1972 (8) TMI 2 - SC - Income Tax

Payment of commission made to the directors was not because of any commercial expediency but for collateral reasons - commission paid to the directors cannot be considered as expenditure incurred wholly and exclusively for the purpose of the business allow this appeal set aside the judgment of the High Court and answer the question referred under section 66(2) in the affirmative and in favour of the assessee

Summary

Issues Involved:
1. Whether the sum of Rs. 1,56,806 paid as selling agency commission was wholly and exclusively laid out for the purpose of business and thus allowable as a business expenditure.

Issue-wise Detailed Analysis:

1. Whether the sum of Rs. 1,56,806 paid as selling agency commission was wholly and exclusively laid out for the purpose of business and thus allowable as a business expenditure:

The case revolves around the assessment year 1955-56, where the assessee paid Rs. 1,56,806 as selling agency commission to M/s. J. K. Alloys Ltd. under an agreement dated December 30, 1949. The Income-tax Officer disallowed the claim, stating the payment was not made on business considerations. The Appellate Assistant Commissioner concurred, adding that the agreement had not been acted upon. However, the Income-tax Appellate Tribunal disagreed, noting the payment was made in accordance with the agreement, which had been bona fide and acted upon.

The Tribunal emphasized that the mere fact no sales were effected directly by the selling agents did not imply the agreement was not acted upon. The agreement allowed the agents to earn a discount even if sales were made directly by the principal. The Tribunal noted the agents were responsible for payment immediately after goods left the principal's works and for the fulfillment of all contracts, including handling breaches by customers. The Tribunal also highlighted that in previous years, similar commissions were considered deductible expenditures.

The High Court, however, answered the question in the negative, focusing on the fact that all sales were directly effected by the assessee during the accounting year. The High Court overlooked clauses 6, 8, and 9 of the agreement and the historical context of the commission being deductible in prior years. It also ignored the assessee's contention that sales were canvassed by the selling agents, even if effected directly by the assessee.

The Supreme Court noted that under section 10(2)(xv) of the Indian Income-tax Act, 1922, it is for the Income-tax Officer to decide if the remuneration paid was wholly and exclusively for business purposes. However, the reasonableness of the expenditure should be judged from the businessman's perspective, not the revenue's. The Tribunal's conclusion that the expenditure was for commercial expediency and that the agreement was in force was supported by good reasons and was not open to review by the High Court.

The High Court erroneously applied the ratio of Swadeshi Cotton Mills' case, which involved payments made for extra-commercial reasons, unlike the present case where the agreement was bona fide and acted upon.

In conclusion, the Supreme Court allowed the appeal, set aside the High Court's judgment, and answered the question in the affirmative, favoring the assessee. The revenue was ordered to pay the costs incurred by the appellant in both the High Court and the Supreme Court.

Appeal allowed.