Case: Aluminium Corporation Of India Ltd Vs. Commissioner Of Income-Tax, West Bengal

the purpose of assessees business, as provided in Section 10 (2) (xv).8. 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 assessees 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.9. 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 exclusively for the purpose of the business is not taken away - see the decision of this Court in Swadeshi Cotton Mills Co. Ltd. v. Commr. of Income-tax, U. P. (1967) 63 ITR 57 (SC). The expenditure incurred must be for commercial expediency. But as observed by this Court in Commissioner of Income-tax, Bombay v. Walchand and Co. Private Ltd. 65 ITR 381 = (AIR 1967 SC 1435 ) 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., 72 ITR 612 = (AIR 1969 SC 609 ) after applying the rule laid down in Walchand and Cos 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 not the case of the Revenue that 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.11-12. The High Court erroneously thought that the facts of this case fell within the ratio of the decision of this Court in Swadeshi Cotton Mills case, (1967) 63 ITR 57 (SC) (supra). The facts of that case were as follows: Therein appellant company was managing agents whose remuneration was an office allowance of Rupees 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 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 companys 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.13

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]In the instant case, it not the case of the Revenue that 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.11-12. The High Court erroneously thought that the facts of this case fell within the ratio of the decision of this Court in Swadeshi Cotton Mills case, (1967) 63 ITR 57 (SC) (supra). The facts of that case were as follows: Therein appellant company was managing agents whose remuneration was an office allowance of Rupees 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 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 companys 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.