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

1. By an agreement dated October 29, 1928 Ciba (India) Ltd.- hereinafter called the principals- appointed one Tejaji Farasram Kharawalla selling agent for the District of Ahmedabad in respect of certain kinds of dyes and dye-stuffs, and agreed to pay him commission at the rate of 121/2 per cent on sales by him of dyes and dye-stuffs of the principals. The commission was to include all charges in connection with the upkeep of offices and godown, turnover rebates and contingency expenses etc.      2. The terms relating to commission were modified by agreement dated August 20. 1935 and out of the commission agreed to be paid 71/2 per cent was to be treated as the selling commission and 5 per cent was to be treated as compensation in lieu of the contingency expenses which the selling agent had to meet, "such as commission to Dyeing Masters, agents etc.". The rights of the selling agent were assigned with the consent of the principals to the respondent Company with effect from October 27, 1947. In assessing the income of the Company for the assessment year 1949-50, the Income-tax Officer included in the taxable income Rs. 58,025/- being the difference between Rs. 1,90,538/- received by the Company as "5 per cent commission", and Rs. 1,32,512/- spent by the Company for meeting the charges which the selling agent was to meet. The Income-tax Appellate Tribunal, however, upheld the contention of the Company that in the computation of the income of the Company, the 5 per cent commission" was wholly exempt by virtue of S. 4 (3) (vi) of the Income-tax Act, 1922.      3. The Commissioner then moved the Tribunal to draw up a statement of the case and to refer the following question to the High Court of Judicature at Bombay :"Whether on the facts of the case, a portion viz. 5 per cent of the selling agency commission of 121/2 per cent received by the assessee company from M/s. Ciba Ltd. in the course of carrying on the selling agency business is exempt from tax under S. 4 (3) (vi) of the Act ?But the Tribunal only referred the following question :"Whether the assessee company held an office or employment of profit within the meaning of S. 4 (3) (vi) of the Indian Income-tax Act ?"The application preferred by the Commissioner to the High Court for calling upon the Tribunal to submit a statement on the question originally submitted was rejected, and the High Court answered the question referred by the Tribunal in the affirmative, observing that it had been conclusively determined by their earlier decision in Tejaji Ferasram Kharawalla v. Commissioner of Income-tax, Bombay (Mofussil), (1948) 16 ITR 260  : (AIR 1949 Bom 34 ) which arose out of a proceeding for assessment to tax of the income of the original selling agent under the same agency agreement. It appears that in so observing the. Court was under some misapprehension for the question referred by the Tribunal had not been decided in the earlier judgment.      4. Against the order passed by the High Court recording an answer in the affirmative on the question referred by the Tribunal and against the order dismissing the notice of motion, the Commissioner appealed to this Court. This Court set aside the order passed by the High Court dismissing the application of the Commissioner and without expressing any opinion on the correctness or otherwise of the answer recorded by the High Court on the question referred by the Tribunal, remanded the case to the High Court with a direction that the Tribunal be called upon to state a case on the question raised in the application of the Commissioner.      5. The case was then heard by the High Court of Gujarat to which it stood transferred because of the reorganization of the State of Bombay. The High Court of Gujarat held that the "5 per cent commission" received by the Company represented a special allowance to meet expenditure "such as commission to Dyeing Masters, agents etc.," and was on that account exempt from tax. The High Court also held that the Company held an office or employment of profit. The Commissioner has again appealed to this Court against the answer recorded by the High Court on the original and supplementary question.

Reasoning:
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.