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TMI Blog1968 (2) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... nts were to receive the commission on all sales either effected by the agents themselves or by the principals directly. Clause 6 of the agreement states as follows : " That the principal will allow the agents discount in the manner indicated hereunder on sale of all products of the principal effected by the agents either by themselves or through sub-agents appointed by them or directly by the principal themselves. " Then follows specific items like ingots, sheets and circles, expanded metal, utensils and anodised and alloy goods, shots---all made of aluminium---with different rates of discount written against each item. In the relevant year of account a sum of Rs. 1,56,806 was paid by the assessee to J. K. Alloys Ltd. as selling agents in terms of the above agreement. The whole question now turns upon this sum of Rs. 1,56,806. The Income-tax Officer disallowed the claim for deduction of the amount on the ground that the payment had not been made on business consideration. He came to certain significant findings of facts. They are in the language of the order of the Income-tax Officer as follows : " It is stated that M/s. J. K. Alloys Ltd. are sole selling agents of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order, it appears that the decision of the Income-tax Officer is based on certain facts. Now it appears that these facts have not been controverted in the subsequent proceedings that were brought up by the assessee. On appeal to the Appellate Assistant Commissioner, the Appellate Assistant Commissioner agreed with the Income-tax Officer that payment had been made for some extraneous consideration, and further held that the agreement had not been acted upon. He emphasized the fact that the Income-tax Officer had requested the assessee to produce all the details of the commission and sales with reference to the services rendered by the sole selling agents which entitled them to such payments and also evidence regarding the actual performance of such services. He quotes the reply of the assessee's officer, Sri Subramaniyam, who gave a note, wherein it was stated by the assessee that "as the problems have been so very numerous and complicated, exchange of correspondence from one table to another in the same premises would have been meaningless. The sole selling agents could discuss the matter with our staff and indicate the lines on which to proceed and they were always available on sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been actually effected by the appellant. Though Sri Bagadthey contends that the selling agents have effected sales, he has not an iota of evidence in support of that contention. He merely relies on the agreement and, in the absence of any disputes between the two contracting parties, I do not think that Sri Bagadthey's argument regarding the absence of motive to reduce the profit is relevant inasmuch as no motive has been attributed in the assessment order. The only question is whether the payment was made wholly and exclusively for the business. The Income-tax Officer has held that it was made for considerations other than business and not connected with it. In the circumstances of the case, I cannot but hold that the Income-tax Officer was justified in disallowing this claim. " The assessee having lost both before the Income-tax Officer and the Appellate Assistant Commissioner, appealed to the Tribunal. The Tribunal came to a different conclusion saying : " In our opinion, the amount of commission, viz., Rs. 1,56,806, paid by the appellant (assessee) to Messrs. J. K. Alloys Ltd. was wholly laid out for the purpose of business and was an admissible charge against the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the selling agents did not amount to a violation of any of the terms of the agreement. In point of fact, as already noted, the agreement contemplates that the selling agents would be entitled to the discount at the stipulated rates even on direct sales effected by the principals. Commission, therefore, accrued to the selling agents on all sales effected by the principals in the relevant previous year. " In our judgment, the Tribunal took a view which is not supported by any fact. The Tribunal certainly was right in saying that the mere fact that no sales were effected did not show that the agreement was not acted upon or that it was sham or collusive and that clause 6 of the agreement itself permitted commission being earned without sales being effected by the agents. But it is not that "mere fact" which was the foundation of the orders of the Income-tax Officer and the Appellate Assistant Commissioner. They found more facts which are quoted above and which were not upset by the Tribunal. The Tribunal apparently was of the view that the very fact that there was an agreement entitling the agent to earn commission without doing any work was enough to show that this sum was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Commissioner of Taxes, a decision of the Privy Council and by the Bombay High Court in Jethabhai Hirji Co. v. Commissioner of Income-tax . In a recent decision of the Division Bench of this court in Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax, to which I was a party, the view taken was the same and it was laid down there that, for the purpose of deduction under section 10(2)(xv) of the Income-tax Act, mere legal liability was not enough. There had to be an expenditure which, in fact, must be laid out and expended wholly and exclusively for the purpose of the business. The Tribunal, in the present case, it must be stated, had not had the benefit of the decision of the Supreme Court in Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax delivered on September 20, 1966, because the Tribunal gave its judgment on July 25, 1963. Mr. Mitter appearing for the assessee based his argument on the agreement dated 30th December, 1949, and its clauses. We have already noticed clause 6 of that agreement. But we must here point out that clause 7 of the agreement expressly provided " that the agents shall keep proper books of accounts in which they will record all s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... understand and apply such money and incur such expenditure. For instance, money paid to an employee under a contract of service in a business during his absence on leave either earned or due to medical reasons would still be regarded as money spent for the purpose of business although the employee might not have been able to render any actual service during the period of his leave or illness. To some extent, therefore, it is possible to stipulate, for the purpose of business, that the business will spend some money for payment of commission to its sole selling agent even for keeping him idle. In this case although it is an admitted fact that the agent did not do any business and although it is an admitted fact that under clause 6 of the agreement itself the agent would earn commission even when the contracts were made directly by the principal without the medium of the agent, the fact that the assessee spent this money wholly and exclusively for the purpose of the business will still have to be established. The facts as found by the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal make strange reading. The assessee at one stage seems to make the case that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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