An 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.

Headnote:
INCOME TAX - S. 4 (3) (vi) - Special allowance to meet expenses - Unexpended surplus - Whether taxable - Held, yes.
Fact of the Case:

The assessee company received a commission of 12.5% from the principals for selling their products. Out of this, 7.5% was treated as selling commission and 5% as compensation for contingency expenses such as commission to Dyeing Masters, agents, etc. The Income-tax Officer included the 5% commission in the taxable income of the company, but the Income-tax Appellate Tribunal held that it was exempt under S. 4 (3) (vi) of the Income-tax Act, 1922. The Commissioner then referred the question of whether the company held an office or employment of profit within the meaning of S. 4 (3) (vi) to the High Court, which answered in the affirmative.
Finding of the Court:

The Supreme Court held that the 5% commission was exempt from tax under S. 4 (3) (vi) of the Income-tax Act, 1922, only to the extent that it was wholly and necessarily incurred in the performance of the duties of the company as selling agent. Any unexpended surplus was taxable.
Issues: Whether the 5% commission received by the assessee company was exempt from tax under S. 4 (3) (vi) of the Income-tax Act, 1922.
Ratio Decidendi: The purpose for which the allowance is granted, in our judgment is alone not determinative of the claim to exemption. An allowance though made to a person holding an office or employment of profit intended for appropriation towards expenditure incurred or to be incurred in the discharge of the duties, does not constitute any real income of the grantee. It is in truth expenditure incurred by the employer through the agency of the grantee. The intention of the framers of the Act was to grant exemption in respect of amounts received by the assessee, not for his own benefit, but for the specific purpose of meeting the expenses wholly and necessarily incurred or to be incurred in the performance of his duties as an agent.
Final Decision: Appeal allowed. Answer recorded by the High Court to the supplementary question is discharged, and the following answer to the supplementary question is recorded: That portion of 5 per cent of the selling agency commission received by the assessee company is exempt under S. 4 (3) (vi) of the income-tax Act, 1922, which is wholly and necessarily incurred in the year of account in the performance of the duties of the company as selling agent.

Judgement

SHAH, J.: 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 : 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 of

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Judicial Analysis