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TMI Blog1976 (1) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... the operations of spinning of yarn from imported wool tops was started some time in the year 1952. Weaving operations were, however, carried on in both these departments. One of the departments was known as M/s. Panipat Woollen Mills, Kharar, while the other one was known as M/s. Navin Woollen Mills. It is said that the assessee-company was running at a constant loss as a result of which, in 1952, the assessee-company decided to instal a plant for manufacture of worsted yarn from imported wool tops by raising a loan of ₹ 7 lakhs from the Industrial Finance Corporation. The plant went into production in September, 1952. The assessee-company appointed M/s. Murlidhar Chiranjilal as the sole selling agents for the worsted yarn on payment of 2% commission. Subsequently on December 15, 1953, the assessee-company entered into an agreement with M/s. Saligram Premnath under which the latter were appointed as the sole selling agents on certain specified conditions the important of which being that the agents were to finance the assessee-company to the extent of ₹ 2,50,000 and the assessee-company agreed to pay 6% interest on the advances to be made by the agents and further agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal further held that the agreement, dated October 20, 1955, amounted to a joint venture for the distribution of profits between the assessee-company and the selling agents after the profits were ascertained. The assessee-company then approached the Tribunal for making a reference to the High Court, and the Tribunal accordingly referred the following two questions to the High Court for its opinion: 1. Whether, on the facts and in the circumstances of the case, the Tribunal rightly held that the sums of ₹ 37,157 and ₹ 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, on the facts and in the circumstances of the case, the Tribunal rightly disallowed the assessee-company's claim for deduction of the payment of ₹ 37,157, and ₹ 73,787, under section 10(1) and section 10(2)(xv) of the Indian Income-tax Act, 1922, in the assessment years 1956-57 and 1957-58, respectively ? The High Court by its judgment dated January 20, 1970, answered both the questions in favour of the assessee-company and held that the payments, in question amounted to a legitimate deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at there being an express provision in the agreement dated October 20, 1955, by which the agents agreed to share losses which was a provision peculiar to the present transaction and was not at all covered by any authority cited before the Tribunal or the High Court, that itself was proof positive of the fact that the transaction amounted to a joint venture with a view to division of profits ; and (2) it was argued that the High Court had exceeded its jurisdiction in travelling beyond the agreed statement of the case framed by the Tribunal and had relied on certain materials which were not at all found by the Tribunal in its order nor were those materials mentioned in the statement of the case. Mr. A. N. Goyal, counsel for the assessee-company, has, however, submitted that the view taken by, the High Court is absolutely correct and the facts of the present case are clearly covered by the decision of this court in Dharamvir Dhir v. Commissioner of Income-tax . A number of other cases have also been cited at the Bar and we shall refer to the same after marshalling the facts found in the present case. Before coming to the facts it may be necessary to mention that there can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made from time to time by the company in consultation and with the consent of the agents. It may be noticed that this clause requires not only consultation with the agents for the programme of manufacture of goods but a tacit consent of the agents. In other words, if the agents withheld their consent, they could veto the programme of manufacture. Such a limitation placed on the power of the assessee-company does not appear to us to be in consonance with a pure and simple contract of agency. Clause 6 which deals with financial arrangements may be extracted thus : (i) The agents shall invest full amount for the working of the worsted plant to the full possible capacity beginning from the purchase of tops to the completion of the yarn sales including wages, power, stores, and repairs and maintenance, etc. Such investments and expenses incurred on tops, manufacturing, bank charges, transport, insurance and octroi will be debited to the account of the company. (ii) Before the beginning of the arrangements under this agreement, the machinery of the worsted plant will be overhauled and similarly before this arrangement ends the machinery will be overhauled...... (viii) In c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termining the net profits or loss position. In case of net loss, if any, there will be a deduction of 50% (fifty per cent.) of such loss from the agent's account. Analysing the terms of this sub-clause it would appear that the agents have been able to secure most liberal and profitable terms. To begin with they were to get a commission at the rate of one and a quarter per cent. on the net proceeds of the sales of all goods. There can be no objections to this. Secondly, the agents will get 50% commission on the net profits of the worsted plant. The net profits would have to be ascertained after deducting all the manufacturing costs, interest, insurance, etc. The conduct of the agents in sharing half of the net profits does not appear to us to be consistent with the payments made to the agents for services rendered. It is difficult to lay down any rule of universal application as to what percentage of profit would be consistent with the payment in lieu of services but taking the totality of the provisions of the agreement it seems to us that the percentage of profits and the manner in which it is to be determined is more consistent with the position of a partner than that of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstrued as a remuneration for services. In this connection, Greene M. R. observed as follows : It is not cash that passes in exchange for these profits, it is services : and the badge of such a contract is remuneration for services, and therefore the first thing that this remuneration would certainly not be is a share of profits purchased by the employee... I can conceive of a case where a person contributes to some sort of a joint adventure services, while others contributes perhaps capital, land, plant, and goods arranging between themselves (it may be something short of a partnership) that nobody shall get anything until the pool of profits is ascertained, and then they shall divide it up between them in specified proportions. That, it seems to me, would be a real agreement for division of profits, because there would be one profit fund only. There would not be two 'profit' funds to be ascertained for different purposes. These observations seem to us to cover the facts of the instant case. Having regard to the terms and conditions of the agreement detailed and analysed above, there can be no doubt that the agents by contributing to the investments and by sharin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the manufacture of the yarn by the plant to be installed by the assessee-company but at every stage in the programme of manufacture. Even at the stage of the sale of the products the consent of the agents was necessary. In other words, the agents were given a complete controlling power so far as the manufacture and sale of the products of the assessee-company were concerned. No such stipulation is to be found in Dharamvir Dhir's case. Finally, not only there was no provision in Dharamvir Dhir's case, under which the trust was to share the losses but there was an express provision to the contrary, namely, that the trust was not liable for any loss. Thus, the mere payment of interest at the rate of 6 per cent. on the loan advanced to the assessee and a percentage in the profits of the business would be quite consistent with a remuneration in lieu of services lent and would certainly amount to an expenditure incurred by the assessee wholly and exclusively for the purpose of the business which was conducted by the assessee. The same, however, cannot be said of the present case. It was on the peculiar facts of Dharamvir Dhir's case that this court observed as follows : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee-company on the decision in J. K. Woollen Manufacturers v. Commissioner of Income-tax where this court observed as follows : The question as to whether an amount claimed as expenditure was laid out or expended wholly or exclusively for the purpose of business, profession or vocation as required under section 10(2)(xv) of the Income-tax Act has to be decided on the facts and in the light of the circumstances of each particular case...... In our opinion, neither the High Court nor the Appellate Tribunal has applied the proper legal test in this case. As pointed out by this court in Commissioner of Income-tax v. Walchand and Co. P. Ltd. in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the income-tax department. It is, of course, open to the Appellate Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of trader or it is not laid out wholly and exclusively for the purpose of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decided. In these circumstances, the decision in the aforesaid case does not appear to be of any assistance to the assessee-company. The Tribunal had interpreted the agreement keeping into account the tests of commercial expediency and we find ourselves in complete agreement with the view taken by the Tribunal. The High Court on the other hand relied upon what it called the surrounding circumstances that the assessee-company was a losing concern from its inception and had to get rid of the previous selling agents, M/s. Murlidhar Chiranjilal, because they caused considerable embarrassment to the assessee-company. While the standing counsel for the revenue has admitted that the company was running at some loss there was no evidence that the company was in such a bad shape that it had to get rid of the first selling agents because the selling agents were causing embarrassment to it. The High Court then relied on the fact that the first agency which was entered into with M/s. Murlidhar Chiranjilal in 1953, also resulted in loss as a result of which the second agreement dated October 20, 1955, was entered into. This does not appear to be of much consequence. The High Court then reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the instant case. Reliance was also placed by counsel for the assessee-company on a Division Bench decision of the Patna High Court in Jamshedpur Motor Accessories Stores v. Commissioner of Income-tax , where Untwalia C.J. as he then was observed as follows : That position being accepted the matter as to what amount was payable to Parikh ought to have been adjudged from the assessee's point of view and not from the department or Tribunal's point of view. It has to be emphasised that unless there is a limitation put by the law on the amount of expenditure a lesser amount than the amount expended cannot be allowed merely because the assessing authority thinks that the assessee could have managed by paying a lesser amount as a prudent businessman. The test of prudence by substituting its own view in place of the businessman's had not been approved by the Supreme Court in the decisions referred to above. Here also the observations were confined only to the question that the test of prudence was to be determined from the point of view of the businessman. Jamshedpur Motor Accessories Stores' case was also concerned regarding the quantum of the payment of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e first come into existence. But profits on their coming into existence attract tax at that point and the revenue is not concerned with the subsequent application of the profits .................. but the principle laid down by Lord Chancellor Halsbury in Gresham Life Assurance Society v. Styles is of general application unaffected by the specialities of the English tax system : ' ......... But when once an individual or a company has in that proper sense ascertained what are the profits of his business or his trade, the destination of those profits or the charge which has been made on those profits by previous agreement or otherwise is perfectly immaterial. The tax is payable upon the profits realised and the meaning to my mind is rendered plain by the words payable out of profits . ' Thus, in short, by controlling the manufacturing programme, sharing to the extent of 50% in the net profits ascertained in the manner stipulated in the agreement and above all for sharing 50% of the losses which are to be deducted from the commission of the agents the agents become completely equated with the proprietors of the firm itself and, therefore, the contract of agency is re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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