Case: Commissioner of Income Tax Punjab, Haryana, J and K, H.P. and Union Territory Ofcha Vs. Panipat Woollen and General Mills Company Limited Chandigarh

in excess of the reason able return as contemplated under the Act. That, in our opinion, would only amount to apportionment or distribution of the profits after they have been earned. It cannot, therefore, be said that the amount set apart for t he purpose of distribution amongst the consumers is not chargeable to tax on the ground that it represents over-charge."This case however was decided on its own facts and has no application to the facts in the instant case.Reliance was also placed by counsel for the assessee Company on a Division Bench decision of the Patna High Court in Jamshedpur Motor Accessories Stores v. Commissioner of Income-tax, Bihar &Orissa(95 I.T.R.664, 672.) where Untwalia, C.J., as he then was, observed as follows:"That position being accepted the matter as to what amount was payable to Parikh ought to have been adjudged from the assessees point of view and not from the department or Tribunals point of view. It has to he emphasised that unless there is, a limitation put by the law on the amount , of expenditure a lesser amount than the amount expended cannot be allowed merely because the assessing authority c thinks that the assessee could have managed by paying a lesser amount as a prudent businessman. - The test of prudence by substituting its own view in place of the business mans h as not been approved by the Supreme Court in the decisions referred to above."Here also the observations were confined only to the question that the test of prudence was to be determined from the point of view of the businessman. Jamshedpur Motor Accessrories Stores case(supra) was also concerned regarding the quantum of the payment of com mission and does not appear to be useful in deciding the point at in the present case.12. Some other decisions were cited at the Bar but they have no bearing on the issue and it is not necessary for us to refer to them. What is, therefore, important to us is that no decision has been cited before us which takes the view that even though under the contract of agency the selling agents who agreed to make substantial investments in the assessee Company and got interest on the loans apart from the commission they also shared profit to the extent of 50% as also loss to that extent and had complete controlling power in t he manufacturing programme or the sale of the products and yet the transaction would be one of agency simpliciter and not a joint Venture. On the facts found by the Tribunal and those mentioned in the statement of the case as discussed above leads to the inescapable conclusion that the present contract of agency really amounts to a transaction by which substantial investments had been made by the selling agents with a. view to control the manufacturing programme and the a gents had also agreed to share the profits and losses equally. This is, therefore, nothing, but a joint venture to divide the profits after the same are ascertained and cannot in any sense be deemed to be expenses incurred by the assessee Company for t he purpose of its business or for that matter for earning profits. In fact in Pondicherry Railway Co. Ltd. v. Commissioner of Income-tax, Madras(A.I.R.1931 P.C. 165, 170.), Lord Macmillan pointed out that a payment made to of profits and conditional on profits being earned cannot be legitimately described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point and the Revenue is not concerned with the subsequent application of the profits In this connection the Privy Council observed as follows."It is claimed for the company that when it makes over to the Colonial Government their half of the net profits it is making an expenditure incurred solely for the purpose of " earning its own profits. The Court below has unanimously negatived this contention and in their Lordships opinion has rightly done so. A payment out of profits and conditional on profits being, earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point and the revenue is not concerned with the subsequent application of the profits. * * * But the principle laid down by Lord Chancellor Halsbury in Gresham Life Assurance Society v. Styles (1892) A.C. 309-at p. 315, is of general application unaffected by the specialities of the English tax system:......But when once an individual or a company has in that proper sense ascertained what a re the profits of his business or his trade, the destination of those profits or the charge which has been made on those profits by previous agreement or otherwise is perfectly immaterial. The tax is payable upon the profits realised and the meaning to my mind is rendered plain by the words payable out of profits.Thus in short by controlling the manufacturing programme, sharing to the extent of 50% in the net profits ascertained in the manner stipulated in the agreement and above all for sharing 50% of the losses which are to be deducted from the commission of the agents the agents become completely equated with the proprietors of the firm itself and therefore the contract of agency is really a sort of a partner ship and has been given the cloak and colour of an agency to conceal the real intent and purpose the commercial venture.In view of the decisions referred to above and the peculiar facts of the present case we are satisfied that the view taken by the Tribunal that the payments in question were not legally deductible under s. 10(2)(xv) of the Act was correct. The view taken by the High Court that the amounts in question were deductible under s. 10(2) (xv) appears to be legally erroneous cannot be upheld.13.

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

Explanation:
1[ds]Analysing the terms of this sub-clause it would appear that the agents have been able to secure most liberal and profitable terms. To begin with they were to get a commission at the rate of one and a quarter per cent on the net proceeds of sales of all goods There can be no objection to this. Secondly, the agents will get 50% commission on the net profits of the worsted plant. The net profits would have to be ascertained after deducing all the manufacturing costs, interest, insurance etc. The conduct of the agents in sharing half of the net profits does not appear to us to be consistent with the payments made to the agents for services rendered. It is difficult to lay down any rule of universal application as to what percentage of profit would be consistent with the payment in lieu of services but taking the totality of the provisions of the agreement it seems to us that the percentage of profits and the manner in which it is to be determined is more consistent with the position of a partner than that of an Agent. Finally the provision for sharing the loss incurred by the Company and for a lump sum deduction of Rs. 50, 000/- is totally inconsistent with a contract of agencyabove sub-clause clearly provides for a separate commission ac count to be maintained by the agents and the commission to be paid every six months. Consequently the agents agreed to pay a sum of Rs. 25, 000/- for six months every half year within ten days. We might further mention here that the provision in the agreement regarding s haring of the loss is absolutely peculiar to this particular agreement and there is not a single authority, which has, in spite of such a provision, held that the transaction does not amount to a joint venture or a division of profits. The provision regarding the consent of the agents to the sales and the programme of manufacture is also pertinent in order to determine whether the transaction amountted to a joint venture in the garb of a contract of agency. It is well settled that the Court in order to construe an agreement has to look to the substance or the essence of it rather than to its form. A party cannot escape the consequences of law merely by describing an agreement in a particular form though in essence and in substance IT H may be a different transaction. In these circumstances, therefore, if we construe the agreement as a sort of a joint venture or a transaction like a partnership which has been given the form and appearance of a contract of agency , the law must have itsso w hatever be the commercial considerations, it is difficult to hold that the commercial expediency dictated the assessee Company to allow itself to be completely overshadowed by its selling agents so as to pay them not only for the services rendered but also allow them to share profits, control the manufacture of the goods and the programme thereof and also to share the losses. The test of commercial expediency cannot be reduced in the shape of a ritualistic formula, nor can it be put in a water-tight compartment so as to be confined in a strait jacket. The test merely means that the Court will place itself in the position of a businessman and find out whether the expenses incurred could be said to have been laid out for the purpose of the business or the transaction was merely a subterfuge for the  purpose of sharing or dividing the profits ascertained in a particular manner. It seems to us that in ultimate analysis the matter would . depend on the intention of the parties as spelt out from the terms of - the agreement or the surrounding circumstances, the nature or character of the trade or venture, the purpose for which the expenses are incurred and the object which is sought to be achieved for incurring those expenses. If the expenses incurred amount to a profit of an enduring nature they may be treated as capital expenditure, whereas if the expenses merely serve to promote or increase the commercial activity they may amount to an expenditure which is incurred for the purpose of thelearned counsel for the assessee Company relied on the aforesaid case because the question whether the transaction amounted to a joint venture appears to have been raised but it appears that this point had been given up when the case was sent on remand and was therefore not decided. In these circumstances, the decision in the aforesaid case does not appear to be of any assistance to the assesseeother decisions were cited at the Bar but they have no bearing on the issue and it is not necessary for us to refer to them. What is, therefore, important to us is that no decision has been cited before us which takes the view that even though under the contract of agency the selling agents who agreed to make substantial investments in the assessee Company and got interest on the loans apart from the commission they also shared profit to the extent of 50% as also loss to that extent and had complete controlling power in t he manufacturing programme or the sale of the products and yet the transaction would be one of agency simpliciter and not a joint Venture. On the facts found by the Tribunal and those mentioned in the statement of the case as discussed above leads to the inescapable conclusion that the present contract of agency really amounts to a transaction by which substantial investments had been made by the selling agents with a. view to control the manufacturing programme and the a gents had also agreed to share the profits and losses equally. This is, therefore, nothing, but a joint venture to divide the profits after the same are ascertained and cannot in any sense be deemed to be expenses incurred by the assessee Company for t he purpose of its business or for that matter for earningin short by controlling the manufacturing programme, sharing to the extent of 50% in the net profits ascertained in the manner stipulated in the agreement and above all for sharing 50% of the losses which are to be deducted from the commission of the agents the agents become completely equated with the proprietors of the firm itself and therefore the contract of agency is really a sort of a partner ship and has been given the cloak and colour of an agency to conceal the real intent and purpose the commercial venture.In view of the decisions referred to above and the peculiar facts of the present case we are satisfied that the view taken by the Tribunal that the payments in question were not legally deductible under s. 10(2)(xv) of the Act was correct. The view taken by the High Court that the amounts in question were deductible under s. 10(2) (xv) appears to be legally erroneous cannot be upheld.