Judgement

RAMASWAMI, J.: These appeals are brought by certificate from the judgment of the Calcutta High Court dated 28th September, 1964 in Income Tax Reference No. 18 of 1961.

2. The respondent (hereinafter called the assessee) is a private limited company incorporate in India and is a subsidiary of the Imperial Chemical Industries, London, which holds the entire share capital of the assessee. The business of the assessee consists mainly of acting as selling agents in India for a large variety of goods such as chemicals, dyes, explosives etc, manufactured or purchased by its London principals and sold in India. The Imperial Chemical Industries (Export) Glassgow (hereinafter referred to as the I. C. I. (Export) Ltd.) is another subsidiary of I. C. I. London which holds the entire share capital of I. C. I. (Export) Ltd. The I. C. I. (Export) Ltd. had appointed as their selling agents in India four companies, viz., (1) Gillanders Arbuthnot and Co. Ltd.. Calcutta, (2) Best and Co. Ltd., Madras, (3) Anglo-Thai Co. Ltd., Bombay, and (4) Shaw Wallace and Co. Ltd. With effect from 1st April, 1948, the I. C. I. (Export) Ltd. terminated the services of the aforesaid selling agents and appointed the assessee as its sole selling agent. The I. C. I. (Export) Ltd. had agreed to pay to the former selling agents compensation at the rate of two fifth, two-fifth and one and two-fifths of the commission earned by the assessee for the three years from 1st April, 1948. The compensation was paid to the four companies through the accounts of the assessee. For this purpose the modus operandi adopted was as follows:- The compensation payable to the former agents was spread over a period of three years and on the assumption that the turnover was constant, the compensation payable to the selling agents was on an average, an amount equal to the 11/15th of the commission earned by the assessee at the normal rates. In order to arrive at the amount of commission to be credited to the assessee s profit and loss account each year the assessee in the first place credited the commission account and debited the I. C. I. (Export) Ltd. account with the full amount of compensation earned by it at normal rates on sales effected during the year. Next the assessee tramsferred from the commission account to a special reserve account called the Explosives Ex-Agents Compensation Reserve Account , the proportion payable to the ex-agents as compensation, namely, 11/ 15th (2/5 + 2/5 + 7/5 =11/5 X 1/3= 11 /15) (leaving 4/15th towards commission account) so that funds might be accumulated for payment to the four companies from time to time.

3. The year of account of the assessee is from 1st October to 30th September every year. As a result of the above method of accounting, the following figures appeared in the assessee s books of accounts :-

Gross Commission Transfer to Reserve for compensation Net Commission

1st April 1948 to 30th September 1948 Rs. 2,91,396 Rs. 2,03,503 Rs. 87,893

Year ending 30th September 1949 Rs. 7,67,294 Rs. 5,41,526 Rs. 2,25,768

Year ending 30th September 1950 Rs. 7,52,204 Rs. 5,29,284 Rs. 2,22,920

Year ending 30th September 1951 Rs. 10,20,922 Rs. 4,00,052 Rs. 6,20,870

TOTAL Rs.28,31,816 Rs. 16,74,365 Rs. 11,57,451

For the assessment years 1949-50, 1950-51, 1951-52 and 1952-53 the assessee showed the net amounts of commission earned on the selling agencies by the I. C. I. (Export) Ltd., adding a foot-note that the amounts were arrived at after deducting the amount of compensation payable to the out-going agents. By his order dated 28th January, 1957 for the assessment year 1951-52 the Income Tax Officer held that the deductions were not permissible. In an appeal preferred by the assessee the Appellate Assistant Commissioner confirmed the assessment by his order dated 25th November, 1957. The assessee took the matter in further appeal to the Appellate Tribunal which dismissed the appeal. The Appellate Tribunal held that there was no justification for th