Case: The Commissioner Of Income-Tax,Bombay Vs. Chandulal Keshavlal &amp; Co., Petlad

The appellant in this appeal is the Commissioner of Income-tax and the respondent is a partnership firm which by an agreement dated September 23, 1935, was appointed the Managing Agent of the Keshav Mills Ltd., Petlad. For the sake of convenience the respondent firm will, in this judgment, be termed the Managing Agent and the Keshav Mills Ltd., the Managed Company. By Cl. 4 of this agreement the Managing Agent was to get a commission of 4 per cent on the sale proceeds of the cloth, yarn or other goods manufactured and sold by the company and 15 per cent on the amount of bills for charges of ginning and pressing and dyeing or bleaching and on the amount of labour bills and other work done in the running of the factory. The commission was exclusive of other charges such as adat, interest, discount, brokerage etc. The amount of commission was to be credited in the account of the Managing Agent every six months and it was entitled to interest at the rate of six per cent per annum on the amount so credited. There were other conditions in the Agency Agreement which are not necessary for the purposes of this case. The total commission for the accounting year 1950 was a sum of Rs. 3,09,114. Sometime during the accounting year, at the oral request of the Board of Directors of the Managed Company, the Managing Agent agreed to accept a sum of Rs. 1,00,000 only as its commission which was credited to the account of the Managing Agent in the books of the company at the end of the year 1950. The Income-tax Officer and the Appellate Assistant Commissioner held that the amount which accrued as commission to the Managing Agent was Rs. 3,09,114 and that amount was taxable. An appeal was taken to the Income-tax Appellate Tribunal by the Managing Agent. By an order dated February 26, 1953, the Appellate Tribunal held that the amount which accrued to the Managing Agent as commission was Rs. 3,09,114 but it accepted Rs. 1,00,000 as taxable income and Rs. 2,09,114 was held to be an allowable expenditure within S. 10(2)(xv) of the Act and it was therefore allowed. The Tribunal in its order said that in the past also the Managing Agent had, in the interest of the Managed Company, waived a portion of a commission and then made the following observationTribunal has also held that if the Managing Agency commission or a part thereof is foregone in the interest of the Managed Company, it would be allowed as an expenditure under S. 10 (2) (xv) of the Act. We allow the amount foregone under S. 10 (2)this order, at the instance of the appellant, a case was stated to the Bombay High Court for its opinion on the following two questions :(i) Whether on the facts and in the circumstances of the case, the sum of Rs. 2,09,114 was assessable in the hands of the assessee as its income.(ii) If the answer to question (i) is in the affirmative whether the said sum is an allowable deduction from the assessees income under S. 10 (2) (xv) of the Act.The Judgment of the High Court shows that it was inclined to decide the questions in favour of the appellant, but at the instance of the Managing Agent the Appellate Tribunal was directed to submit a supplementary statement.2. No fresh evidence was led before the Tribunal but it appears that some emphasis was laid on a letter of the Managing Agent dated September 18, 1951, sent to the Income-tax Officer. In this letter the Managing Agent had stated that the only commission which accrued to it was a sum of Rs. 1,00,000 and nothing had been foregone from out of the commission or relinquished. It is also stated that the amount of Rs. 1,00,000 accrued because of the variation of the terms of the Managing Agency Agreement. Reference was also made in the letter to the Balance Sheet of the Managed Company ending December 31, 1950, showing that the paid up capital was rupees 30 lacs, depreciation fund rupees 14 lacs, totalling rupees 44 lacs. As against this sum the Block Account showed a debit of over rupees 48 lacs and it was with the object of strengthening the financial position of the Managed Company and in its interest that the Chairman of the Board of Directors had requested and the Managing Agent had agreed to accept rupees 1 lac as commission. The Income-tax Appellate Tribunal submitted a supplementary Statement of Case dated May 3, 1954 in which it said (1) that there was no oblique motive in accepting Rs. 1,00,000 instead of rupees 3 lacs odd as commission and that the remission was bona fide. It was also remarked that it was not even faintly suggested by the Department that what was given up by the Managing Agent from the commission was done with some dishonest motive; (2) the amount foregone by the Managing Agent was an expenditure incurred wholly and exclusively for the purpose of the business of the Managing Agent; (3) that when the appeal was decided by the Appellate Tribunal it did not have the slightest doubt in its mind that the commission was foregone for business considerations; and (4) that the amount was given up or expended for reasons of commercial expediency. A very significant paragraph in the supplementary Statement of the Case was paragraph 4 which statedwas assumed that what was in the interest of the managed company was in the interest of the managing agent. The interest of the managing agent and the managed company are so to say linked up. If the managed company is put on a sounder position, not only the share-holders of the managed company benefit, but also the managing agent, inasmuch as the managing agent would get a larger commission inbasic facts which arise out of the Statement of the Case and the documents which were produced by the Managing Agent are : (1) the rather unsatisfactory financial position of the managed company as shown by the Balance Sheet (2) in the past also the Managing Agent had been remitting a part or whole of the commission whenever the profits of the Managed Company were unsatisfactory; (3) in the year of account the profits of the managed company as per profit and loss account were Rs. 5,72,192. This was after paying to the managing Agent a commission of Rs. 1,00,000 and if whole of the accrued commission had been deducted then the profits would have been Rs. 3,63,078 which would be the lowest amount since 1940 and the amount of commission would have been the highest(4) it was not a bounty by the Managing Agent to the Managed Company; (5) the business of the Managing Agent was so linked up with the Managed Company that if the letter was put on a sounder position the Managing Agent would also get a larger commission in future; and (6) the Managing Agent had accepted Rs. 1,00,000 at the instance of the Chairman of the Board of Directors of the Managed company. This was the material on which the Tribunal gave a finding in its supplementary statement that what was given up by the assessee was an expenditure for the purpose of the asessees business. On this statement the High Court by its judgment dated February 15, 1955, held the finding of the Appellate Tribunal to be one of fact. It saidthis is a finding of fact and unless it can be suggested that there was no evidence to support the finding of fact we are concluded by this finding ofthe question in regard to S. 10 (2) (xv) was answered in favour of the Managing Agent. It is against this judgment and order that the appellant has come in appeal to this Court by special leave.

Reasoning: The cases we have discussed above show that it is a question of fact in each case whether the amount which is claimed as a deductible allowance under S. 10 (2) (xv) of the Income-tax Act was laid out wholly and exclusively for the purpose of such business and if the fact-finding tribunal comes to the conclusion on evidence which would justify that conclusion it being for them to find the evidence and to give the finding then it will become an admissible deduction. The decision of such questions is for the Income-tax Appellate Tribunal and the decision must be sustained if there is evidence upon which the Tribunal could have arrived at such a conclusion.8. Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party, (1915) 6 Tax Cas 399 (supra). Another test is whether the transaction is properly entered into as a part of the assessees legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby (1951 SCR 594  : (AIR 1951 SC 278  ) (supra) ). But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee. In the present case the finding is that it was laid out for the purpose of the assessees business and there is evidence to support thisin cases like the present one in order to justify deduction the sum must be given up for reasons of commercial expediency; it may be voluntary, but so long as it is incurred for the assessees benefit the deduction would be claimable.9. The Income-tax Appellate Tribunal has found in favour of the Managing Agent that the amount was expended for reasons of commercial expediency, it was not given as a bounty but to strengthen the Managed Company and if the financial position of the Managed Company became strong the Managing Agent would benefit thereby.That finding is one of fact. On that finding the Income-tax Appellate Tribunal rightly came to the conclusion that it was a deductible expense under S. 10 (2) (xv).