1976 (1) TMI 1 - SC - Income Tax

Whether the payment of profit to the agent is a business expenditure - agreements amount to a joint venture to divide the profit after they were ascertained and the payments made by the assessee were not deductible under s. 10(2)(xv)

Issues Involved:
1. Whether the sums of Rs. 37,157 and Rs. 73,787 were chargeable to tax in the hands of the assessee-company in the assessment years 1956-57 and 1957-58, respectively.
2. Whether the assessee-company's claim for deduction of the payment of Rs. 37,157 and Rs. 73,787 under section 10(1) and section 10(2)(xv) of the Indian Income-tax Act, 1922, was rightly disallowed by the Tribunal.

Detailed Analysis:

Issue 1: Taxability of Sums in the Hands of the Assessee-Company

The Supreme Court examined whether the sums of Rs. 37,157 and Rs. 73,787 were chargeable to tax in the hands of the assessee-company for the assessment years 1956-57 and 1957-58. The Tribunal had held that these sums were not legal deductions under section 10(2)(xv) of the Indian Income-tax Act, 1922, and amounted to a division of profits after they were earned. This view was based on the interpretation that the agreement dated October 20, 1955, between the assessee-company and its selling agents amounted to a joint venture for the distribution of net profits. The High Court, however, had reversed this view, holding that the payments were legitimate deductions under section 10(2)(xv) and not a division of profits.

The Supreme Court agreed with the Tribunal, noting that the agreement's terms indicated a joint venture rather than a pure agency relationship. Key clauses in the agreement, such as the agents' consent being required for the manufacturing programme, the agents' obligation to make full investments for the worsted plant, and the sharing of net profits and losses, supported this conclusion. The Court emphasized that a payment out of profits and conditional on profits being earned could not be described as a payment made to earn profits. Therefore, the sums were chargeable to tax in the hands of the assessee-company.

Issue 2: Deductibility of Payments under Section 10(1) and Section 10(2)(xv)

The second issue was whether the payments of Rs. 37,157 and Rs. 73,787 could be deducted under section 10(1) and section 10(2)(xv) of the Act. The Tribunal had disallowed these deductions, viewing them as applications of profits rather than expenses incurred for the purpose of the business. The High Court had disagreed, emphasizing that the commercial expediency of the businessman should be considered and that the agreement was a contract of agency, not a joint venture.

The Supreme Court, however, found that the agreement's terms indicated a joint venture. The agents' involvement in the manufacturing programme, their substantial financial investments, and their sharing of profits and losses were inconsistent with a simple agency contract. The Court reiterated that the test of commercial expediency should be applied from the perspective of a businessman but also noted that the expenses must be for the purpose of the business and not for dividing profits. The Court concluded that the payments were not deductible under section 10(2)(xv) as they were part of a joint venture agreement for profit distribution.

Conclusion:

The Supreme Court allowed the appeals, setting aside the High Court's judgment and restoring the Tribunal's decision. The two questions referred to the High Court were answered against the assessee-company and in favor of the revenue. The sums of Rs. 37,157 and Rs. 73,787 were chargeable to tax in the hands of the assessee-company, and the payments were not deductible under section 10(2)(xv) of the Act. The Court left the parties to bear their own costs.

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