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PETITIONER: COMMISSIONER OF INCOME-TAX, GUJARAT AHMEDABAD

       Vs.

RESPONDENT: TEJAJI FARASRAM KHARAWALLA LTD.

DATE OF JUDGMENT: 19/07/1967

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C. SHAH, J.C. SIKRI, S.M. SHAH, J.C. SIKRI, S.M.

CITATION:  1968 AIR  200            1967 SCR  (3) 876  CITATOR INFO :  R          1969 SC 812  (6)  RF         1970 SC1212  (16)  F          1987 SC 500  (44)

ACT: Indian  Income-tax  Act, 1922, s. 4(3)  (vi)-  Allowance  to agent for expenses wholly and necessarily in the performance of  duties  Exemption under section  whether  applicable  to whole  amount  so sanctioned whether  actually  expended  or not--’Incurred’ whether includes ’to be incurred’.

HEADNOTE: The   respondents   were  selling  agents  for   the   goods manufactured  by another company.  They were paid 7-1/2%  on the  sales  as  selling commission  and  5%  as  contingency expenses.   The  question  in  income-tax  proceedings   was whether   the  amount  not  spent  out  of  the  grant   for contingency  expenses was exempt from taxation by virtue  of s,  4(3) (vi) of the Indian Income-tax Act, 1922.  The  High Court in reference held that the "5% commission" received by the  respondents  represented a special  allowance  to  meet expenditure  and was on that account exempt from  tax.   The Revenue appealed. HELD,:    (i)  In  the  context  in  which:  the  expression ’incurred’  occurs  in  s. 4(3) (vi)  it  undoubtedly  means ’incurred or to be incurred’.  To qualify for exemption  the allowance must be granted to meet expenses incurred or to be incurred  wholly and necessarily in the performance  of  the duties of an office or employment of profit. [41A] (ii) In framing S. 4(3) (vi) the intention of the framers of the  Act  was  to  grant exemption  in  respect  of  amounts received  by the assesses, not for his own benefits but  for the  specific  purpose of meeting the  expenses  wholly  and necessarily incurred or to be incurred in the performance of his  duties as agent.  It would therefore be  reasonable  to hold that the allowance granted to meet the expenses  wholly and   necessarily  incurred  or  to  be  incurred   in   the Performance of the duties of the office or employment of the

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grantee alone qualifies for exemption under the Act, and any surplus remaining in the hands of the grantee after  meeting the  expenses does not bear the character of  the  allowance for meeting expenses.  This would be so even if the employer has disabled himself from demanding refund of the amount not expended for meeting the expenses incurred or to be incurred in the performance of the duties of an office of  employment or  profit,  and the surplus remaining in the hands  of  the grantee  acquires for the purpose of the Income-tax Act  the character of additional remuneration. [40C-E] Tejaji  Farasram  Kharawala v. Commissioner  of  Income-tax. Bombay (Mofussil), [1948] 16 I.T.R. 260, disapproved. (iii)     The allowance may be in respect of a period longer than the accounting year or years.  But on that account  the whole  receipt reduced by the expenses actually incurred  in the  year of account is not liable to be brought to  tax  in that  year.   In  such a case it will be  the  duty  of  the Income-tax  Officer  to  determine  the  amount  allowed  in respect of the year of account in which the expenditure  has been  incurred  and  the difference between  the  amount  so determind  and the amount actually expended would  alone  be brought to tax. [41G] The position in this respect remains the same even after the amendment of s. 4(3) (vi) by the Finance Act, 1955. [41B] 38 Commissioner  of  Income-tax, U.P. v. Sharma &  Company.  57 I.T.R. 470, disapproved.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2162 of 1966. Appeal from the judgment and order dated September 6, 9, 1963 of the Gujarat High Court in Income-tax Reference No. 9 of 1963. B.   Sen, A. N. Kirpal, R. N. Sachthey and S. P. Nayar,  for the appellant. I. N. Shroff, for the respondent. The Judgment of the Court was delivered by Shah, J.By an agreement dated October 29, 1928 Ciba  (India) Ltd.-hereinafter  called  ’the  principals’--appointed   one Tejaji Farasram Kharawalla selling agent for the District of Ahmedabad  in  respect  of certain kinds of  dyes  and  dye- stuffs, and agreed to pay him commission at the rate of  12- 1/2%  on  sales  by  him  of  dyes  and  dye-stuffs  of  the principals.  The commission was to include " all charges  in connection  with the upkeep of offices and godown,  turnover rebates and contingency expenses etc." The terms relating to commission were modified by  agreement dated August 20, 1935 and out of the commission agreed to be paid, 71% was to be treated as the selling commission and 5% was to be treated as compensation in lieu of the contingency expenses  which  the  selling agent had to  meet,  "such  as commission  to Dyeing Masters, agents etc.". The  rights  of the  selling  agent were assigned with the  consent  of  the principals  to  the  respondent  Company  with  effect  from October  27, 1947.  In assessing the income of  the  Company for  the  assessment year 1949-50,  the  Income-tax  Officer included  in  the  taxable income  Rs.  58,025/-  being  the difference between Rs. 1,90,538/- received by the Company as "5% commission" and Rs. 1,32,512/- spent by the Company  for meeting  the  charges which the selling agent was  to  meet. The  Income-tax  Appellate  Tribunal,  however,  upheld  the contention  of  the Company that in the computation  of  the income of the Company, the "5% commission" was wholly exempt

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by virtue of S. 4 (3)(vi) of the Income-tax Act, 1922. The  Commissioner  then  moved the Tribunal  to  draw  up  a statement of the case and to refer the following question to the High Court of Judicature at Bombay:               "Whether  on the facts of the case, a  portion               viz. 5 of the selling agency commission of 12-               1/2% received by the assessee company from M/s               Ciba  Ltd.  in the course of carrying  on  the               selling  agency  business is exempt  from  tax               under s. 413(vi) of the Act?"               But  the Tribunal only referred the  following               question:               "Whether  the assessee company held an  office               or employment of profit within the meaning  of               s. 4(3)(vi) of the Indian Income-tax Act?" 39 The  application preferred by the Commissioner to  the  High Court for calling upon the tribunal to submit a statement on the question originally submitted was rejected, and the High Court answered the question referred by the Tribunal in  the affirmative,   observing  that  it  had  been   conclusively determined  by  their earlier decision  in  Tejaji  Farasram Kharawalla    v.   Commissioner   of   Income-tax,    Bombay (Mofussil)(1)-which arose out of a proceeding for assessment to tax of the income of the original selling agent under the same agency agreement.  It appears that in so observing  the Court  was  under  some misapprehension,  for  the  question referred by the Tribunal had not been decided in the earlier judgment. Against  the  order passed by the High  Court  recording  an answer  in the affirmative on the question referred  by  the Tribunal  and  against the order dismissing  the  notice  of motion, the Commissioner appealed to this Court.  This Court set aside the order passed by the High Court dismissing  the application  of the Commissioner and without expressing  any opinion  on  the  correctness or  otherwise  of  the  answer recorded  by the High Court on the question referred by  the Tribunal,  remanded  the  case  to the  High  Court  with  a direction  that the Tribunal be called upon to state a  case on  the  question raised in the application of  the  Commis- sioner. The  case  was then heard by the High Court  of  Gujarat  to which it stood transferred because of the reorganisation  of the  State of Bombay.  The High Court of Gujarat  held  that the  "5% commission" received by the Company  represented  a special allowance to meet expenditure "such as commission to Dyeing Masters, agents etc.", and was on that account exempt from tax.  The High Court also held that the Company held an office or employment of profit.  The Commissioner has  again appealed  to this Court against the answers recorded by  the High Court on the original and supplementary question. Section  4(3)(vi) of the Indian Income-tax Act, 1922, as  it stood in the year of assessment read as follows:--               "Any  income, profits or gains failing  within               the following classes shall not be included in               the total income of the person receiving them:               (vi)  Any   special  allowance,   benefit   or               perquisite   specifically  granted   to   meet               expenses  wholly and necessarily  incurred  in               the performance of the duties of an office  or               employment of profit." The   clause  grants  exemption  in  respect   of   expenses "incurred": but on that account an allowance granted to meet expenses to be incurred in future in the performance of  the duties of an

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(1)  [1948] 16 I.T.R. 260. 40 office or employment of profit is not outside the  exemption claimed.  In the context in which the expression  "incurred" occurs, it undoubtedly, means "incurred or to be  incurred". To  qualify for exemption the allowance must it is clear  be granted  to meet expenses incurred or to be incurred  wholly and  necessarily  in  the performance of the  duties  of  an office  or employment of profit.  But the purpose for  which the  allowance  is granted, in our judgment,  is  alone  not determinative  of  the  claim to  exemption.   An  allowance though  made to a person holding an office or employment  of profit   intended  for  appropriation  towards   expenditure incurred  or to be incurred in the discharge of the  duties, does  not constitute any real income of the grantee.  It  is in  truth expenditure incurred by the employer  through  the agency of the grantee.  The intention of the framers of  the Act was to grant exemption in respect of amounts received by the assessee, not for his own benefit, but for the  specific purpose  of  meeting  the expenses  wholly  and  necessarily incurred or to be incurred in the performance of his  duties as  an  agent.  It would, therefore, be reasonable  to  hold that  the allowance granted to meet the expenses wholly  and necessarily incurred or to be incurred in the performance of the duties of the office or employment of the grantee  alone qualifies  for  exemption  under the Act,  and  any  surplus remaining  in  the hands of the grantee  after  meeting  the expenses  does not bear the character of the  allowance  for meeting expenses but for performing the duties of the office or  employment.  This would be so even if the  employer  has disabled  himself  from demanding refund of the  amount  not expended for meeting the expenses incurred or to be incurred in the performance of the duties of an office or  employment of  profit,  and the surplus remaining in the hands  of  the grantee  acquires for the purpose of the Incometax  Act  the character of additional remuneration. We are unable to agree with the decision of the Bombay  High Court  in  Tejaji  Farasram Kharawalla’s  case(1)  that  the object  with  which  the  grant  is  made  by  the  employer determines  the claim to exemption under S. 4(3)(vi) of  the Income-tax  Act.  The observations made by Chagla, C.J.,  at p.  267  that  "what is emphasized  in  this  sub-clause  S. 4(3)(vi) is the purpose of the grant, the object with  which the  grant was made. Once it is established that  the  grant was  for that particular purpose, it is no longer  necessary for  the  assessee to prove that in fact  he  expended  that grant for the purpose for which it was given.  He may  spend more,  or  he may spend less, but qua that  grant  which  is given.  for  a  particular purpose, he is  entitled  to  the exemption", do not, in our judgment, give due effect to  the key words "to meet expenses wholly and necessarily  incurred in the performance of the duties of an office or  employment of  profit." What is exempted is not the consideration  paid for  meeting the expenditure incurred’ or to be incurred  in the performance of the duties of an office or (1)  16 I.T.R. 260. 41 employment:the  exemption  operates  only in  respect  of  a special  allowance or benefit specifically granted  to  meet expenses wholly and necessarily incurred in the discharge of the duties of the office or employment. The judgment of the Allahabad High Court in Commissioner  of Income-tax, U. P. v. Sharma & Company(1) and especially  the observations of Pathak, J., on which reliance was placed  by counsel, for the Company may also be referred to.  In Sharma

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&  Company’s  case(1) the assessee firm which was  the  sole selling  agent of a "cotton mill", received a sum  exceeding Rs. 67,000/- from the owners of the mills for the purpose of meeting the expenses in connection with the management of  a retail  cloth shop on behalf of the mill and actually  spent only  Rs.  12,641/-.   The claim of the  firm  that  it  was entitled  to  exemption from liability to pay tax  under  s. 44(3)(vi) of the Act (before it was amended in 1955) even in respect of the balance retained by it was upheld by the High Court of Allahabad.  Pathak, J., observed that s.  4(3)(vi), as it then stood, required the Income-tax Officer to enquire whether the purpose of the grant was covered by the language of the clause, and he was not concerned to determine whether the  amount granted was actually expended by the  recipient. The  learned  Judge  in  so holding  was  impressed  by  two considerations:   that  the  expression   "incurred"   means incurred  already,  or to be incurred in  future;  and  that income-tax being an annual tax in a case where the allowance is  an  ad hoc allowance which is to cover a  period  longer than or ending after the year of account, or is a periodical allowance,  the Income-tax Officer may under the Act  exempt expenditure incurred in the year of account and no more, and thereby  the  intention  of the  employer  would  be  wholly frustrated and the employee may be called upon to pay tax on a receipt which is not his income. The expression "incurred" means for reasons already set  out incurred or to be incurred.  But that has no bearing on  the question whether the unexpended surplus in the hands of  the employee  is taxable.  And we do not feel impressed  by  the second consideration.  The allowance may be in respect of  a period  longer than the accounting year or which  runs  into the  succeeding  accounting  year or  years.   But  on  that account  the whole receipt reduced by the expenses  actually incurred in the year of account is not liable to be  brought to  tax.  If it appears from a review of  the  circumstances that  a special allowance is made for a period  longer  than the year of account, or that the period covered by the grant of  a  special  allowance extends beyond the  close  of  the account year, it would, in our judgment, be the duty of  the income-tax  Officer  to  determine  the  amount  allowed  in respect of the year of account in which the expenditure  has been  incurred,  and the difference between  the  amount  so determined  and the amount actually expended would alone  be brought to tax. (1)  57 I.T.R. 470. 42 It may be noted that the Parliament has by the Finance  Act, 1955, with effect from April 1, 1955, recast cl. (vi) of  s. 4(3) of the Income-tax Act, 1922 and has expressly  provided that  the special allowance granted to meet expenses  wholly and necessarily incurred in the performance of the duties of an  office  or employment of profit to the extent  to  which such  expenses are actually incurred for that  purpose,  was exempt from tax.  The Legislature, by the amendment made  it clear  that  only  the expenses  actually  incurred  by  the assessee  will  be  exempted under  s.  4(3)(vi).   But  the principle  that  an amount granted to cover expenses  to  be incurred  for  a  period which extends beyond  the  year  of account  in  which the grant is received will  be  allocated between the year of account and the period outside the  year of account will apply to the Act as amended. There is no doubt that the selling agent under the agreement with  the  principals holds an employment  for  profit.   No argument  to  the contrary was advanced before  us.   It  is unnecessary therefore to consider the elaborate judgment  of

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the  High  Court on the question whether the  selling  agent holds  an office within the meaning of s. 4(3) (vi)  of  the Act. The  appeal is therefore allowed and the answer recorded  by the High Court to the supplementary question is  discharged, and  the following answer to the supplementary  question  is recorded: "That portion of 5 per cent of the selling agency commission received  by the assessee company is exempt under s.  4  (3) (vi)  of  the  Income-tax Act, 1922,  which  is  wholly  and necessarily   incurred  in  the  year  of  account  in   the performance of the duties of the company as selling agent." There  will be no order as to costs in this appeal  in  this Court and in the High Court. G.C.                    Appeal allowed. 43