P. B. MUKHARJI J. - the question asked on this income-tax reference is as follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,56,806 was wholly and exclusively laid out for the purpose of business and as such allowable as business expenditure ?'
The assessee is the Aluminium Corporation of India Ltd. of 7, Council House Street, Calcutta. The statement of the case relates to the assessment year 1955-56, the corresponding previous year being the financial year ended on March 31, 1955. BY an agreement dated December 30, 1949, the assessee appointed Messrs. J. K. Alloys Ltd. as the sole selling agent for selling its aluminium products. The agreement was effected for a period of 5 years from April 1, 1950. Under the terms of the agreement the selling agents were to receive the commission on all sales either effected by the agents themselves or by the principals directly. Clauses 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 companys products. Selling agency commission is paid to M/s. J. K. Alloys Ltd. because the assessee gets expert opinion in regard to marketing of its manufactured articles from the above party. Thus commission is paid to M/S. J. K. Alloys Ltd. not because sales are effected through them but it is paid for technical advice relating to sales matter received from them. The assessee has absolutely no evidence to show the extent and type of expert opinion received from their sole selling agents. In order to find out whether the assessee actually derives benefits by making. In order to find out whether the assessee actually derives benefits by making these payments they were asked to submit evidence regarding services rendered by M/s. J. K. Alloys Ltd. In respects to the above query it has been stated that the problems relating to the sales matter are numerous and complicated and, therefore, the company believes that exchange of correspondence regarding these matters would be meaningless and wasteful. It has been stated further that the sole selling agents discussed the matter with companys staff and indicated the lines on which to proceed. It is contended that in order to minimise delay and expenditure the company follows a practice of discussing the sales problems directly with their selling agents over the table and coming to a decision.'
On these facts, the Income-tax Officer came to the following conclusion :
'It is really surprising that the assessee is making huge payments as selling agency commission and it is not able to produce any evidence whatsoever regarding the nature and extent of services rendered by the sole selling agents. I have already stated that sales are not effected through sold selling agents but the company is making sales direct to its customers. It is ridiculous that the assessee will pay more than Rs. 1 1/2 lakhs simply to get advice regarding market conditions. By paying much lesser amount the company could have engaged a technical expert having sound knowledge of sales and other allied matters. On the facts and circumstances of the case, it appears to me that this payment has been made not on business considerations, but some extraneous considerations have influenced the company to make these payments. Keeping in view the above points. I hold that is no an expenditure laid out wholly and exclusively for the business of the company and therefore this cannot be allowed as a deduction.'
Reading this 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 emphasised the fact that the Income-tax Officer had requested the assessee to produce all he details of the commission and sales with reference to the services rendered by the sole selling agents which entitled then to such payments and also evidence regarding the actual performance of such services. He quotes the reply of the assessees officer, Sri Subramaniyam, who gave a note, wherein it was stated by the assessee that 'as the problems have been so very numerious 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 spot for guidance and discussion.'
The Appellate Assistant Commissioner also records the fact that Sri Bagadthey for the assessee had stated that he would furnish a written statement, but subsequently he did not do so. The Appellate Assistant Commissioner also records Sri Bagadtheys admission that all sales were effected by the assessee in its own name for the reason that the assessee desired to retain the goodwill for such sales and also wanted the contracts for sales to be always in its own name. He also records the further fact urged by Sri Bagadthey that the sole selling agency commission was adjusted against each sale as and when it took place and not at the end of the year and that it support of it a credit note book was shown to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner has also noted Sri Bagadtheys statement that the existence of this selling agency commission was brought to the notice of the Industrial Finance Corporation.
The Appellate Assistant Commissioner thereafter records the undisputed facts in this case, viz., (1) that the sales were effected directly by the assessee, (2) that no sales were effected by the selling agents and (3) that there is no evidence in support of the assessees contention that the selling agent did effects sales in pursuance of the aforesaid agreement. On these facts admitted, the Appellate Assistant Commissioner, confirming the findings and order of the Income-tax Officer, came to the following conclusion :
'In the absence of any evidence, it is not possible to accept the appellants representatives contention. It is clear that the agreement has not been acted upon.'
He then further proceeds to dispose of the assessees contention in the following terms :
'With regard to Sri Bagadtheys contention that the appellant could not be expected to maintain a record of the services referred by the selling agents, especially when there is no dispute between the contracting parties, it seems to me that he is really begging the question. As I have stated earlier it is for the appellant to prove that the payment was made or the expenditure incurred wholly and exclusively for the business. The question is what were the consideration for which the payment was made. Ordinarily, if the sales had been effected by the sole selling agents, commission would be due to them. But the sales have been actually effected by the appellant. Though Sri Bagadthey contends that the selling agents have effected sales, the has not an iota of evidence in support of has contention. He merely relies on he agreement and, in the absence of any dispute between the two contracting parties, I do not think that Sri Bagadtheys argument regarding the absence of motive to reduce the profits 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 he 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 appellant (assessee) to Messrs. J. K. Alloys Ltd. was wholly laid out for the purpose of business and was an admissible charge against the appellants income assessable for the year 1955-56.'
It is that decision of the Tribunal which the revenue is challenging in this reference. The main ground of the challenge of the revenue is that this is a decision which is not supported by any fact or any evidence whatsoever. Mr. Pal, appearing for the revenue, contends that the mere fact of an agreement to pay commission is not enough to prove that the expenditure under the agreement has been made or laid out 'wholly and exclusively for the purpose of such business' within the meaning of section 10(2)(xv) of the Income-tax Act. There is substance in the contention made on behalf of the revenue on facts of his case. The Tribunal puts its decision in the following terms :
'There is no dispute that the amount in question was actually paid as commission to M/s. J. K. Alloys Ltd. It is also common ground that all the sales during the year were effected directly by the appellant and no sales effected by the selling agents. On these facts, the Appellate Assistant Commissioner concluded that the agreement had not been acted upon and that the payment was made for some extra commercial considerations. We are afraid we are unable to concur with the Appellate Assistant Commissioner. The mere fact that no sales were effected during the year of account by the selling agents themselves does not, necessarily, mean that the agreement was not acted upon. In fact, clause 6 of the agreement quoted above explicitly refers to the fact that the agents shall be entitled to the payment of the discount even if all the sales were effected directly by the principals themselves. The agreement has not been impugned by the department as a sham and collusive transaction; in fact, the entire selling agency commission paid to M/s. J. K. Alloys Ltd. had all along been allowed by the department as an admissible expenditure in the hands of the assessee up to the assessment for the year 1954-55. Evidently, the agreement in question had been entered into bona fide and had been acted upon. If the selling agents had committed breach of any of the covenants in the selling agents had committed breach of any of the covenants in the year of account, it was open to the principals to terminate the agency by resort to the forfeiture clause quoted above. The principals did not, however, forfeit the agency as, manifestly, there was no breach of any covenant. The mere fact that in the year of account no sales were 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 be entitled to the discount at the stipulated rates even on direct sales effected by the principal. Commission, therefore, accrued to the selling agents on all sales effected by the principal in the relevant 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 they 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 expended or laid our wholly or exclusively for the purpose of the business. That is a view which we find unable to accept. This was the very point which was decided by the Supreme Court in Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax. The Supreme Court there points out that the question whether an amount claimed as expenditure was laid out or expended wholly or exclusively for the purpose of the assessees business is to be decided on the facts and in the light of circumstances of each case. But the conclusion on the admissibility of an allowance was one of law. The Supreme Court particularly points out there that 'merely because of the existences of an agreement between the assessee and his employee for payment of a certain remuneration and the fact of actual payment, the Income-tax Officer is not bound to hold that the payment was made exclusively and wholly for the purpose of the assessees business.
Although there might be such an agreement in existence and the payment might have been made, it is still open to the Income-tax Officer to consider all the relevant factors and determine for himself whether the remuneration paid to the employee or any portion thereof is properly deductible under section 10(2)(xv) of the Income-tax Act. The observation of Ramaswami J. at pages 60-61 of that report in Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax clearly brings out the ratio of his decision. The learned judge a page 60 observes :
'It is an erroneous proposition to contend that as soon as an assessee has established two facts, viz., the existence of an agreement between the employer and the employee and the fact of actual payment, no discretion is left to the Income-tax Officer except to hold that the payment was made wholly and exclusively for the purpose of the business.'
This is exactly the mistake which the Tribunal made in holding that because the agreement of an agency was there in the present case and becasue the payment was made thereunder, therefore, it must be taken to be an expenditure made or laid out wholly and exclusively for the purpose of the assessees business.
On the basis of the Supreme Court decision in this case, we are bound to hold that the Tribunal was wrong and the Tribunals decision must be set aside in this case.
Similar views were taken, as pointed out by the Supreme Court, in Aspro Ltd. 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, 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, have 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 sales made by the principal, its representatives and/or agents in that behalf.' Except what has been termed as credit note, the agents have not in this case produced any 'proper books of the account' in support of the assessees claim, nor were they called for by the assessee or produced. Mr. Mitter for the assessee also emphasised the fact that the revenue authorities did no come to the conclusion that the whole agreement was a sham or collusive transaction. No doubt that is true, but what they did say is that the agreement was not acted upon. What is necessary for the revenue is to come to a finding whether the particular sum has been expended wholly and exclusively for the purposes of business. If that fact is not established, then the claim for deduction under section 10(2)(xv) cannot obviously be allowed on the very terms and language of that section. Throwing a document or an agreement in the face and saying that the payment has been made under his agreement does not make it expenditure wholly and exclusively for the purpose of business. No doubt an agreement as a document is a cogent factor or a cogent piece of evidence, but the fact of the money being spent wholly and exclusively for the agreement, before a claim for deduction can be allowed under section 10(2)(xv) of the Income-tax Act. There is no such evidence in the present case as stated both by the Income-tax Officer and confirmed by the Appellate Assistant Commissioner that there was not an 'iota' of evidence.
The primary fact to be proved and established under section 10(2)(xv) of the Income-tax Act is that the sum claimed as a deduction was expended or laid out wholly and exclusively for the purpose of business of the assessee. That is a question of fact to be proved by cogent evidence. A written agreement or a written document under which such payment is made is a piece of evidence only and does not conclude this question or the fact which is to be established.
No doubt, the expresion 'purpose of the business' has to be understood in a reasonable commercial sense, and the business practice and the business methods are relevant considerations to determine the purpose of the business in a particular case. In doing so, great deference should be shown to the business, for it is the business which has to judge, understand and apply such money and incur such expendiure. 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 a money spent for the purpose of business although the employee might no 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 makes strange reading. The assessee at one stage seems to make the case that this money was not paid as commission for the agency but was paid for expert advice in the technical matter of marking for which there was no proof. Promise was made by the assessee to produce a written statement showing the details. That promise was not kept. The reason for not producing this statement is not far to seek because the assessee really is taking a self-contradictory position, by saying first that all the sales were directly by the principal and not by the assessee as agent and then saying that the money was for expert advice or technical matter of marketing. Then the assessees case became oral conversations across the table because both the agent and the assessee happened to be in the same building. Incidentally it may be pointed out that, although under clause 1 of the agreement the agents were to act as the selling agents of 'all' aluminium ingots, sheets, circles, expanded metal, shots, utensils and anodised and alloy goods manufactured by the assessee, which meant that the agent was bound to sell all such goods of the assessee, yet there was no recital in this agreement of the 30th December, 1949, to say that the agent could not sell other peoples goods, even similar goods, either in competition or rivalry with those of the assessee. In other words, there was no negative covenant restraining the agent in that respect.
On the facts found it appears that the payment by the assessee to J. K. Alloys Ltd., in the year under consideration, was a payment for idleness and for doing no work. That, on the facts of this case, does not establish this money spent wholly and exclusively for the purpose of business. We do not want to be understood as saying that in special circumstances payment for idleness, as, for instance, in the case of negative covenants, may not be a purpose of the business. But what we are saying is that, on the facts of the present case, it is not so. Reference was made to a case decided by a Division Bench of the Allahabad High Court in Central Distillery & Chemical Works Ltd. v. Commissioner of Income-tax, where expenditure was allowed as deduction to a managing agent, even for the period when the managing agent did not do any work, because under the Defence of India Rules the Government had issued a notification appointing a Controller to control and supervise the work of the concern. That has no application to the facts before us. Here there was no forcible prevenion of the agent so that the was rendered incapable of doing any work for his principal.
For the reasons stated above, we answer the question in the negative and hold that the sum of Rs. 1,56,806 has no been establish to have been spent or laid out wholly and exclusively for the purpose of the business of the assessee. The Commissioner will his costs. Certified for two Counsel.
K. L. Roy J. - I agree.