PETITIONER:
THE COMMISSIONER OF INCOME-TAX,BOMBAY
Vs.
RESPONDENT:
CHANDULAL KESHAVLAL & CO., PETLAD
DATE OF JUDGMENT:
17/02/1960
BENCH:
GAJENDRAGADKAR, P.B.
BENCH:
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:
lncome-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
JUDGMENT:
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
some one 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 tradand 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, negativing 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.
