JUDGMENT Sen, J.
1. In this reference, on an application of the Commissioner of Income-tax, West Bengal-III, Calcutta, under [SECTION] of the [ACT], this court directed the Tribunal to draw up a statement of case and refer the following questions for the opinion of this court as questions of law arising from its order :
"1. Whether, on the facts and in the circumstance of the case and on a proper interpretation of the [ACT], and the amendments to the [ACT], on the 23rd September, 1958, and the letters dated the 28th December, 1964, and 11th April, 1967, of the Government of India, the Tribunal erred in holding that liability for payment of Rs. 52,556.80 as additional price for sugarcane accrued during the previous year ended on 30th September, 1960, and was allowable as deduction for the assessment year 1961-62.
2. Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the payment of Rs. 63,770 to M/s. Indian Sugar Supplying Agency and Rs. 3,986 to Sri [ENTITY] was an allowable deduction under [SECTION] of the [ACT]?"
2. It appears to us that question No. 1 is covered by a decision of this court in [PRECEDENT] . Following the said decision, we answer the question in the negative and in favour of the assessee.
3. The facts relevant to the second question as found and/or admitted in these proceedings are shortly as follows : The assessee is a company engaged in the manufacture and sale of sugar and in the assessment year 1961-62, the corresponding accounting year being that ended on the 30th September, 1960, it carried on such activities.
4. On the 14th May, 1959, the assessee had entered into an agreement with one Indian Sugar Supplying Agency, a partnership firm (hereinafter referred to as the agent) whereby the latter had been appointed the sole selling agent of the assessee. In terms of and under the said agreement, the agent had deposited a sum of Rs. 1,50,000 with the assessee carrying interest at the rate of 6% per annum. The agent was also entitled to receive commission from the assessee at the rate of 1% on the sales of all sugar sold in India. The agent was required to open an office at Kanpur and to give the assessee such assistance as might be necessary in effecting the sales. It was stipulated that the agreement could be terminated by either party on one month's notice.
5. On the same day, i.e., the 14th May, 1959, the assessee entered into another agreement with one [ENTITY], whereby the assessee agreed to pay to the latter brokerage at the rate of 0-1-0 (one anna) on all sugar sold and delivered through the agent as long as the agreement between the assessee and the agent would subsist. Such brokerage had to be paid in the first week of November every year on the quantities of sugar sold and delivered up to the 30th September of every year.
6. During the relevant assessment year, the assessee paid to the agent a sum of Rs. 70,896 by way of commission and a sum of Rs. 3,986 to the said [ENTITY] as brokerage.
7. In the assessment proceedings for the said assessment year, the ITO found that the Central Government had imposed controls over price, distribution and movement of sugar which were in force during the relevant period. The procedure laid down by the Central Government was, inter alia, that permits were issued by the controlling authority in favour of customers with copies to the assessee. The factory of the assessee despatched sugar to the destination as directed in the permits and bills were drawn on the permit-holders at ex factory rates and sent to the permit-holders through banks. No option was left to the assessee, who was compelled to sell only to the permit-holders.
8. The ITO found further that as a result of such control the sole selling agency was no longer required to nor could it perform any service for the assessee. He came to the conclusion that the commission had been paid to the agent without any consideration at all and that the agency agreement had become void in law as an agreement without consideration. He also held that the payment of commission could not be justified on grounds of commercial expediency in a purely seller's market where the supply was restricted and the distribution was controlled by the State. The ITO, therefore, disallowed the payments made by the assessee to the agent and the broker.
9. Being aggrieved the assessee preferred an appeal to the AAC. It was contended in the appeal that the assessee had incurred a contractual liability to pay brokerage and commission on the 14th May, 1959, whereas the control of sugar was imposed by the Central Government on the 27th July, 1959, after such contractual liability had been incurred. It was brought to the notice of the AAC that control on sugar was removed on September 28, 1961. The AAC, however, did not accept the contentions of the assessee and confirmed the order of the ITO.
10. A further appeal was preferred to the Income-tax Appellate Tribunal by the assessee. The Tribunal took note of the following facts. The agreements in question had been entered into by and between the parties on the 14th May, 1959, whereas the control was imposed on the 27th July, 1959. Such control was removed with effect from the 28th September, 1961, but reimposed from the 17th April, 1963. Subsequently, on and from the 1st November, 1967, there was partial removal of the control. The Tribunal did not accept the finding of the ITO that the contract between the parties was void for want of consideration or as being opposed to public policy. The Tribunal also noted that so far as the assessee was concerned the consideration for the agreement was that, apart from giving necessary assistance to the assessee for effecting the sales, the said sum of Rs. 1,50,000 would be kept in deposit by the agent with the assessee and also that the office would be continued to be kept open by the agent at Kanpur.
11. The revenue relied on and cited a decision of this court in [PRECEDENT]. The Tribunal distinguished the said decision on facts and following the decision of the Allahabad High Court in [PRECEDENT] upheld the contentions of the assessee and allowed the appeal.
12. At the hearing, the sole contention of Mr. [ENTITY], learned counsel for the revenue, has been that, under the agreement between the assessee and the agent, commission was payable by the assessee for the services to be rendered by the agent. By reason of the control imposed no services were or could be rendered by the agent and, therefore, payment of such commission could not be justified on the ground of business expediency. Mr. [ENTITY] laid emphasis on the following observations in the order of the Tribunal:
"In the present case, the commission was payable on all the sugars sold within India. The consideration of the payment of commission, of course, was the assistance in effecting sales."
13. Mr. [ENTITY] sought to distinguish the case of Jaswant Sugar Mills Ltd. on facts. The facts in that case were that the assessee, a company which manufactured sugar, had appointed a sole selling agent for sale of sugar on commission. Subsequent thereto, control on sale of sugar was imposed whereunder the assessee had to supply sugar in accordance with the directions of the Government. During the relevant assessment years, when such control was in force the assessee paid commission as stipulated to the selling agent and claimed deduction of the same as business expenditure. The claim of the assessee was rejected by the revenue authorities and also the Tribunal. On a reference, the Allahabad High Court noted that the agent duly maintained an office as required under the agreement and that control on sugar was removed from time to time so that the assessee could not be sure as to how long such control would continue.
14. The High Court noted that under the relevant clause of the agreement commission was to be computed at the rate of 21/2% of the net value of all products supplied, after deducting all expenses. The High Court held that though the commission was payable for services to be rendered by the agent the latter would still be entitled to receive such commission where the product would be despatched on nomination by the Government as long as the agreement was in force. The High Court further held that such commission was paid for the purposes of business of the assessee-company and the expenditure was incurred wholly and exclusively for the purpose of business of the company.
15. Mr. [ENTITY] submitted that, in the instant case; the commission was payable on net sales whereas in the case of Jaswant Sugar Mills Ltd. , the commission payable was on the net value and, therefore, the said decision, could be distinguished on facts.
16. Mr. [ENTITY], learned counsel for the assessee, submitted that the only contention of the revenue before the Tribunal had been that the decision of this court in [PRECEDENT] should be followed on the facts. Mr. [ENTITY] pointed out that the said decision had subsequently been reversed by the Supreme Court in [PRECEDENT]. The facts in that case were, inter alia, that by an agreement the assessee had appointed a sole selling agent for an initial period of 5 years who was entitled to commission on the sale of all products whether made through agents or directly to the customers. The agents would, however, remain responsible for payment of the price due from the purchasers and also for the due fulfilment of all contracts by the assessee including all loss and damages arising from the breach of such contracts. In the relevant assessment year, the income-tax authorities had disallowed the claim for deduction of the commission paid to the agent on the sole ground that in that year all sales had been effected directly by the assessee and not through the agents. The Tribunal, on an appeal before it, allowed the claim of the assessee. On a reference, this court held that the expenditure in question was not incurred for the purpose of the assessee's business and was, therefore, not allowable as a deduction. On further appeal the Supreme Court reversed the decision of this court and held that the conclusions of the Tribunal arrived at after consideration of the various terms of the agreement were supported by cogent reasons and the primary facts found by the Tribunal as also the factual inferences therefrom were not open to review by the High Court.
17. In our opinion, on the facts and circumstances of the present case, the contentions of the assessee must succeed. The minor distinction sought to be drawn by [ENTITY] between the facts of the case before us and those in the case of Jaswant Sugar Mills Ltd. does not affect the position in any significant way and is of little substance. It is patent from the terms of the agreement as recorded in the order of the Tribunal and the statement of case that the consideration for payment of the commission was not only the assistance to be rendered by the agent in selling the product, but also the deposit of a substantial sum of Rs. 1,50,000 at a very low rate of interest, being only 6% per annum, and also the obligation of the agent to maintain an office at Kanpur for rendering of such service whenever it may be required. It is nobody's case that the control as was imposed by the Central Government in 1959 was meant to continue permanently. The bona fides of the agreement between the assessee and its agent have also not been challenged.
18. For the reasons given above, we hold that the commission paid to the agent was backed by adequate commercial consideration and that the expenditure incurred by the assessee under the agreement was expedient for the purpose of the business of the assessee.
19. The brokerage paid to [ENTITY] was ancillary to the agreement between the assessee and its agent. If payment of commission to the sole selling agent was justified, the brokerage paid to [ENTITY] must necessarily be allowed.
20. For the reasons given above, we answer question No, 2 in the negative and in favour of the assessee. In the facts and circumstances, there will be no order as to costs.
[ENTITY], J.
21. I agree.