
assessee.
The question referred to the High Court for its opinion pro-
ceeds on the basis that the facts and circumstances of the
case as
1099
found by the Tribunal are not in dispute but what is
disputed is the legal affect of the facts and circumstances
found by the Tribunal. As held by this Court in the earlier
decisions that when a question refers to the facts and
circumstances in the case, it means the facts and
circumstances as found by the Tribunal. If any party wants
to challenge the correctness of the findings given by the
Tribunal either on the ground that the same is not supported
by any evidence on regard or is based on irrelevant or
inadmissible evidence or is unreasonable or perverse, a
question raising any one of these grounds must be sought for
and obtained. It is needles-, to say that the jurisdiction
of the High Court in a reference under s. 66 is only an
advisory jurisdiction. That being so it can only pronounce
its opinion on the questions referred to it. It is trite to
say that it cannot sit as an appellate court over the deci-
sion of the Tribunal. Bearing these facts in mind, let us
now proceed to set out the facts as found by the Tribunal.
The controversy in this case relates to the assessment of
the assessee for the assessment year 1955-56, the
corresponding previous year being the financial year ending
on March 31, 1955.
By an agreement dated December 30, 1949, the assessee com-
pany appointed M/s. J. K. Alloys Ltd. as the selling agents
for selling its aluminium products. The agreement was
effective for a period of 5 years from April 1, 1950. The
relevant clauses of the agreement are 1, 2, 6, 8, 9, 14 and
15. They read thus :
“1. That the Agents shall act as the Selling
Agents of all Aluminum Ingots, Sheets,
Circles, Expanded Metal, Shots, Utensils and
Anodised and alloy goods manufactured by the
Principal.
2. That this Agreement shall commence from
the 1st day of April, 1950 and shall continue,
unless otherwise determined by mutual consent
of the parties, till the 31st day of March,
1955.
6.That the Principal will allow the Agents
discount in the manner indicated hereunder on
sale of all products of the Principal effected
by the Agents either by themselves or through
Sub-Agents appointed by them or directly by
the Principal themselves
Aluminium Ingots 1-
1/2%
Aluminium Sheets & Cycles 2-
1/2%
Aluminium Expanded Metal 12-
1/2%
Aluminium Utensils & anodised and
alloy goods 17-
1/2%
Aluminium Shots
5%
1100
Provided always that the rates of discount
abovementioned or any of them may be varied by
mutual consent of the parties.
8.That the Agents shall be responsible for
payment of the price and all other moneys to
the Principal immediately after the goods
leave the Principal’s works or godown. Such
payment will be made on presentation of
necessary papers or documents ‘by the
Principal to the Agents and not later than a
fortnight after the date the goods shall have
been despatched. In default of payment as
aforesaid the Principal will be entitled to
charge interest until, realisation at the rate
of six per cent per annum on the balance for
the time being outstanding.
9.That the Agents will be responsible for
the due fulfilment of all contracts made by
them whether for ready or forward sales and
also for the consequences of any breach of
contract by any customer and for all losses
and damages arising therefrom to the Principal
provided, there shall be no default on the
part of the Principal when manufacturing or
giving delivery of any goods required or sold
under any contract in compliance with the
stipulations thereof.
14.That the parties may by mutual consent
agree to continue after the expiry of the 31st
day of March, 1955 on the same terms and
conditions as are herein contained or any
modification thereof as they may decide in
which case the agency business shall be
terminated by either party giving to the other
less than three months’ notice in writing sent
by Registered Post and such notice shall be
deemed to have been given seven days after the
same has been posted.
15.Notwithstanding anything contained in
any of the foregoing clauses if the Agents
shall fail to make any payments as herein
provided or commit any breach of any covenant
herein contained and on the part of the Agents
to be observed and performed the Principal
shall have right at any time to terminate this
Agreement by giving to the Agent,, one month’s
notice in respect there-
In the relevant year of account, the assessee paid to M/s.
J. K. Alloys Ltd. Rs. 1,56,806/- as selling agency
commission in accordance with the terms of the agreement.
The Income-tax Officer disallowed the claim for deduction of
that amount on the ground that the payment had not been made
on business considera-
1101
tions. On appeal the Appellate Assistant Commissioner
agreed with the conclusion reached by the Income-tax Officer
that the payment had been made for some extra commercial
considerations; but he further held that the agreement had
not been acted upon. On a further appeal, the Income-tax
Appellate Tribunalopined that it was unable to concur with
the view taken by the Income-tax authorities that the
agreement had not been acted upon and that the payment had
been made for some extra commercial considerations. In the
course of its order it observed:
“There is no dispute that the, amount in
question was actually paid as commission to
Messrs. J. K. Alloys Ltd. It is also common
ground that all the sales during the year were
effected directly by the appellant and no
sales were effected by the selling agents. On
these facts, the Appellate Assistant
Commissioner concluded that the agreement bad
not been acted upon and that the payment was
made for some extra commercial considerations.
We are afraid, we are unable to concur with
the, Appellate Commissioner. The mere fact
that no sales were effected during the year of
account by the selling agents themselves does
not, necessarily, mean that the agreement was
not acted upon. In fact, clause 6 of the
agreement quoted above explicitly refers to
the fact that the agents shall be entitled to
the payment of the discount even if all the
sales were effected directly by the Principals
themselves. The agreement has not been
impugned by the Department as a sham and
collusive transaction; in fact the entire
selling agency commission paid to Messrs. J.
K. Alloys Ltd.. had all along been allowed by
the Department as an admissible expenditure in
the hands of the assessee upto the assessment
for the year 1954-55. Evidently, the
agreement in question had been entered into
bona fide and had been acted upon.”
The only ground on which the Income-tax Officer as well as
the Appellate Assistant Commissioner disallowed the
commission paid wasthat during the accounting year all the
sales were effected directlyby the assessee and no sales
were effected by the selling agents. But those
authorities failed to take note of the fact that apart from
the fact that the selling agents were entitled to discount
even in respect of the sales directly made by the assessee,
the agents were responsible for the payment of the price due
from the purchasers immediately after the goods left the
Principal’s works or godown. Such payment had to be made on
presentation of necessary papers or documents by the
assessee, not later than I fortnight after the date the
goods were despatched. In default of
1102
payment as aforesaid, the assessee was entitled to charge
interest until realisation at the rate of six per cent per
annum on the balance for the time being outstanding. Under
cl. (9) of the agreement, the agents were also responsible
for due fulfillment of all contracts made by them whether
for ready or forward sales and also for the consequences of
any breach of contract by any customer and for all losses
and damages arising therefrom to the assessee provided there
was no default on the part of the assessee in manufacturing
or giving delivery of any goods required or sold under any
contract in compliance with the terms of the agreement. The
Income-tax Officer, the Appellate Assistant Commissioner
also overlooked the fact that in the previous years, the
commission paid by the assessee to the selling agent,, had
been considered as deductible expenditure. From this it
follows that from 1950 to 1954. the agents did function in
accordance with the terms of the agreement. It was
contended before the Appellate Assistant Commissioner that
even though the sales were directly effected by the
assessee, they were canvassed by the selling agents.
Neither the Income-tax Officer nor the Appellate Assistant
Commissioner has held against that plea. Under these
circumstances, the Tribunal rightly came to the conclusion
that the commission paid was an expenditure expended wholly
and exclusively for the purpose of assessee’s business, as
provided in s. 10(2) (xv).
The only reason that persuaded the High Court to come to the
conclusion that the expenditure in question was not expended
for the purpose of the assessee’s business was that in the
accounting year all sales were directly effected by the
assessee and no sale was ‘effected by the selling agents.
But the High Court overlooked clauses 6, 8 and 9 of the
agreement referred to earlier. It also overlooked the
significance of the fact that in the earlier years the
commission paid to the selling agents had been considered as
deductible expenditure. It also did not take notice of the
contention of the assessee that though the sales were
directly effected by the assessee, they were all canvassed
by the selling agents.
It is true that under s. 10(2)(xv), it is for the Income-tax
Officer to decide whether any remuneration paid by an
assessee to his selling agents was wholly or exclusively
expended for the purpose of his business. It is also true
that the mere fact that the assessee establishes the
existence of an agreement between him and his agents and the
fact of actual payment, the discretion of the Income-tax
Officer to consider whether the expenditure was made
exclusive for the purpose of the business is not taken away-
see the decision of this Court in Swadeshi Cotton Mills Co.
Ltd. v. Commissioner of Income-tax, U.P.(1). The expenditure
incurred must be for commercial expediency. But as observed
by this
1103
Court in Commissioner of Income-tax, Bombay v. Walchand &
Co. Private Ltd.(1) that in applying the text 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 view of the businessman and not of the revenue.
In J. K.’Woollen Manufacturers v. Commissioner of Income–
tax, U.p.(2), after applying the rule laid down in Walchand
& Co.’s case (supra) that 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 view of the businessman and not of the income-
tax department, this Court proceeded to observe:
“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 a trader or it is not laid out wholly and
exclusively for the purpose of the business of
the assessee and to disallow it.”
In the instant case, it is not the case of the Revenue the
assessee did not pay the commission in question nor is its
case that the expenditure in question was not incurred by
the assessee in the character of a trader. Therefore the
only question that remains. to be considered is whether it
was not expended wholly or exclusively for the purpose of
the business of the assessee. The Tribunal after taking
into consideration the various terms of the agreement as
well as the significance of the deduction given in the
earlier assessment years came to the conclusion that the
Income-tax Officer and the Appellate Assistant Commissioner
erred in their opinion that the expenditure was not incurred
for any commercial’ expediency or that the agreement was not
in force in the relevant accounting year. The Tribunal has
given good reasons in support of its conclusion. The
primary facts found by the Tribunal and the factual
inference drawn therefrom was not open to review by the High
Court.
The High Court erroneously thought that the facts of this
case fell within the ratio of the decision of this Court in
Swadeshi Cotton Mill’s case (supra). The facts of. that
case were as follows
Therein appellant company was managing whose remuneration
was an office allowance of Rs. 5,000/- per month and 10%, of
the net profits of the company. Under article 118 of the
articles of association of the company, its directors were
each
(1) 65 I.T.R. 381.
(2) 72 I.T.R. 612.
1104
entitled to a remuneration of Rs. 100 per month. At an
extraordinary general meeting of its shareholders article
118 was amended to provide for the payment to the directors
of a commission of 1% of the net profits of the company in
addition to their monthly remuneration and as a result the
five directors of the company became entitled to a sum of
Rs. 28,218 each for the calendar year 1948. The Tribunal
found that the payment of the commission to the directors
was for extra commercial reasons on the grounds : (i) that
they did not render any special service in that year; (ii)
that the management of the company was done by the managing
agents and very little was done by the directors; (iii) that
the remuneration of Rs. 100 per month was not considered by
the directors to be inadequate in earlier years; (iv) that
the increase in the company’s profits by about Rs. 30 lakhs
was due to the control of cloth having been lifted and not
to any special exertion of .the directors. On the basis of
those findings which were all findings of fact, the Tribunal
came to the conclusion that the commission paid to the
directors cannot be considered as expenditure incurred
wholly and exclusively for the purpose of the business. The
High Court as well as this Court accepted the findings
reached by the Tribunal. From the facts of that case, it is
clear that the payment of commission made to the directors
was not because of any commercial expediency but for
collateral reasons. Hence the rule laid down in that
decision is inapplicable to the facts of the present case.
In the result we allow this appeal, set aside the judgment
of the High Court and answer the question referred under s.
66(2) in the affirmative and in favour of the assessee. The
Revenue shall pay the costs of the appellant both it the
High Court and in this Court.
G. C. Appeal allowanced.
1105
