1967 (6) TMI 9 - HC - Income Tax

Principles of commercial trading and commercial expediency - expenditure incurred - section 10(2)(xv)

Summary

Issues Involved:
1. Admissibility of a certain payment made by the assessee to his agent as an item of expenditure under section 10(2)(xv) of the Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Admissibility of Payment as Deductible Expenditure under Section 10(2)(xv):

The central issue in this judgment is whether the payment made by the assessee to his agent can be considered an admissible item of expenditure under section 10(2)(xv) of the Income-tax Act, 1922. The assessee, a partner in Messrs. Halar Salt and Chemical Works, executed a power of attorney in favor of Somchand in 1951, empowering him to act on behalf of the assessee in the business. Subsequently, an agreement dated 24th December 1959, was made between the assessee and Somchand, stipulating that Somchand would render specific services for a remuneration of 10% of the assessee's share of profits, subject to a minimum of Rs. 15,000.

The Income-tax Officer initially disallowed the expenditure, arguing it was not laid out or expended wholly and exclusively for the purpose of the assessee's business. This view was upheld by the Appellate Assistant Commissioner. However, the Tribunal disagreed, holding that the expenditure was indeed for the assessee's business and therefore allowable under section 10(2)(xv).

The judgment emphasizes that the test for determining whether an expenditure is laid out wholly and exclusively for business purposes is commercial expediency. It need not be fruitful or necessary for direct and immediate business benefit; it suffices if the expenditure is incurred voluntarily on commercial grounds to facilitate business indirectly.

The court noted that the partnership deed required the day-to-day business to be attended by partners or their agents. Given that the assessee resided in Mombasa, he could not personally attend to the partnership business, necessitating the agreement with Somchand. The court found no evidence that the agreement was a sham or that the remuneration was excessive or driven by extra-commercial considerations.

The revenue's argument that Somchand had previously acted without remuneration was dismissed. The court highlighted that prior to the agreement, Somchand was under no obligation to act, and the services he rendered were occasional. Post-agreement, Somchand was bound to attend to the day-to-day business, justifying the remuneration.

Even though the assessee moved to India during the accounting year, the agreement remained justified as the business was conducted in Jamnagar and Calcutta, while the assessee settled in Bombay. The court held that the payment to Somchand met the test of commercial expediency and was laid out wholly and exclusively for the assessee's business.

The court's conclusion was supported by the precedent set in Commissioner of Income-tax v. New Digvijaysinhji Tin Factory, where similar payments were deemed legitimate deductions under section 10.

Conclusion:

The court answered the question in the affirmative, affirming that the payment made by the assessee to his agent was an admissible item of expenditure under section 10(2)(xv) of the Income-tax Act, 1922. The Commissioner was directed to pay the costs of the reference to the assessee.