1960 (2) TMI 1 - SC - Income Tax

The respondent a partnership firm which, by an agreement was appointed the managing agent. The total commission was a sum of Rs. 3,09,114 accrued to such managing agent. At the oral request, 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. Assessee claimed Rs. 2,09,114 as deduction on account of surrender of income. Held that Rs. 2,09,114 to be accepted as deducible expenditure.

Issues Involved:
1. Assessability of the sum of Rs. 2,09,114 as income.
2. Allowability of the sum of Rs. 2,09,114 as a deduction under section 10(2)(xv) of the Indian Income-tax Act.

Issue-wise Detailed Analysis:

1. Assessability of the sum of Rs. 2,09,114 as income:

The managing agent was entitled to a commission of Rs. 3,09,114 for the accounting year 1950, but agreed to accept only Rs. 1,00,000 at the oral request of the board of directors of the managed company. The Income-tax Officer and the Appellate Assistant Commissioner held that the entire amount of Rs. 3,09,114 accrued as commission and was taxable. However, the Income-tax Appellate Tribunal held that while Rs. 3,09,114 accrued as commission, only Rs. 1,00,000 was taxable and Rs. 2,09,114 was an allowable expenditure under section 10(2)(xv) of the Act. The Tribunal noted that the managing agent had previously waived a portion of the commission in the interest of the managed company.

2. Allowability of the sum of Rs. 2,09,114 as a deduction under section 10(2)(xv):

The High Court was inclined to decide in favor of the appellant but directed the Tribunal to submit a supplementary statement. The Tribunal reaffirmed that the remission was bona fide, without any oblique motive, and was incurred wholly and exclusively for the purpose of the managing agent's business. The Tribunal emphasized that the interests of the managing agent and the managed company were linked, and strengthening the financial position of the managed company would benefit the managing agent in the future.

The High Court held that the Tribunal's finding was one of fact and concluded that there was evidence to support this finding, thus answering the question regarding section 10(2)(xv) in favor of the managing agent. The appellant argued that there was no evidence to support the finding that the amount foregone was wholly and exclusively laid out for the managing agent's business. The appellant relied on several cases, including Tata Sons Ltd. v. Commissioner of Income-tax and Union Cold Storage Company Limited v. Jones, to argue that the benefit to the managing agent was indirect and not directly related to its business.

The court reviewed various precedents, noting that if an expense is incurred for fostering another's business, is gratuitous, or for an improper purpose, it is not deductible. However, if it is incurred for commercial expediency and benefits the assessee, it is deductible. The Tribunal found that the amount was expended for commercial expediency, not as a bounty, and would strengthen the managed company, benefiting the managing agent.

The Supreme Court upheld the High Court's judgment, concluding that the Tribunal's finding was supported by evidence and that the expense was deductible under section 10(2)(xv). The appeal was dismissed with costs.

Conclusion:

The Supreme Court dismissed the appeal, affirming the High Court's judgment that the sum of Rs. 2,09,114 was an allowable deduction under section 10(2)(xv) of the Indian Income-tax Act, as it was expended for commercial expediency and benefited the managing agent. The Tribunal's finding was deemed a question of fact, supported by evidence.

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