Divan, C.J.
1. In this reference under s. 256(2) of the I. T. Act, 1961, the following two questions have been referred to us at the instance of the assessee :
' (1) Whether there was any evidence before the Tribunal to come to the conclusion that the amount of commission paid was exorbitant and that there was no commercial consideration or business expendiency for the payment of such an exorbitant commissio
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of commission paid was exorbitant and that there was no commercial consideration or business expendiency for the payment of such an exorbitant commissio ?'
2. The assessment year under consideration is assessment year 1969-70, the previous year being the year July 1, 1967, to June 30, 1968. The assessee is a private limited company and has been carrying on the business of manufacturing and sale of electric transformers. The main shareholders of the assessee-company during the previous year were Shri L. H. Patel, Shri N. R. Patels, Shri B. H. Patel and Shri H. R. Patel. The assessee appointed M/s. Voltamp Associates, a registered partnership firm, as the sole selling agents of the assessee-company. The assessee-company's name is Voltamp Transformers Private Ltd. In the registered firm of Voltamp Associates, the partners were Srimati Urmilaben L. Patel, wife of Shri L. H. Patel, and Srimati Kusumben N. Patel, wife of Shri N.R.Patel. An agreement of sole selling agency was executed on On October 9, 1967. According to the terms and conditions of the sole selling agency, the agreed rate of commission was at the rate of three per cent, in the case of sales made to Government and semi-Government institutions and at the rate of five per cent. in the case of sales to private parties and the commission was to be calculated on the invoice value of the goods sold by the company. Sales tax, general sales tax, exercise duty or any other taxes, freight, transport charges, etc., were not to be included in the net voice value for the purpose of calculating the commission. In the previous year, that is, in the year ending June 30, 1968, the assessee-company paid a total amount of commission of Rs. 80,977 to the partnership firm of Voltamp Associates. The question was whether this amount of commission could be allowed. The ITO, after examining all the facts of the case, came to the conclusion that there was no commercial expendiency for paying the commission. He, accordingly disallowed the entire commission amount of Rs. 80,777.
3. The appeal taken by the assessee-company to the AAC succeeded because that officer held that the assessee was entitled to the deduction of the amount of commission of Rs. 80,977. Against the decision of the AAC the revenue went up in appeal before the Income-tax Appellate Tribunal and the Tribunal held that the commission which was paid to the sole selling agents was not a permissible deduction. The Tribunal approved the conclusions of the ITO and set aside the order of the AAC. Thereafter, in pursuance of the directions given by this court on an application made by the assessee, the two questions hereinabove set out have been referred to us for our opinion.
4. It is true that in this case we have to deal essentially with findings of fact arrived at by the Tribunal, but as has been pointed out by the Supreme Court in CIT v. Officer-in-charge (Court of Wards), Paigah : [1976]10ITR133(SC) , if the Tribunal has applied wrong principles of law and has relied upon incorrect principles of law for arriving at its conclusion on facts, then those conclusions which become in such cases mixed questions of law and fact are vitiated and it is open to this court, in exercise of its jurisdiction under s. 256 of the I. T. Acts, to arrive at its own conclusions in the light of facts which are otherwise not in dispute or facts which otherwise emerge from the materials on record.
5. In the instant case, the Tribunal has found that Urmilaben L. Patel wife of Shri L. H. Patel, and Kusumben N. Patel, wife of N. R. Patel, who were two of the directors of the assessee-company, were partners in Voltamp Associates, the sole selling agency firm, and the two ladies, Urmilaben and Kusumben, were not actively engaged in the conduct of the business of the firm. It was one J. P. Patel, an employee of the selling agents, who was carrying on the correspondence and none of the partners had carried on any correspondence on behalf of the sole selling agency. The Tribunal in its order has observed :
'On a careful analysis and appraisement of evidence and materials on record and the submissions made by the learned representatives of the rival parties, we have come to the conclusion that there is no commercial consideration or business expendiency for the payment of such an exorbitant commission. The sole reason for paying such a huge commission is that M/s. Voltamp /Associates, sole selling agents, consisted of the wives of two directors of the assessee-company. The ladies had rendered no service to the firm. The whole correspondence on behalf of the firm was carried on and conducted by Shri J. P. Patel.'
Thereafter, the Tribunal examined the terms and conditions of the sole selling agency agreement and observed :
'It is surprising to find that in spite of the fact that the sole selling agents will get quite a high rate of commission and yet they shall not be personally responsible if any customer does not accept the articles ordered by it or does not pay the amounts of the goods sold and delivered to it, the assessee-company rest contented by providing only that the agents will always make their best endeavours to see that they receive offers from reliable parties.'
6. With respect to the Tribunal, the distinction between an ordinary agent and a del credere agent has been overlooked by the Tribunal. As is well known an ordinary agent does not guarantee solvency of third party to his principal whereas, in the case of a del credere agent, he guarantees the solvency of the third party to his principal and the guarantee or the assurance or personal responsibility of the sole selling agent would arise only if the arrangement was in the nature of a del credere agency. The Tribunal then proceeds :
'As a matter of fact the reading of the agreement makes it clear that this document was executed with a view to bifurcating or splitting up the profits for the benefit of the relatives of the directors. Section 40A of the Income-tax Act, 1961 makes it clear that where the assessee incurs any expenditure in respect of which payment has been made or is to be made to any person referred to clausein (b) of section 40A and the Income-tax Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. Although a provision has been made under section 40A for the disallowance of certain expenses yet the Income-tax Officer can disallow the expenses having regard to the legitimate needs of the business of the assessee.'
7. In this case, evidence was led by the assessee to show that before the assessee was formed as a private limited company, there was a partnership firm called Voltamp Corporation and the business of Voltamp Corporation was taken over as a running business by the assessee-company. Now, two letters written by a concern called Escorts Ltd. were brought on record for the purpose of showing that commission at the rate of five per cent. was paid to M/s. Escorts Ltd. for selling transformers to the Madras State Electricity Board and to the Gujarat State Electricity Board, the sales having been effected in the year 1963. Thus, even for sales effected to government or semi-government bodies, commission at the rate of five per cent. was paid by Voltamp Corporation, the predecessor-in-business of the assessee-company, and this has been shown by the correspondence which has been brought on record. The correspondence is in the form of letters exchanged between Escorts Ltd. and Voltamp Corporation. Thus, it cannot be said that the commission paid at the rate of five per cent. to agents for selling the transformers was excessive and it must be borne in mind that under the selling agency agreement entered into between the assessee-company and Voltamp Associates, in the case of sales effected to government or semi-Government institutions, commission payable to the sole selling agent was at the rate of three per cent. and the commission was to be paid at the rate of five per cent. in the case of sales effected to other bodes. under these circumstances, it cannot be said that the rate of commission which was agreed upon between the assessee-company and the sole selling agent was excessive or exorbitant. It must be pointed out that the Tribunal has dealt with this aspect of the commission paid to M/s. Escorts Ltd. in a very cursory manner and the Tribunal observers in its order in this connection :
'The payments of commission at 5% by M/s. Voltamp Corporation to M/s. Escorts Ltd., Madras and Delhi, for procuring orders from the Gujarat Electricity Board and the Madras Electricity Board is not relevant to the facts of the case.'
8. Under s. 40A(2)(a) what the ITO has to decide is whether the expenditure in question is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made. Now, if in fact the evidence regarding the commission paid to M/s. Escorts Ltd., by the predecessor-in-business of the assessee-company in respect of sales of transformers is not disbelieved or is not treated as a got-up evidence, then it would surely follow that in this line of business of sales of transformers, payment of five per cent. commission by the manufacturer to the agent, through whose efforts the sales are effected, is not considered to be unreasonable or excessive and that payment of five per cent. commission is the fair market value of the service rendered by the agent in effecting such sales on behalf of the manufacturer. If that is so, we fail to understand how the Tribunal can come to the conclusion that the payment' of commission at the rate of three per cent. in the case of sales effected to Government and semi-Government institutions and five per cent. in the case of sales effected to other parties is excessive or exorbitant.
9. In our opinion, the Tribunal has proceeded on a wrong footing of law altogether when it emphasised again and again in its order that the two ladies, Urmilaben and Kusumben, who were two of the partners in the firm of Voltamp Associates, had not attended personally to the work of the firm and had left it to J. P. Patel, an employee of the partnership firm, to attend to the work of the firm. Now, as regards the bona fides of the partnership firm of Voltamp Associates, it has been brought on record that the partnership firm was formed with effect from December, 1965, and that even during the two years and ten months since it came into existence, it had been doing considerable business in the line of electrical materials, etc., because the profit and loss account of Voltamp Associates shows that in Samvat year 2022, that is, in the year which ended in October, 1966, the total purchases came to Rs. 79,587.20 and the total sales came to Rs. 92, 221.55. In Samvat Year 2023, that is, in the subsequent year, the total purchase came to Rs. 1,74, 496 and the total sales came to Rs. 2,11,680 and since the sole selling agency agreement had come into force a short time before the end of the accounting period, there was commission of Rs. 1,900 odd for Samvat year 2023. By that time, the partnership firm had also established a branch at Himatnagar and another branch at Vijapur and the two branches were also yielding profits to the partnership firm and the figures of purchases and sales which we have mentioned above do not reflect the sales and purchases of Himatnagar branch or Vijapur branch because the profit and loss account merely brings in the net profit of the working of Himatnagar branch and the net profit of the working of Vijapur branch. Under these circumstances, it is clear that even before the sole selling agency agreement was entered into in October, 1967, with Voltamp Associates, that partnership firm had considerable experience of dealing in goods and was earning a tidy profit on its own without the benefit of the sole selling agency agreement with the assessee-company. It is not as if a totally new inexperienced concern was being entrusted with the work of sole selling agency, and one aspect of the case which has to be borne in mind is that after the sole selling agents were appointed, the sales of the transformers manufactured by the assessee-company jumped tremendously. It may be pointed out that so far as the year immediately preceding the entering into of the sole selling agency was concerned, the assessee had sold transformers worth Rs. 18.69 lakhs whereas in the year in which the assessee entered into the sole selling agency agreement it sold transformers worth Rs. 50.40 lakhs. Moreover, the employee, J. P. Patel, who was the mainstay of Voltamp Associates, had previously been serving with the well-known firm of J. N. Marshal & Co. of Bombay and because of that earlier service with J.N. Marshal & Co., he had contacts with the Electricity Boards and othe r Government offices apart from having sales experience acquired in the office of J. N. Marshal & Co. J. N. Marshal & Co., It has been pointed out in the letter dated February 21, 1972, annex.'F' to the statement of the case, that in the earlier year when the agents were not appointed, profits of the assessee-company were Rs. 1,50, 000 whereas in the year in which the sole selling agents were appointed, the profits were in the vicinity of Rs. 5,00,000. It has also been pointed out by the assessee that apart from paying commission to the sole selling agents, the assessee-company had paid commission to others who brought business to the assessee-companyhad paid commission to others who brought business to the assessee company and all those people to whom they paid commission were the people because of whom they got the business of orders for transformers. It has also been pointed out that the sole selling agents had sufficient staff of about eight to ten people working with them and in the year concerned, apart from the commission of Rs. 80,977, Voltamp Associates had earned about Rs. 59,000 from their business with others. Thus, taking an overall picture on the ground of fair price for the services rendered by the sole selling agents, it cannot be said that the commission paid was exorbitant or excessive or unreasonable, nor can it be said that Voltamp Associates were selected by the assessee-company as their sole selling agents simply because two of the partners of Voltamp Associates were wives of two of the directors of the assessee-company and the third partner, B. H. Patel, was a director of the assessee-company. If services are in fact rendered by the sole selling agent, it is immaterial whether the partners of the sole selling agency firm personally do not attend to the work or get the work attended to by their employees. The question is whether services were in fact rendered by the sole selling agents to the principal, the manufacturer-assessee in this case, and, secondly, whether the remuneration which was paid to them was the fair market value for the services rendered by them. The correct principles in this connection are to be found laid down by the Bombay High Court in CIT v. Hind Commission Agents : [1963]48ITR615(Bom) . There the Bombay High Court has pointed out (p. 625) :
'It is not necessary that, in order that a business activity may be carried on by a person, he has to carry on transactions by him self only. He can as well carry them out through agents or servants or employees appointed by him for the purpose, himself remaining inactive. The transactions, however, carried out by the agents on behalf of the principal will be business transactions of the principal.'
10. In CIT v. Edward Keventer P. Ltd. : [1972]86ITR370(Cal) , on the facts before it, the Calcutta High Court held that the ITO did not apply the correct principles in forming his opinion as to the reasonableness of the sums paid to the directors. He had not given any proper consideration to the legitimate business needs of the company and, on the aspect of benefit, his view was mainly influenced by applying his mind to the kind of physical or hard labour done by the directors. The ITO considered the sums paid to the directors to be unreasonable on the basis of percentage in relation to the profits of the company. The ITO did not appreciate that for a company of that kind which had two producing centres and other distributing centres with a huge annual turnover ranging from over Rs. 23, 66,000 to Rs. 30,86,000 during the relevant years, total head office expenses of about Rs. 5,000 per month inclusive of all payments to directors, both on account of remuneration and commission, could not by any proper standard be said to be unreasonable, having regard to the legitimate business needs of such a company. There appeared to be no justification for the finding that the payment of the commission was by way of allocation of profits. This decision of the Calcutta High Court was confirmed by the Supreme Court in CIT v. Edward Keventar (p) Ltd. : [1978]115ITR149(SC) , and the Supreme Court observed that no fault could be found with the reasoning of the Calcutta High Court in taking the view that the Tribunal was right in holding that the disallowance was not justified.
11. It is well-settled law that so far as the questions of commercial expediency and business needs of an organisation are concerned, it is not the view-point of a revenue officer which should count but it should be the view-point of an ordinary business man dealing with a situation like the one faced by the particular assessee in question. It is, therefore, from that particular view-point that the question has to be approached.
12. The Tribunal in its conclusion has relied upon two decisions, one of the Supreme Court in Bengal Enamel Works Ltd. v. CIT : [1970]77ITR119(SC) and the other, also of the Supreme Court, in Juggilal Kamlapat v. CIT : [1970]75ITR186(SC) . It is well settled, as was held by the Supreme Court in Juggilal Kamlapat's case : [1970]75ITR186(SC) , that the veil of Corporate existence and corporate personality can be pierced in order to arrive at correct facts if it is necessary by lifting the veil, in the field of taxation. But in the instant case, there was no veil to be pierced for the purpose of arriving at its conclusion. The only question was whether the payment was excessive, unreasonable or exorbitant and,secondly, whether there was commercial expediency in paying Rs. 80,000 odd as commission to the sole selling agents. What we have set out hereinabove clearly shows that as a result of the sole selling agents efforts, the sales of transformers have jumped from rupees eighteen lakhs to rupees fifty lakhs and a great deal of credit for these larger sales must go to the sole selling agents and the efforts of the firm of sole selling agents in selling the transformers manufactured by the assessee-company. So far as the decision in Bengal Enamel Works's case : [1970]77ITR119(SC) is concerned, there a very large amount was being paid by the assessee concerned to a doctor of medicine who was not an expert in enamelware, and the principal business of the assessee was making and selling enamelwares. In such a situation, the Supreme Court disallowed the extra expenditure in the shape of the amount of commission paid to the doctor of medicines, who happened to be the son-in-law of the principal shareholder and managing director of the company.
13. In the case before us, though the partners of the firm of sole selling agents are related to two of the directors of the assessee-company and the third partner is also a director in the assessee-company, yet it can be seen that the commission paid by the assessee-company to the sole selling agent was neither exorbitant, nor was it unreasonable or excessive. The emphasis placed on the personal service not being rendered by the two ladies who were partners in the firm of Voltamp Associates, was a totally extraneous consideration and that extraneous consideration has been allowed to hold a great deal of sway over the decision-making process when the Tribunal was considering the matter. The facts which we have set out in our judgment have hardly been considered at all and the payment of five per cent. commission to the predecessor-in business of the assessee-company has been brushed aside of no consequence. Really speaking, in order to arrive at the conclusion whether the payment made was a fair market value for the services rendered by the sole selling agency, it is only the instances like sales through M/s. Escorts Ltd. which would have given a standard of comparison for judging whether the payment was fair or not or whether the payment was excessive, exorbitant or unreasonable, but that standard of comparison was treated as of no consequence.
14. Under these circumstances, the Tribunal's conclusion on a question of fact has been vitiated by the wrong approach adopted by it, both in judging the question of reasonableness of the amount paid to Voltamp Associates and also in a considering the question whether the partners of the sole selling agency were required to attend personally to the work selling agents. In the process the Tribunal has brushed aside the services rendered by the sole selling agents and has also brushed aside the material placed on record for the purpose of showing that it was not a novice in the line and even apart from the work of the sole selling agents, Voltamp Associates had sound experience, separate staff and expertise of its own in dealing with electrical appliances and electrical articles.
15. In view of the above observations, we must hold that the Tribunal had come to the wrong conclusion when it held that the amount of commission paid to Voltamp Associates was exorbitant and that there was no commercial consideration or business expediency for the payment of such exorbitant commission.
We accordingly answer the questions referred to us as follows :
Question No. 1. - In the negative, in the sense that there was no evidence before the Tribunal to come to the conclusion that the amount of commission paid was exorbitant and that there was no commercial consideration or business expendiency for the payment of such an exorbitant commission.
Question No. 2. - In the negative, that is, in favour of the assessee and against the revenue.
16. Thus, both the questions are answered in favour of the assessee and against the revenue. The Commissioner will pay the costs of this reference to the assessee.