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PETITIONER: ALUMINIUM CORPORATION OF INDIA LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, WEST BENGAL

DATE OF JUDGMENT29/08/1972

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. REDDY, P. JAGANMOHAN KHANNA, HANS RAJ

CITATION:  1973 AIR  520            1973 SCR  (1)1097  CITATOR INFO :  RF         1975 SC   5  (23)  RF         1986 SC  98  (18)  R          1986 SC1483  (4)

ACT: Income Tax Act 1922 s. 10(2) (xv) & 66-Expenditure laid  out wholly  and exclusively for business-Commission  payable  to selling  agents  in  a case where  sales  are  not  actually effected  through selling agents-Construction of  agreement- Expenditure  on  such  Commission  whether  allowable  as  a deduction-Question of fact decided by Tribunal-High  Court’s power to interfere in reference proceedings under s. 66.

HEADNOTE: Under  clause  (6)  of the agreement  between  the  assessee company and its Selling Agent, discount was to be allowed to the  Selling Agents not only on sales effected  through  the said  Agents  or  sub-agents  but  also  on  sales  effected directly by the principal.  Under clause (8) the Agents were responsible  for  the  payment if the  price  due  from  the purchasers immediately after-the goods left the  Principal’s works   or  godown.   Such  payment  bad  to  be   made   on presentation  of  necessary  papers  or  documents  by   the assessee,  not later than a fortnight after the  goods  were despatched.  In default of payment the assessee was entitled to charge interest until realisation at the rate of six  per cent   per  annum  on  the  balance  for  the   time   being outstanding.   Under  cl. (9) of the agreement,  the  Agents were  also responsible for due fulfilment of  all  contracts made by them whether for ready or forward sales and also for the  consequences of any breach of contract by any  customer and  for  all losses and damages arising  therefrom  to  the assessee  provided there was no default on the part  of  the assessee  in manufacturing or giving delivery of  any  goods required  or sold under any contract in compliance with  the terms of the agreement. The  commission paid by the assessee to the  Selling  Agents was  allowed  by the income tax  authorities  as  deductible expenditure  for some years.  In respect of  the  assessment year 1955-56 however the assessees claim for such  deduction was  disallowed.   The  Income Tax  Officer  held  that  the payment  had not been made on business considerations.   The

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Appellate  Assistant  Commissioner  further  held  that  the agreement had not been acted upon.  The Tribunal however did not agree with the view that the payment had been, made  for extra-commercial  considerations, or that the agreement  had not been acted upon.  The High Court in reference held  that the expenditure in question was not expended for the purpose of the asses was business within the meaning of s. 10(2)(xv) of  the income-tax Act, 1922 inasmuch as in  the  accounting year all sales were directly effected by the assessee and no sale was effected by the Selling Agents.  In appeal to  this Court by certificate, HELD : (i) The jurisdiction of the High Court under s. 66 is only  an advisory jurisdiction.  That being so it  can  only Pronounce  its opinion on the questions referred to it.   It cannot  sit as an appellate court over the decision  of  the Tribunal., [1099C] In the present case the High Court overlooked the effect  of cls.  6,  8 and 9 of the agreement. it also  overlooked  the significance  of  the  fact that in the  earlier  years  the commission paid to the Selling Agents had been considered is I deductible expenditure.  It also did not take notice 1098 of the contention of the assessee that though the sales were directly effected by the assessee they were all convassed by the Selling Agents. [1102E-F] The  Tribunal  after taking into consideration  the  various terms  of the agreement as well as the significance  of  the deduction given in the earlier assessment years came to  the conclusion  that  the Income-tax Officer and  the  Appellate Assistant  Commissioner  erred in, their  opinion  that  the expenditure  was not incurred for any commercial  expediency or  that  the agreement was not in force  in;  the  relevant accounting  year.   The Tribunal had given good  reasons  in support of its conclussion.  The primary facts found by, the Tribunal and the factual inference drawn thereform was,  not open to review by the High Court. [1103F] The appeal must accordingly be allowed. Swadeshi  Cotton Mills Co. Ltd. v. Commissioner  of  Income- tax, U.P.. 63 I.T.R. 57, distinguished on facts. Commissioner of Income-tax, Bombay v. Walchand & Co. Private Ltd.,  65  I.T.R.  381, and J.K.  Woollen  Manufacturers  v. Commissioner of Income-tax U.P., 72 I.T.R. 612, applied.

JUDGMENT: CIVIL APPELLATE JURISDICTION : C.A. No. 394 of 1969. Appeal by certificate from the judgment and order dated Feb- ruary  12,  1968 of the Calcutta High  Court  in  Income-tax Reference No. 57 of 1964. A.K. Sen, Leila Seth, 0. P. Khaitan and B. P. Maheshwari, for the appellant. S.K.  Wiyar,  R.  N. Sachthey and S. P.  Nayar,  for  the respondent. The Judgment of the Court was delivered by Hegde, J. This is an assessee’s appeal by certificate  under S.  66A(2)  of  the  Indian  Income-tax  Act,  1922  (to  be hereinafter  referred  to  as  the  Act).   The   Income-tax Appellate   Tribunal.   Calcutta  ’B’  Bench  as   per   the directions  given by the High Court in an application  under S.  66(2) submitted the following question for  ascertaining the Opinion of the High Court.               "Whether on the facts and in the circumstances               of the case, the Tribunal was right in holding

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             that the sum of Rs. 1,56,806/- was wholly  and               exclusively  laid  out  for  the  purpose   of               business  and as such allowable as a  business               expenditure." The  High Court has answered that question in  the  negative and  in  favour  of the Revenue.   The  correctness  of  the decision  of the High Court is challenged before us  by  the assessee. The question referred to the High Court for its opinion pro- ceeds  on the basis that the facts and circumstances of  the case as 1099 found  by  the  Tribunal  are not in  dispute  but  what  is disputed is the legal affect of the facts and  circumstances found by the Tribunal.  As held by this Court in the earlier decisions  that  when  a question refers to  the  facts  and circumstances   in  the  case,  it  means  the   facts   and circumstances as found by the Tribunal.  If any party  wants to  challenge the correctness of the findings given  by  the Tribunal either on the ground that the same is not supported by  any  evidence  on regard or is based  on  irrelevant  or inadmissible  evidence  or is unreasonable  or  perverse,  a question raising any one of these grounds must be sought for and obtained.  It is needles-, to say that the  jurisdiction of  the  High Court in a reference under s. 66  is  only  an advisory jurisdiction.  That being so it can only  pronounce its opinion on the questions referred to it.  It is trite to say that it cannot sit as an appellate court over the  deci- sion  of the Tribunal.  Bearing these facts in mind, let  us now proceed to set out the facts as found by the Tribunal. The  controversy in this case relates to the  assessment  of the   assessee   for  the  assessment  year   1955-56,   the corresponding previous year being the financial year  ending on March 31, 1955. By  an agreement dated December 30, 1949, the assessee  com- pany appointed M/s.  J. K. Alloys Ltd. as the selling agents for  selling  its  aluminium products.   The  agreement  was effective  for a period of 5 years from April 1, 1950.   The relevant clauses of the agreement are 1, 2, 6, 8, 9, 14  and 15.  They read thus :               "1.  That the Agents shall act as the  Selling               Agents   of  all  Aluminum   Ingots,   Sheets,               Circles,  Expanded Metal, Shots, Utensils  and               Anodised  and alloy goods manufactured by  the               Principal.               2.    That this Agreement shall commence  from               the 1st day of April, 1950 and shall continue,               unless otherwise determined by mutual  consent               of  the parties, till the 31st day  of  March,               1955.               6.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  Aluminium Ingots                           1-               1/2%  Aluminium Sheets & Cycles                  2-               1/2%  Aluminium Expanded Metal                  12-               1/2%                Aluminium Utensils & anodised and  alloy goods                               17-               1/2%

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Aluminium                               Shots               5%               1100               Provided  always  that the rates  of  discount               abovementioned or any of them may be varied by               mutual consent of the parties.               8.That the Agents shall be responsible for               payment  of the price and all other moneys  to               the  Principal  immediately  after  the  goods               leave  the Principal’s works or godown.   Such               payment  will  be  made  on  presentation   of               necessary   papers   or  documents   ’by   the               Principal  to the Agents and not later than  a               fortnight after the date the goods shall  have               been  despatched.   In default of  payment  as               aforesaid  the Principal will be  entitled  to               charge interest until, realisation at the rate               of  six per cent per annum on the balance  for               the time being outstanding.               9.That the Agents will be responsible  for               the  due fulfilment of all contracts  made  by               them  whether for ready or forward  sales  and               also  for  the consequences of any  breach  of               contract  by any customer and for  all  losses               and damages arising therefrom to the Principal               provided,  there  shall be no default  on  the               part  of the Principal when  manufacturing  or               giving delivery of any goods required or  sold               under  any  contract in  compliance  with  the               stipulations thereof.               14.That  the parties may by mutual  consent               agree to continue after the expiry of the 31st               day  of  March,  1955 on the  same  terms  and               conditions  as  are herein  contained  or  any               modification  thereof  as they may  decide  in               which  case  the  agency  business  shall   be               terminated by either party giving to the other               less than three months’ notice in writing sent               by  Registered Post and such notice  shall  be               deemed to have been given seven days after the               same has been posted.               15.Notwithstanding  anything  contained  in               any  of  the foregoing clauses if  the  Agents               shall  fail  to make any  payments  as  herein               provided or commit any breach of any  covenant               herein contained and on the part of the Agents               to  be  observed and performed  the  Principal               shall have right at any time to terminate this               Agreement by giving to the Agent,, one month’s               notice in respect there- In  the relevant year of account, the assessee paid to  M/s. J.  K.  Alloys  Ltd.   Rs.  1,56,806/-  as  selling   agency commission  in accordance with the terms of  the  agreement. The Income-tax Officer disallowed the claim for deduction of that amount on the ground that the payment had not been made on business considera- 1101  tions.   On  appeal the  Appellate  Assistant  Commissioner agreed with the conclusion reached by the Income-tax Officer that  the  payment had been made for some  extra  commercial considerations;  but he further held that the agreement  had not  been acted upon.  On a further appeal,  the  Income-tax Appellate  Tribunalopined that it was unable to concur  with the  view  taken  by the  Income-tax  authorities  that  the agreement  had not been acted upon and that the payment  had

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been made for some extra commercial considerations.  In  the course of its order it observed:               "There  is  no  dispute that  the,  amount  in               question  was actually paid as  commission  to               Messrs.  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 were effected by the selling agents.  On               these    facts,   the   Appellate    Assistant               Commissioner concluded that the agreement  bad               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 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 Messrs.   J.               K. Alloys Ltd.. had all along been allowed  by               the Department as an admissible expenditure in               the hands of the assessee upto the  assessment               for   the   year  1954-55.    Evidently,   the               agreement  in question had been  entered  into               bona fide and had been acted upon." The  only ground on which the Income-tax Officer as well  as the   Appellate   Assistant  Commissioner   disallowed   the commission paid wasthat during the accounting year all  the sales were effected directlyby  the assessee and no  sales were effected by the selling agents. But            those authorities failed to take note of the fact that apart  from the  fact that the selling agents were entitled to  discount even in respect of the sales directly made by the  assessee, the agents were responsible for the payment of the price due from  the  purchasers immediately after the goods  left  the Principal’s works or godown.  Such payment had to be made on presentation  of  necessary  papers  or  documents  by   the assessee,  not  later than I fortnight after  the  date  the goods were despatched.  In default of 1102 payment  as aforesaid, the assessee was entitled  to  charge interest  until realisation at the rate of six per cent  per annum on the balance for the time being outstanding.   Under cl.  (9) of the agreement, the agents were also  responsible for  due fulfillment of all contracts made by  them  whether for ready or forward sales and also for the consequences  of any  breach of contract by any customer and for  all  losses and damages arising therefrom to the assessee provided there was no default on the part of the assessee in  manufacturing or  giving delivery of any goods required or sold under  any contract in compliance with the terms of the agreement.  The Income-tax  Officer,  the Appellate  Assistant  Commissioner also overlooked the fact that in the    previous years,  the commission  paid by the assessee to the selling agent,,  had been  considered  as deductible expenditure.  From  this  it follows  that from 1950 to 1954. the agents did function  in accordance  with  the  terms  of  the  agreement.   It   was contended  before the Appellate Assistant Commissioner  that

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even  though  the  sales  were  directly  effected  by   the assessee,  they  were  canvassed  by  the  selling   agents. Neither  the Income-tax Officer nor the Appellate  Assistant Commissioner  has  held  against  that  plea.   Under  these circumstances,  the Tribunal rightly came to the  conclusion that the commission paid was an expenditure expended  wholly and  exclusively for the purpose of assessee’s business,  as provided in s. 10(2) (xv). The only reason that persuaded the High Court to come to the conclusion that the expenditure in question was not expended for  the purpose of the assessee’s business was that in  the accounting  year  all sales were directly  effected  by  the assessee  and no sale was ’effected by the  selling  agents. But  the  High Court overlooked clauses 6, 8 and  9  of  the agreement  referred  to  earlier.  It  also  overlooked  the significance  of  the  fact that in the  earlier  years  the commission paid to the selling agents had been considered as deductible expenditure.  It also did not take notice of  the contention  of  the  assessee that  though  the  sales  were directly  effected by the assessee, they were all  canvassed by the selling agents. It is true that under s. 10(2)(xv), it is for the Income-tax Officer  to  decide  whether any  remuneration  paid  by  an assessee  to  his selling agents was wholly  or  exclusively expended  for the purpose of his business. It is  also  true that  the  mere  fact  that  the  assessee  establishes  the existence of an agreement between him and his agents and the fact  of  actual payment, the discretion of  the  Income-tax Officer  to  consider  whether  the  expenditure  was   made exclusive for the purpose of the business is not taken away- see the decision of this Court in Swadeshi Cotton Mills  Co. Ltd. v. Commissioner of Income-tax, U.P.(1). The expenditure incurred must be for commercial expediency.  But as observed by this 1103 Court  in Commissioner of Income-tax, Bombay v.  Walchand  & Co.  Private Ltd.(1) that in applying the text 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 revenue. In  J. K.’Woollen Manufacturers v. Commissioner  of  Income- tax, U.p.(2), after applying the rule laid down in  Walchand & Co.’s case (supra) that 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, this Court proceeded to observe:               "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  a trader or it is not laid out wholly  and               exclusively for the purpose of the business of               the assessee and to disallow it." In  the instant case, it is not the case of the Revenue  the assessee  did not pay the commission in question nor is  its case  that the expenditure in question was not  incurred  by the  assessee in the character of a trader.   Therefore  the only  question that remains. to be considered is whether  it was  not expended wholly or exclusively for the  purpose  of the  business  of the assessee.  The Tribunal  after  taking into  consideration  the various terms of the  agreement  as well  as  the  significance of the deduction  given  in  the

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earlier  assessment  years came to the conclusion  that  the Income-tax Officer and the Appellate Assistant  Commissioner erred in their opinion that the expenditure was not incurred for any commercial’ expediency or that the agreement was not in force in the relevant accounting year.  The Tribunal  has given  good  reasons  in support  of  its  conclusion.   The primary  facts  found  by  the  Tribunal  and  the   factual inference drawn therefrom was not open to review by the High Court. The  High Court erroneously thought that the facts  of  this case fell within the ratio of the decision of this Court  in Swadeshi  Cotton  Mill’s case (supra).  The facts  of.  that case were as follows Therein  appellant company was managing  whose  remuneration was an office allowance of Rs. 5,000/- per month and 10%, of the  net profits of the company.  Under article 118  of  the articles  of association of the company, its directors  were each (1) 65 I.T.R. 381. (2) 72 I.T.R. 612. 1104 entitled  to  a remuneration of Rs. 100 per  month.   At  an extraordinary  general meeting of its  shareholders  article 118 was amended to provide for the payment to the  directors of  a commission of 1% of the net profits of the company  in addition  to their monthly remuneration and as a result  the five  directors of the company became entitled to a  sum  of Rs.  28,218 each for the calendar year 1948.   The  Tribunal found  that the payment of the commission to  the  directors was  for extra commercial reasons on the grounds : (i)  that they  did not render any special service in that year;  (ii) that the management of the company was done by the  managing agents and very little was done by the directors; (iii) that the remuneration of Rs. 100 per month was not considered  by the  directors to be inadequate in earlier years; (iv)  that the increase in the company’s profits by about Rs. 30  lakhs was  due to the control of cloth having been lifted and  not to any special exertion of .the directors.  On the basis  of those findings which were all findings of fact, the Tribunal came  to  the  conclusion that the commission  paid  to  the directors  cannot  be  considered  as  expenditure  incurred wholly and exclusively for the purpose of the business.  The High  Court  as  well as this Court  accepted  the  findings reached by the Tribunal.  From the facts of that case, it is clear  that the payment of commission made to the  directors was  not  because  of  any  commercial  expediency  but  for collateral  reasons.   Hence  the rule  laid  down  in  that decision is inapplicable to the facts of the present case. In  the result we allow this appeal, set aside the  judgment of the High Court and answer the question referred under  s. 66(2) in the affirmative and in favour of the assessee.  The Revenue  shall  pay the costs of the appellant both  it  the High Court and in this Court. G. C.                Appeal allowanced. 1105