Case: Commissioner of Income Tax, Gujarat Vs. M/s. Tejaji Farasram Kharawalla Limited

of the grantee acquires for the purpose of the Income-tax Act the character of additional remuneration. 7. We are unable to agree with the decision of the Bombay High Court in Tejaji Farasram Kharawallas case, (1948) 16 ITR 260 : (AIR 1949 Bom 34 ) that the object with which the grant is made by the employer determines the claim to exemption under S. 4 (3) (vi) of the Income-tax Act. The observations made by Chagla, C. J.; at p. 267 (of ITR) : (at p. 35 of AIR) that:"what is emphasized in this sub-clause [S. 4 (3) (vi)] is the purpose of the grant, the object with which the grant was made.* * * Once it is established that the grant was for that particular purpose, it is no longer necessary for the assessee to prove that in fact he expended that grant for the purpose for which it was given. He may spend more, or he may spend less, but qua that grant which is given for a particular purpose he is entitled to the exemption", do not, in our Judgment give due effect to the key words `to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit." What is exempted is not the consideration paid for meeting the expenditure incurred or to be incurred in the performance of the duties of an office or employment the exemption operates only in respect of a special allowance or benefit specifically granted to meet expenses wholly and necessarily incurred in the discharge of the duties of the office or employment. 8. The judgment of the Allahabad High Court in Commissioner of Income-tax U. P. v. Sharma and Co., Kanpur, 1965-57 ITR 470 : (AIR 1965 All 277 ) and especially the observations of Pathak, J., on which reliance was placed by counsel for the Company may also be referred to. In Sharma and Companys case, 1965-57 ITR 470 : (AIR 1965 All 277 ) the assessee firm which was the sole selling agent of a "cotton mill", received a sum exceeding Rs. 67,000/- from the owners of the mills for the purpose of meeting the expenses in connection with the management of a retail cloth shop on behalf of the mill and actually spent only Rupees 12,641/-. The claim of the firm that it was entitled to exemption from liability to pay tax under S. 4 (3) (vi) of the Act (before it was amended in 1955) even in respect of the balance retained by it was upheld by the High Court of Allahabad. Pathak, J., observed that S. 4 (3) (vi), as it then stood, required the Income-tax Officer to enquire whether the purpose of the grant was covered by the language of the clause, and he was not concerned to determine whether the amount granted was actually expended by the recipient. The learned Judge in so holding was impressed by two considerations : that the expression "incurred" means incurred already, or to be incurred in future and that income-tax being an annual tax in a case where the allowance is an ad hoc allowance which is to cover a period longer than or ending after the year of account, or is a periodical allowance, the Income-tax Officer may under the Act exempt expenditure incurred in the year of account and no more, and thereby the intention of the employer would be wholly frustrated and the employee may be called upon to pay tax on a receipt which is not his income. 9. The expression "incurred" means for reasons already set out incurred or to be incurred. But that has no bearing on the question whether the unexpended surplus in the hands of the employee is taxable. And we do not feel impressed by the second consideration. The allowance may be in respect of a period longer than the accounting year or which runs into the succeeding accounting year or years. But on that account the whole receipt reduced by the expenses actually incurred in the year of account is not liable to be brought to tax. If it appears from a review of the circumstances that a special allowance is made for a period longer than the year of account or that the period covered by the grant of a special allowance extends beyond the close of the account year, it would, ill our judgment, be the duty of the Income-tax Officer to determine the amount allowed in respect of the year of account in which the expenditure has been incurred and the difference between the amount so determined and the amount actually expended would alone be brought to tax. 10. It may be noted that the Parliament has by the Finance Act, 1955, with effect from April 1, 1955, recast Cl. (vi) of S. 4 (3) of the Income-tax Act, 1922 and has expressly provided that the special allowance granted to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit to the extent to which such expenses are actually incurred for that purpose, was exempt from tax. The Legislature, by the amendment made it dear that only the expenses actually incurred by the assessee will be exempted under S. 4 (3) (vi). But the principle that an amount granted to cover expenses to be incurred for a period which extends beyond the year of account in which the grant is received will be allocated between the year of account and the period outside the year of account will apply to the Act as amended. 11. There is no doubt that the selling agent under the agreement with the principals holds an employment for profit. No argument to the contrary was advanced before us. It is unnecessary therefore to consider the elaborate judgment of the High Court on the question whether the selling agent holds an office within the meaning of S. 4 (3) (vi) of the Act.

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

Explanation:
1[ds]It would, therefore, be reasonable to hold that the allowance granted to meet the expenses wholly and necessarily incurred or to be incurred in the performance of the duties of the office or employment of the grantee alone qualifies for exemption under the Act, and any surplus remaining in the hands of the grantee after meeting the expenses does not bear the character of the allowance for meeting expenses but far performing the duties of the office or employment. This would be so even if the employer has disabled himself from demanding refund of the amount not expended for meeting the expenses incurred or to be incurred in the performance of the duties of an office or employment of profit, and the surplus remaining in the hands of the grantee acquires for the purpose of the Income-tax Act the character of additional remuneration7. We are unable to agree with the decision of the Bombay High Court in Tejaji Farasram Kharawallas case, (1948) 16 ITR 260  : (AIR 1949 Bom 34 ) that the object with which the grant is made by the employer determines the claim to exemption under S. 4 (3) (vi) of the Income-tax ActWhat is exempted is not the consideration paid for meeting the expenditure incurred or to be incurred in the performance of the duties of an office or employment the exemption operates only in respect of a special allowance or benefit specifically granted to meet expenses wholly and necessarily incurred in the discharge of the duties of the office or employment9. The expression "incurred" means for reasons already set out incurred or to be incurred. But that has no bearing on the question whether the unexpended surplus in the hands of the employee is taxable. And we do not feel impressed by the second consideration. The allowance may be in respect of a period longer than the accounting year or which runs into the succeeding accounting year or years. But on that account the whole receipt reduced by the expenses actually incurred in the year of account is not liable to be brought to tax. If it appears from a review of the circumstances that a special allowance is made for a period longer than the year of account or that the period covered by the grant of a special allowance extends beyond the close of the account year, it would, ill our judgment, be the duty of the Income-tax Officer to determine the amount allowed in respect of the year of account in which the expenditure has been incurred and the difference between the amount so determined and the amount actually expended would alone be brought to tax10. It may be noted that the Parliament has by the Finance Act, 1955, with effect from April 1, 1955, recast Cl. (vi) of S. 4 (3) of the Income-tax Act, 1922 and has expressly provided that the special allowance granted to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit to the extent to which such expenses are actually incurred for that purpose, was exempt from tax. The Legislature, by the amendment made it dear that only the expenses actually incurred by the assessee will be exempted under S. 4 (3) (vi). But the principle that an amount granted to cover expenses to be incurred for a period which extends beyond the year of account in which the grant is received will be allocated between the year of account and the period outside the year of account will apply to the Act as amended11. There is no doubt that the selling agent under the agreement with the principals holds an employment for profit. No argument to the contrary was advanced before us. It is unnecessary therefore to consider the elaborate judgment of the High Court on the question whether the selling agent holds an office within the meaning of S. 4 (3) (vi) of the Act.