Case: Lachminarayan Madan Lal Vs. Commissioner of Income Tax, West Bengal

2. The assessee is a registered firm o? three partners Madanlal Bagaria, Bajranglal Bagaria and Sohanlal Bagaria each having a 1/3 rd share in the partnership. The partner are brothers. Its business is the o? manufacture and sale of aluminium utensils. Upto the assess ment year 1962-63, the firm was making its sales direct to the customers. In the assessment year 1963-64 (the relevant previous year being 2012 R. N. 13-4-1963 to 1-4-1964) the assessee claimed to have paid Rupees 31,684/- to Messrs. Eastern Sales Corpn. as selling agency commission and claimed deduction of the same under Section 37 of the Indian Income-tax Act l961 (to be hereinafter referred to as the Act) as an item of expenditure laid out or expended wholly and exclusively for the purpose of the business. The Income-tax Officer rejected that claim. But the Appellate Assistant Commissioner in appeal allowed the same. The A. A. C. after summarising the conclusions reached by the I. T. O. and setting out the arguments advanced on either side, concluded bya careful consideration of the facts and circumstances, I am inclined to take the view that the discount should be allowed as a deduction, as having been laid out wholly and exclusively for the purpose of the appellants business. The facts narrated above, clearly indicate that there has been a phenomenal increase in the sales of the appellant, after the appointment of the selling agents. The mere fact of the partners of the selling agents being closely related to the partners of the appellant firm is of little consequence, in the absence of proof of collusion between the two concerns. Instead of the payment being made to total strangers, the discount in the present case has been paid to a firm constituted by the near relations of the partners of the appellant and what is more, the payment was against actual service rendered. The depositions recorded by the I. T. O. referred to above, clearly bring out that the selling agency firm contacted the customers and thereby improved sales of the appellant".Aggrieved by the decisions of the A. A. C., the Department took up the matter in appeal to the Income tax Appellate Tribunal. The Tribunal reversed the order of the A. A. C. and restored that of the I. T. O. It came to the conclusion that the so-called selling agency agreement between the assessee firm and the selling agency firm was only a make-believe arrangement. It was merely a device to minimise the tax liability of the assessee firm and it was not a genuine business arrangement. It arrived at that conclusion on the basis of the following facts :4. The selling agency firm had four major partners. Two minors were also entitled to share in the benefits of that partnership. One of the major partner was Shiva Kumari Bagaria wife of Madan Lal Bagaria, one of the partners in the assessee firm. She had a 1/3rd share in the profits of the selling agency firm. Another partner of that firm was Triveni Devi Bagaria wife of Bajranglal Bagaria, a partner in the assessee firm. She had l/9th share in the profits of the selling agency firm. Bajranglals major son Kanti Prasad Bagaria was another partner in the selling agency firm. He had l/9th share in the profits of that firm. Nandlal Bagaria, the minor son of Bajranglal Bagaria was entitled to get 1/9th share in the profits of the selling agency firm. In effect the wife and the children of Bajranglal were entitled to l/3rd share in the profits of the selling agency firm. Another partner of the selling agency firm was Benarshi Devi Bagaria, wife of Sohan Lal Bagaria, one of the partners in the assessee firm. She had l/6th share in the profits of the selling agency firm. Shyamsunder Bagaria, minor son of Sohanlal was entitled to get 1/6th share in the profits of the selling agency firm This shows that the wife and son of Sohanlal were entitled to l/3rd share in the profits of the selling agency firm. From these facts, the Tribunal inferred that the selling agency firm is nothing but another manifestation of the assessee firm. The Tribunal further came to the conclusion that on the day the selling agency agreement was entered into viz. on March 26, 1962, the selling agency firm had not even come into existence. It came into existence for the first time on April 13, 1962. The partnership agreement clearly shows that the partnership came into existence only on April 13, 1962. This discrepancy between the two documents was emphasised by the Tribunal in support of its conclusion that the agreement in question was a mere make-believe document. The Tribunal also took into consideration that out of the partners, two were minors who could not have rendered any assistance in the matter of selling the products of the assessee firm; three of the partners of the firms were ladies who had no prior business experience and consequently they would have been of little assistance in carrying on the activities of the selling agency firm. The only male adult who was the partner in the selling agency firm was Kanta Prasad Bagaria who had only a l/9th share in the profits of the firm. Further Kanta Prasad was a partner in another manufacturing concern situate at a place quite distant from the place where the selling agency business was said to have been carried on. The Tribunal further took note of the fact that the business address of the selling agency firm was the same as that of the assessee firm. The selling agency firm had no godown of its own nor any transport vehicles. On the basis of these findings, it reached the conclusion that the selling agency firm had no genuine existence. Prima facie all these are findings of fact.

Court's reasoning:
14. According to the findings given by the Tribunal this case belongs to the latter category namely that the assessee by adopting a device has made to appear that the income which belonged to it had been earned by some other person.15. Mr. Setalvad placed considerable reliance on the decision of this Court in Commissioner of Income-tax, Punjab v. Indian Woollen Textile Mills, 51 ITR 291   = (AIR 1964 SC 735  ). Therein this Court observed that in that case the Tribunal assumed the only fact on which its conclusion was founded and had ignored other relevant matters on which A. A. C. had relied in support of its conclusion. Consequently the Tribunal must be held to have misdirected itself in law in arriving at its finding. We have earlier considered the contention of Mr. Setalvad that the Tribunal had misdirected itself but we have not been able to accept the same. Hence the ratio of this decision is of no assistance to the appellant.16. Reference was also made to the decision of this Court in Commissioner of Income-tax West Bengal-II v. Durga Prasad More, 82 ITR 540   = (AIR 1971 SC 2439  ). We fail to see how this decision can lend any assistance to the appellants case. In that case this Court reversing the decision of the High Court held that it could not be said that the finding of the Tribunal as to the unreality of the trust put forward was not based on evidence or was otherwise vitiated.17. In our opinion the facts of this case come within the rule laid down by this Court in Swadeshi Cotton Mills Co. Ltd. v. Commr. of Income-tax, U. P., (1967) 63 ITR 57 (SC).The question whether an amount claimed as an expenditure was laid out or expended wholly and exclusively for the purpose of the business has to be decided on the facts and in the light of the circumstances in each case. The mere existence of an agreement between the assesses and its selling agents or payment of certain amounts as commission assuming there was such payment does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessees business. Although there might be such an agreement in existence and the payments might have been made, it is still open to the Income-tax Officer to consider the relevant factors and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under S. 37 of the Act.