1969 (2) TMI 15 - SC - Income Tax

The payment of compensation by the assessee to the ex-agents was not by an overriding title created either by act of the parties or by operation of law - hence inclusion made by ITO in total income was justified - Revenue appeal allowed

Summary

Issues Involved:
1. Validity of the agreement between the assessee and I.C.I. (Export) Ltd.
2. Allowability of compensation paid to ex-agents as business expenditure under Section 10(2)(xv) of the Income-tax Act, 1922.
3. Whether the compensation paid to ex-agents was diverted by an overriding title before it reached the assessee.

Issue-wise Detailed Analysis:

1. Validity of the Agreement Between the Assessee and I.C.I. (Export) Ltd.:
The primary issue was whether there was a valid agreement between the assessee and I.C.I. (Export) Ltd. regarding the quantum of commission to be paid to the assessee. The Appellate Tribunal found no evidence of such an agreement, stating, "there was no agreement between the assessee and the I.C.I. (Export) Ltd. and if there was one it was not acted upon." The High Court, however, disagreed and concluded that the inclusion of the compensation amounts in the assessee's total income was not justified. The Supreme Court held that the High Court erred in reappraising the evidence and interfering with the Tribunal's factual findings, emphasizing that the High Court is not a court of appeal under Section 66(1) of the Income-tax Act, 1922. The Supreme Court reiterated that findings of fact by the Tribunal should be accepted unless there is no evidence to support them or they are perverse.

2. Allowability of Compensation Paid to Ex-agents as Business Expenditure Under Section 10(2)(xv):
The assessee argued that the compensation paid to the ex-agents was an expenditure laid out wholly and exclusively for the purpose of the business and should be allowable under Section 10(2)(xv) of the Act. The appellant contended that the payment was not made in the character of a trader but as an agent of I.C.I. (Export) Ltd., and thus, it was not allowable. The Supreme Court agreed with the appellant, noting that without proof of the exact terms and conditions of the agreement, it was impossible to accept the argument that the compensation was an allowable business expenditure.

3. Whether the Compensation Paid to Ex-agents Was Diverted by an Overriding Title:
The respondent contended that the compensation was diverted by an overriding title before it reached the assessee, and thus, it should not form part of the assessee's income. The Supreme Court rejected this argument, stating that the payment of compensation was not by an overriding title created either by act of the parties or by operation of law. The Court emphasized that an obligation to apply income in a particular way after it has accrued or arisen amounts merely to the apportionment of income and is not deductible. The true test is whether the amount sought to be deducted never reached the assessee as his income, which was not the case here.

Conclusion:
The Supreme Court concluded that the judgment of the Calcutta High Court was erroneous. The High Court's reappraisal of the evidence was unwarranted, and the compensation paid to the ex-agents did not qualify as an allowable business expenditure nor was it diverted by an overriding title. The Supreme Court set aside the High Court's judgment and answered the question referred by the Appellate Tribunal in the affirmative and against the assessee. The appeals were allowed with costs.