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PETITIONER: COMMISSIONER OF INCOME-TAX, CALCUTTA, NOWST BENGAL III

       Vs.

RESPONDENT: IMPERIAL CHEMICAL INDUSTRIES (INDIA) PRIVATE LTD.

DATE OF JUDGMENT: 20/02/1969

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C. GROVER, A.N.

CITATION:  1969 AIR 1160            1969 SCR  (3) 804  1969 SCC  (1) 629  CITATOR INFO :  RF         1986 SC  98  (18)  R          1986 SC1483  (4)  R          1986 SC1483  (4)

ACT: Indian  Income-tax Act, 1922, ss. 3, 10(2) (xv)  and  66(1)- Assessee   appointed  sole  selling  agent   of   principal- Compensation paid to former selling agents through  accounts of  assessee--compensation paid through assessee’s  accounts whether  deductible expenditure-Payment whether  expenditure laid  out  for purposes of  business-Payment  whether  under overriding    title-Tribunal’s   finding   of   fact    that compensation  was not paid by assessee under  any  agreement with principal cannot be interfered with by High Court  when question not referred to it.

HEADNOTE: The  Imperial  Chemical Industries (Export)  Glasgow  was  a subsidiary  of  Imperial Chemical Industries  London.   With effect  from  1st  April  1948  the  former  terminated  the services of four selling agents in India and in their  place appointed the respondent company (another subsidiary of  the Imperial Chemical Industries, London) as their sole  selling agents.   The  four former selling agents were  to  be  paid compensation for the termination of their services and  this was  done  through the accounts of the respondent.   In  its income  returns for the years 1949-50, 1950-51, 1951-52  and 1952-53 the respondent showed as its income the net  amount of  commission  arrived at after deducting  from  the  gross commission  the  compensation  paid to  the  former  selling agents.   The Income-tax Officer in his order for  the  year 1951-52 held that the said deductions were not  permissible. His   order  was  confirmed  by  the   Appellate   Assistant Commissioned  and  the Income-tax Appellate  Tribunal.   The Tribunal  held  that  there was  no  agreement  between  the Imperial  Chemical  Industries  (Export)  Glasgow  and   the respondent  company casting on the latter the  liability  to pay the compensation to the former selling agents out of the commission earned by it; the Tribunal further said that even if  there  was  an  agreement it was  not  acted  upon.   In

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reference under s. 66(1) of the Indian Income-tax Act,  1922 the  High  Court took the opposite view and  held  that  the claim  made  by the respondent company was  allowable.   The revenue appealed to this Court.  The questions that fell for consideration  were  :  (i)  whether  the  High  Court   was justified in interfering with the Tribunal’s finding of fact on  a  question  not  referred  to  it;  (ii)  whether   the compensation  amounts paid by the respondent to  the  former selling   agents  were  expenditure  laid  out  wholly   and exclusively  for ’the purpose of business; (ii) whether  the income  in  question  was diverted  before  it  reached  the respondent by virtue of an overriding title. HELD : (i) It is well-established that the High Court is not a  Court of Appeal in a reference under s. 66(1) of the  Act and it is not open to the High Court in such a reference  to embark  upon  a reappraisal the evidence and  to  arrive  at findings  of  fact  contrary  to  those  of  the  Appellate: Tribunal.   It is the duty of the High Court  while  hearing the reference to confine itself to the facts as found by the Appellate Tribunal and to answer the question of law in  the context  of those facts.  It true that the finding  of  fact will be defective in law if there is no evidence 805 to  support  it or if the finding is perverse.  But  in  the hearing  of a reference under s. 66(1) of the Act it is  not open  to  the assessee to challenge such a finding  of  fact unless  he  has applied for the reference  of  the  specific question under s. 66(1). [809 B-D] In  the  present ease the assessee had in  its  applications under  s.  66(1)  expressly raised the  question  about  the validity of the finding of the Appellate Tribunal as regards the  agreement  but  the question was not  referred  by  the Appellate  Tribunal to the High Court and the contention  of the  assessee with regard to the question must be deemed  to have  been rejected.  The assessee did not  thereafter  move the  High  Court under s. 66(2) of the Act requiring  it  to call for a statement of the case on that specific  question. The  High Court was therefore in error in embarking  upon  a reappraisal  of the evidence before the  Appellate  Tribunal and setting aside the finding of the Appellate Tribunal that there  was no agreement as claimed by the assessee  for  the payment of compensation to the former selling agents out of its own commission and. that if there was such an  agreement it was not acted upon. [809 F-H] India Cements Ltd. v. Commissioner of Income-tax, 60  I.T.R. 52, Commissioner of Income-tax v. Sri Meenakshi Mills  Ltd., 63 I.T.R. 609 and Commissioner of Income-tax, Bombay City  I v. Greaves Cotton & Co. Ltd., 68 I.T.R. 200, applied. (ii) In  the  absence  of  proof  of  the  exact  terms  and conditions  of the agreement it was not possible  to  accept the argument that the amount paid as compensation to the ex- agents  was an ’expenditure laid out wholly and  exclusively for  the purpose of the business’ under s. 10(2)(xv) of  the Act. [810 D] (iii)     The   assessee’s  documents  suggested  that   the payment  of compensation was the exclusive liability of  the I.C.I. (Exports) Ltd. and the assessee was not under a legal obligation to pay the amount of compensation to the outgoing agents.   It  was  not  established  that  the  payment   of compensation  was by an overriding title created  either  by the  Act  of  the parties or by the operation  of  law.   An obligation to apply the income in a particular way before it is  received  by the assessee or before it  has  accrued  or arisen  to the assessee results in the diversion of  income. An  obligation to apply income accrued, arisen  or  received

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amounts merely to the apportionment of income and the income so  applied  is  not  deductible.  The  true  test  for  the application  of  the  rule  of diversion  of  income  by  an overriding title is whether the amount sought to be deducted in  truth never reached the assessee as his income. [810  H- 811 H] Raja  Bejoy  Singh Dudhuria v. Commissioner  of  Income-tax, [1933]  1  I.T.R.  135, P. C.  Mullick  v.  Commissioner  of Income-tax, [1938] 6 I.T.R. 206 and Commissioner of  Income- tax,  Bombay City II v. Sitaldas Tirathdas, 41  I.T.R.  367, applied.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION: Civil Appeals Nos.  1549  to 1552 of 1968. Appeals from the judgment and order dated September 28, 1964 of  the Calcutta High Court in Income-tax Reference  No.  18 1961. Sukumar Mitra, S. K. Aiyar, R. H. Dhebar, R. N. Sachthey and B. D. Sharma, for the appellant (in all the appeals). 806 M.   C. Chagla, T. A. Ramachandran and D. N. Gupta, for  the respondent (in all the appeals). The Judgment of the Court was delivered by Ramaswami, J. These appeals are brought by certificate  from the   judgment  of  the  Calcutta  High  Court  dated   28th September, 1964 in Income Tax Reference No. 18 of 1961. The  respondent  (hereinafter  called  the  assessee)  is  a private  limited  company  incorporated in India  and  is  a subsidiary  of  the Imperial  Chemical  Industries,  London, which  holds the entire share capital of the assessee.   The business  of  the  assessee consists  mainly  of  acting  as selling agents in India for a large variety of goods such as chemicals, dyes, explosives etc., manufactured or  purchased by  its London principals and sold in India.   The  Imperial Chemical  Industries (Export) Glasgow [hereinafter  referred to  as  the I.C.I. (Export) Ltd.] is another  subsidiary  of I.C.I. London which holds the entire share capital of I.C.I. (Export)  Ltd.   The I.C.I. (Export) Ltd. had  appointed  as their  selling  agents in India four  companies,  viz.,  (1) Gillanders  Arbuthnot & Co. Ltd., Calcutta, (2) Best  &  Co. Ltd.,  Madras, (3) Anglo Thai Co. Ltd.  Bombay and (4)  Shaw Wallace  & Co. Ltd.  With effect from 1st April,  1948,  the I.C.I.   (Export)  Ltd.  terminated  the  services  of   the aforesaid  selling agents and appointed the assessee as  its sole selling agent.  The I.C.I. (Export) Ltd. had agreed  to pay to the former selling agents compensation at the rate of two  fifth,  two  fifth  and  one  and  two  fifths  of  the commission  earned by the assessee for the three years  from 1st  April,  1948.  The compensation was paid  to  the  four companies  through the accounts of the assessee.   For  this purpose  the  modus operandi adopted was  as  follows  :-The compensation payable to the former agents was spread over  a period  of  three  years  and on  the  assumption  that  the turnover  was  constant,  the compensation  payable  to  the selling  agents  was on an average, an amount equal  to  the 11/15th  of  the commission earned by the  assessee  at  the normal  rates.   In  order  to  arrive  at  the  amount   of commission to be credited to the assessee’s profit and  loss account  each year the assessee in the first place  credited the commission account and debited the I.C.I. (Export)  Ltd. account  with the full amount of compensation earned by  it at  normal rates on sales effected during the  year.   Next,

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the  assessee transferred from the commission account  to  a special  reserve  account called the  ’Explosives  Ex-Agents Compensation Reserve Account’, the proportion payable to the ex-agents  as  compensation, namely,  11/15th  (2/5+2/5+7/5= 11/5  X  1/3  = 11/15) (leaving  4/15th  towards  commission account)  so that funds might be accumulated for payment  to the four companies from time to time.  807 The  year of account of the assessee is from 1st October  to 30th September every year.  As a result of the above  method of  accounting,  the  following  figures  appeared  in   the assessee’s books of accounts -----------------------------------------------------------                      Gross    Transfer toNet                 Commission    Reserve forCommission                                compensa-                                tion -----------------------------------------------------------                          Rs.       Rs.          Rs. 1st April 1948 to 30th  September 1948      2,91,396   2,03,503      87,893 Year ending 30th September 1949      7,67,294    5,41,526      2,25,768 Year ending 30th september 1950      7,52,204  5,29,284      2,22,920 year ending 30 th september 1951      10,20,922  4,00,052      6,20,870                   ------------------------------------      TOTAL         28,31,816  16,74,365    11,57,451 ----------------------------------------------------------     For  the assessment years 1949-50, 1950-51, 1951-52  and 1952-53  the assessee showed the net amounts  of  commission earned  on the selling agencies by the I.C.I. (Export)  Ltd. adding  a foot note that the amounts were arrived at after deducting  the  amount of compensation payable to  the  out- going agents.  By his order dated 28th January, 1957 for the assessment year 1951-52 the Income Tax Officer held that the deductions were not permissible.  In an appeal preferred by the. assessee the Appellate Assistant Commissioner confirmed the assessment by his order dated 25th November, 1957.   The assessee took the matter in further appeal to the  Appellate Tribunal which dismissed the appeal.  The Appellate Tribunal held  that there was no justification for the absence  of  a written  agreement between the I.C.I. (Export) Ltd. and  the assessee  when the former selling agencies  were  terminated and  the assessee was appointed as the sole  selling  agent. It  was  observed that the assessee was not  collecting  any commission  on behalf of the outgoing agents and it was  not their legal obligation to pay compensation to the  out-going agents. If the assessee was not entitled to more than  3/5th of  commission  during the first two years, it  should  have credited  that  amount  whereas the  assessee  had  actually credited four-fifteenth on a notional basis which was not in consonance with the arrangement.  The conclusion reached  by the  Appellate  Tribunal was that "there  was  no  agreement between  the  assessee and the I.C.I. (Export) Ltd.  and  if there  was one it was not acted upon".  It was held  by  the Appellate Tribunal that the payment of compensation was  not because of an overriding title created either by the act  of the parties or by operation of law. At  the instance of the assessee the following  question  of law  was referred to the High Court under section  66(1)  of the Income-Tax Act, 1922 (hereinafter called the Act):-- 808                 "Whether  the  inclusion by the  Income  Tax

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             officer.  of Rs. 2,03,503, Rs. 5,411,526,  Rs.               5,29,284  and 4,00,052 in the  assessment  for               the years 1949-50, 1950-51, 1951-52 and  1952-               53,  for relevant accounting years ending  the               30th   Sept.   1948,  1949,  1950   and   1951               respectively  in the computation of the  total               income  of  the  assessee  is  justified   and               correct ?"    The  High Court answered the question in the negative  in favour  of  the assessee holding that the inclusion  of  the amount  of compensation in the total income of the  assessee for the relevant assessment years was not justified.     On  behalf  of the appellant it was contended  that  the High  Court had no legal Justification for interfering  with the  finding  of the Appellate Tribunal that there  was  no proof  of the agreement between the assessee and the  I.C.I. (Export) Ltd. with regard to the quantum of commission to be paid to the assessee for the period between 1st April,  1948 and  31st March, 1951.  On this point reference was made  by Mr. Chagla to (a) the letter dated 11th March, 1947 from the I.C.I.  (Export) Ltd. to M/s.  Gillanders Arbuthnot  &  Co., (b) the affidavits of Mr. W. A.Bell and Mr. J. W.  Donaldson and  (c)  the  letter  dated  3rd  January,  1958  of   M/s. Lovelocke  and Lewes, Chartered Accountants,  Calcutta.   It was  argued that these documents established that there  was an  agreement  between  the I.C I.  (Export)  Ltd.  and  the assessee, that for the period 1st April 1948 to 31st  March, 1951 the assessee was entitled to receive as its  commission only  the amounts representing the, difference  between  the normal  rates of commission and the compensation payable  to the  former  agents  during  that  period.   The   Appellate Tribunal had considered all these documents and reached  the conclusion  that there was no agreement between  the  I.C.I. (Export) Ltd. and the assessee and ’if there was one it  was not  acted upon’.  The Appellate Tribunal remarked that  the letter dated 11th March, 1947 from the I.C.I. (Export)  Ltd. set forth only the terms and conditions subject to which the selling agencies of the out-going agents were terminated. It was silent on the crucial question of commission to be  paid to the assessee during the three years from the date of  its appointment  as sole selling agent.  The affidavits  of  Mr. Bell  and  Mr. Donaldson were produced for  the  first  time before the Appellate Assistant Commissioner.  The affidavits were  made-  many  years  ’after the  crucial  date  of  the appointment of the assesee as the sole selling agent of  the I.C.I.  (Export)  Ltd.  The affidavits did not  mention  the amount of commission to be paid to the out-going agents  and the affidavits were also not consistent with the entries  in the  books of accounts of the assessee.  The letter  of  M/s Lovelocke and Lewes was produced at a very late stage during the  hearing-  of the appeal before the Tribunal  and  even, otherwise the 809 letter  merely explains the method of accounting adopted  by the assessee and did not carry the matter any further in the circumstances, the Appellate Tribunal held that there was no agreement between the assessee and the I.C.I. (Export)  Ltd. and  if there was any such agreement it was not acted  upon. It is manifest that the finding of the Appellate Tribunal on this question is a finding on question of fact and the  High Court  was not entitled to interfere with this finding.   It is  well established that the High Court is not a  Court  of Appeal  in a reference under s. 66(1) of the Act and it  is not  open  to the High Court in such a reference  to  embark upon a reappraisal of the evidence and to arrive at findings

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of fact contrary to those of the Appellate Tribunal.  It  is the,  duty of the High Court while hearing the reference  to confine  itself  to  the facts as  found  by  the  Appellate Tribunal and to answer the question of law in the context of those  facts.  It is true that the finding of fact  will  be defective  in law if there is no evidence, to support it  or if  the  finding  is  perverse.  But in  the  hearing  of  a reference  under s. 66(1) of the Act it is not open  to  the assessee to challenge such a finding of fact unless he  has, applied  for  the reference of the specific  question  under s.66(1).  In India Cements Ltd.. v. Commissioner  of  Income Tax(’)  it  was held by this Court that in a  reference  the High  Court must accept the findings of fact reached by  the Appellate Tribunal and it is for the party who applied for a reference to challenge those findings of fact, first, by  an application  under  s. 66(1).  If the  party  concerned  has failed  to  file  an application under  s.  66(1)  expressly raising  the question about the validity of the  finding  of fact, he is not entitled to urge before the High Court  that the  finding is vitiated for any reason.  The same view  has been expressed by this Court in Commissioner of   Income Tax v.  Sri Meenakshi Mills Ltd.(2) and Commissioner  of  Income Tax,  Bombay City I v. Greaves Cotton & Co.  Ltd.(3).In  the present  case  the  assessee has in  his  application  under s.66(1) expressly raised the question about the validity  of the  finding  of  the  Appellate  Tribunal  as  regards  the agreement but the question was not referred by the Appellate Tribunal  to  the  High  Court and  the  contention  of  the assessee with regard to the question must be deemed to  have been  rejected.   The assessee did not thereafter  move  the High  Court under s. 66(2) of the Act requiring it  to  call for  a statement of the case on that specific question.   We are therefore of opinion that the High Court was in error in embarking  upon  a reappraisal of the  evidence  before  the Appellate  Tribunal  and setting aside the  finding  of  the Appellate  Tribunal that "there was no agreement as  alleged in the affidavits of Mr. W. A. Bell and Mr. J. W.  Donaldson and "if there was such an agreement it was not acted upon". (1) 60 I.T.R. 52. (2) 63 I.T.R. 609. (3) 68 I.T.R. 200. 810      It was argued by Mr. Chagla that even if the  agreement was  not established,, the amount, Paid by the  assessee  as compensation  to the ex-agents was an expenditure  laid  out wholly and exclusively for the purpose of the business  such is  allowable under  s.10(2) (xv) of the Act.  The  contrary view  point was urged on  behalf of the appellant,.  It  was pointed out that the assessee was acting as the agent of the I.C.I. (Export) Ltd. for the payment of compensation of  the ex-agents  and the    payment was made not in the  character of  a  trader  but  in the character of  the  agent  of  its Principal.   The  contention of the appellant was  that  the assessee  got the right to sell goods after 1st  April  1948 and  for  getting  that right the  assessee  parted  with  a portion of its commission for the first two years after  1st April  1948  and  paid very much more  than  the  commission earned  in the third year.  This position was borne  out  by the accounts of the respondent which show that the  assessee received the commission at full rates and out of it  created a reserve account of which these compensations were made  to the  ex-agents.  We have already referred to the finding  of the  Appellate  Tribunal  that  no  agreement  between   the assessee  and the I.C.I. (Export) Ltd. has been proved.   In the  absence of proof of the exact terms and  conditions  of

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the ’agreement it is not possible to accept the argument  of the assessee that the amount paid as compensation to the ex- agents  was an "expenditure laid out wholly and  exclusively for the purpose of the business" under s. 10(2) (xv) of  the Act.     It was finaly contended on behalf of the respondent that by  virtue  of an overriding title the income  was  diverted before  it  reached  the assessee, and  so,  the  amount  of compensation paid to the ex-agents did not form part of  the income of the assessee.  In other words, the contention  was that the compensation payable to the ex-agents was  diverted from  the  income of the assessee by  ,an  overriding  title arising  under  the agreement between the assessee  and  the I.C.I.  (Export)  Ltd.  The argument was stressed  that  the commission payable as compensation to the ex-agents did  not form  part of the income of the assessee.  We are unable  to accept  this argument as correct.  We have  already  pointed out  that the finding of the Appellate Tribunal is that  the precise terms of the agreement between the assessee and  the I.C.I EXPORT Ltd. have not been established.  In any  event, even  on  basis  of  the affidavits  of  Mr.  Bell  and  Mr. Donaldson  the payment of compensation to the  "-agents  was apparently  made  by the assessee for and on behalf  of  the I.C.I. (Export) Ltd.  The assessee’s documents suggest  that the  payment of compensation was the exclusive liability  of the  I.C.I. (Export) Ltd. and the assessee was not  under  a legal  obligation to pay the amount of compensation  to  the out-.going  agents.  It is not established that the  payment of compensation ,was by an overriding title ,created  either by the act of the parties 811 or  by  the operation of law.  An obligation  to  apply  the income  in  a particular way before it is  received  by  the assessee or before it has accrued or arisen to the  assesses results in the diversion of income.  An obligation to  apply income  accrued,  arisen or received amounts merely  to  the apportionment  of income and the income so applied  is  not deductible.   The true test for the application of the  rule of diversion of income by an overriding title is whether the amount  sought  to be deducted ’in truth never  reached  the assessee as his income.  The leading case on the subject  is Raja  Bejoy Singh Dudhuria v. Commissioner of Income  Tax(1) where  the  step mother of the Raja had brought a  suit  for maintenance and a compromise decree was passed in which  the step mother was to be paid Rs. 1,100 per month, which amount was  declared a charge upon the properties in the  hands  of the  Raja  by  the Court.  The Raja  sought  to,deduct  this amount  from his assessable income, which was disallowed  by the  High  Court  at Calcutta.  On appeal  to  the  Judicial Committee Lord Macmillan observed as follows               "But  their  Lordships do not agree  with  the               learned Chief Justice in his rejection of  the               view  that the sums paid by the  appellant  to               his  step  mother  were not  ’income’  of  the               appellant  at all.  This in  their  Lordships’               opinion is the true view of the matter.               When  the Act by section 3 subjects to  charge               ’all  income’  of the individual, it  is  what               reaches  the individual as income which it  is               intended  to charge.  In the present case  the               decree   of   the  court   by   charging   the               appellant’s  whole resources with  a  specific               payment to his step-mother has to that  extent               diverted his income from him and has  directed               it to his step-mother; to that extent what  he

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             receives for her is not his income.  It is not               a case of the application by the appellant  of               part of his income in a particular way, it  is               rather  the  allocation of a sum  out  of  his               revenue  before  it  becomes  income  in   his               hands". Another case of the Judicial Committee is reported in P.  C. Mullick v. Commisisoner of Income Tax(2), where, a  testator appointed  the appellants as executors and directed them  to pay  Rs. 1,00,000 out of the income on the occasion  of  his addya  sradh.   The  executors  paid  Rs.  5,537  for   such expenses,   and  sought  to  deduct  the  amount  from   the assessable  income.   The Judicial Committee  confirmed  the decision   of  the  Calcutta  High  Court  disallowing   the deduction  and observed that the payments were made  out  of the  income  of  the  estate coming  to  the  hands  of  the executors  and  in pursuance of an obligation  imposed  upon them by the testator.  The Judicial Committee observed  that it was not a case in which (1) [1933] 1 I.T.R. 135. (2) [1938] 6 I.T.R. 206. 812 a  portion of the income had been diverted by an  overriding title  from the person who would have received it  otherwise and  distinguished  Bejoy  Singh   Dudhuria’s  case(1).   In Commissioner  of  Income  Tax Bombay  City  II  v.  Sitaldas Tirathdas(2),  Hidayatullah,  J.,  speaking  for  the  Court observed as follows                    "There is a difference between an  amount               which a person is obliged to apply out of  his               income  and an amount which by the  nature  of               the obligation cannot be said to be a part  of               the  income  of the assessee.   Where  by  the               obligation   income  is  diverted  before   it               reaches  the assessee, if is  deductible;  but               where the income is required to ’be applied to               discharge  an  obligation  after  such  income               reaches the assessee, the same consequence, in               law, does not follow.  It is the first kind of               payment which can truly be excused and not the               second.   The  second  payment  is  merely  an               obligation  to pay another a portion of  one’s               income,  which has been received and is  since               applied.   The  first is a case in  which  the               income never reaches the assessee, who even if               he were to collect it, does so, not as part of               his  income,  but  for and on  behalf  of  the               person to whom it is payable".    In  view of the principle laid down in these  authorities we  are of ,opinion that the payment of compensation by  the assessee  to the ex-agents was not by an  overriding  title created either by act of the parties or by operation of law. We  accordingly  reject the argument of Mr. Chagla  on  this aspect of the case. For  the reasons expressed we hold that the judgment of  the Calcutta High Court dated 28th September, 1964 should be set aside  and the question referred by the  Appellate  Tribunal should  be  answered  in the  affirmative  and  against  the assessee.   The appeals are accordingly allowed with  costs. One hearing fee. G.C.     Appeals allowed. (1) [1933] I.T.R. 135.                (2) 41 I.T.R. 367. 813

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