1974 (1) TMI 6 - HC - Income Tax

Assessee company agreed to pay commission to agent. The commission was credited in the accounts every month. Subsequently it was mutually agreed between the company and the agent that no commission was to be paid due to commercial expediency. Accordingly the entries in accounts were reversed - Whether, on the facts and in the circumstances of the case, the amount of Rs. 2,04,947 was allowable as deduction of selling commission? - I answer the question referred to this court in the negative, against the assessee and in favour of the revenue. I hold that, on the facts and in the circumstances of this case, the amount of Rs. 2,04,947 was not allowable as deduction of selling commission in the assessment for the assessment year 1955-56

Issues Involved:

1. Whether the amount of Rs. 2,04,947 was allowable as a deduction of selling commission in the assessment for the assessment year 1955-56.

Issue-wise Detailed Analysis:

1. Allowability of Rs. 2,04,947 as Deduction of Selling Commission:

The primary issue for determination was whether the amount of Rs. 2,04,947, representing the selling commission, was allowable as a deduction in the assessment year 1955-56. The facts of the case reveal that the assessee, a limited company, had an agreement with Ashoka Marketing Ltd. for selling its products, under which commissions were payable. Due to the poor financial results of the assessee-company, a mutual agreement was reached to revise the commission rates, leading to the remission of the commission amounts initially credited in the books.

Principles of Law:

1. Accrual of Income and Liability in Mercantile System:
- In a mercantile system, actual cash receipt is not necessary; it suffices if the income has accrued. Similarly, liabilities incurred during the accounting year must be allowed as revenue expenses, regardless of actual payment.

2. Forgoing of Income or Liability:
- If income or liability is forgone voluntarily and not due to commercial expediency, it does not affect the accrual of income or liability for tax purposes.

3. Effect of Book Entries:
- Book entries are not decisive. The legal effect of forgoing income or liability must be considered. If the transactions are part of the same transaction and wipe off the accrual or liability, they are not taxable or deductible. If separate, the accrual or liability remains.

Application to Facts:

The agreement allowed for mutual consent to vary terms. The assessee-company, facing financial difficulties, negotiated a reduction in commission rates, which was accepted by Ashoka Marketing Ltd. The original commission entries were reversed, and no commission was ultimately charged in the profit and loss account.

Tribunal's Decision:

The Tribunal held that the remission of commission was not on grounds of commercial expediency and thus denied the deduction. However, the Tribunal did not fully consider the mutual agreement to revise the commission rates.

Relevant Case Laws:

1. Commissioner of Income-tax v. New Jehangir Vakil Mills Co. Ltd.:
- The liability incurred was the total commission amount, not the lesser amount voluntarily given up.

2. Commissioner of Income-tax v. Chamanlal Mangaldas & Co.:
- The right to claim full remuneration was taken away by mutual agreement, thus only the lesser amount was taxable.

3. Commissioner of Income-tax v. Shoorji Vallabhdas and Co.:
- Income that did not result due to a change in agreement terms was not taxable.

Conclusion:

The liability to pay the commission was obliterated by mutual consent, making it non-existent. Thus, the assessee-company could not claim it as a business expense under section 10(2)(xv) of the Act. The Tribunal's reliance on certain case laws was misplaced as the remission was part of a mutual agreement and not a voluntary relinquishment.

Final Judgment:

The court held that the amount of Rs. 2,04,947 was not allowable as a deduction of selling commission in the assessment for the assessment year 1955-56. The assessee was ordered to pay the costs of the reference, with a hearing fee assessed at Rs. 250.

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