1969 (12) TMI 25 - HC - Income Tax

Commission to the selling agent - expense incurred wholly and exclusively for the purposes of the assessee-company - omission of the assessee-company to terminate the selling agency agreement could not be a valid ground for holding that the expenditure was not wholly and exclusively for purposes of the business of the company

Issues Involved:
1. Deductibility of commission paid to selling agents under section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Validity and enforceability of the selling agency agreement.
3. Commercial prudence and necessity of maintaining the selling agency agreement post-government control on sugar sales.

Issue-wise Detailed Analysis:

1. Deductibility of Commission Paid to Selling Agents:
The primary question was whether the expenditure incurred by the assessee in paying commission to its selling agent was deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Tribunal initially disallowed the commission paid on the sale of controlled sugar, arguing that the selling agency agreement should have been terminated once government control was imposed. However, the court found this reasoning unsound, noting that some sugar was still sold in the open market and that the agent handled other products like strawboard. The court emphasized that the reasonableness of the expenditure must be judged from the point of view of the business, not the revenue, citing previous rulings such as Commissioner of Income-tax v. Walchand and Co. (Private) Ltd. and J. K. Woollen Manufacturers v. Commissioner of Income-tax. The court concluded that the commission paid was wholly and exclusively for the purposes of the business, thus deductible.

2. Validity and Enforceability of the Selling Agency Agreement:
The agreement between the assessee and the selling agent, National Finance Ltd., was executed on October 1, 1948, and provided for a commission of 2.5% on the net value of the product supplied. The Tribunal did not challenge the validity of this agreement, and the court noted that the agreement remained in force at all material times. The court pointed out that the agent was entitled to receive commission under clause 12 of the agreement, even though much of the sugar was dispatched to dealers nominated by the government. The court held that so long as the agreement was valid and in force, the assessee was liable to pay the commission, making the expenditure legitimate and deductible.

3. Commercial Prudence and Necessity of Maintaining the Selling Agency Agreement:
The Tribunal suggested that the assessee should have terminated the selling agency agreement when government control was imposed, arguing that no useful purpose could be served by the selling agents under such circumstances. However, the court rejected this view, stating that it was not the Tribunal's function to advise the assessee on managing its affairs. The court referenced the Supreme Court's ruling in Commissioner of Income-tax v. Walchand and Co. (Private) Ltd., which clarified that the test of commercial expediency must be judged from the business's perspective. The court also noted that the selling agent handled other products and maintained an office as required by the agreement, indicating that the agency still served a business purpose. The court concluded that the expenditure on commission was commercially prudent and necessary, thus deductible.

Conclusion:
The court answered both parts of the referred question in favor of the assessee. It held that the amounts of Rs. 92,883, Rs. 1,18,946, and Rs. 59,089 paid by the assessee-company for the assessment years 1951-52, 1952-53, and 1953-54, respectively, were incurred wholly and exclusively for the purposes of the business of the assessee-company. The Commissioner of Income-tax was directed to pay Rs. 200 as costs of the reference.

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