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 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 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 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% Aluminium Shots 5%
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-
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 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 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 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 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 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.
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.