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1970 Supreme(P&H) 17
PUNJAB & HARYANA HIGH COURT
D.K.Mahajan and S.S.Sandhawalia JJ.
Panipat Woollen And General Mills Co.Ltd.
Versus
Commissioner Of Income-tax
Income tax Reference No. 2 of 1965,
Decided On : JANUARY 20, 1970
An expenditure is allowable as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922, if it is a part of the company's working expenses and is laid out as part of the process of profit earning.
Headnote:
INCOME TAX - DEDUCTION - COMMISSION PAID TO SELLING AGENTS - WHETHER ALLOWABLE AS DEDUCTION UNDER SECTION 10(2)(XV) OF THE INDIAN INCOME-TAX ACT, 1922 - HELD, YES.
Fact of the Case:
The assessee, a woolen mill company, entered into an agreement with its selling agents, whereby the agents were to provide unlimited funds for the proper running of the business and were to take charge of the entire production. The agents were also to share the losses, if any, and their share of losses was to be adjusted against their account, namely, the interest due to them as well as 11/2 per cent commission on the total sales. The method of computing profits in order to determine the commission over and above 11/4 per cent, namely, 50 per cent commission under Clause 7(i) of the agreement, did not provide for the determination of the net profits according to mercantile practices or in accordance with Section 10 of the Income-tax Act. The Income-tax Officer allowed the deduction of the commission paid to the agents, but the Commissioner disallowed it, holding that it was a distribution of profits between the assessee and its selling agents after the profits had accrued and had been ascertained. The assessee appealed to the Appellate Tribunal, which upheld the Commissioner's order.
Finding of the Court:
The Tribunal erred in holding that the commission paid to the agents was not allowable as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The commission was an amount legitimately incurred by the assessee-company in carrying out its business activities in order to earn profits. The so-called profits for the working out of 50 per cent commission were not arrived at on any commercial basis, but on an agreed basis. The deductions to be taken into account to arrive at profits were not those which were contemplated either by the Income-tax Act or by a prudent commercial practice or normal commercial method of accountancy.
Issues: Whether the commission paid to the selling agents was allowable as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922.
Ratio Decidendi: The test for determining whether an expenditure is allowable as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922, is whether it is a part of the company's working expenses and is laid out as part of the process of profit earning. In the present case, the commission paid to the agents was an amount legitimately incurred by the assessee-company in carrying out its business activities in order to earn profits. The so-called profits for the working out of 50 per cent commission were not arrived at on any commercial basis, but on an agreed basis. The deductions to be taken into account to arrive at profits were not those which were contemplated either by the Income-tax Act or by a prudent commercial practice or normal commercial method of accountancy. Therefore, the commission was allowable as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922.
Final Decision: The questions referred to the court were answered in favor of the assessee. No order was made as to costs.
D.K.Mahajan, J.
1. At the instance of the assessee, the Income-tax Appellate Tribunal (Delhi Bench "B") has referred the following two questions of law for our opinion:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal rightly held that the sums of Rs. 37,157 and Rs. 73,787 were chargeable to tax in the hands of the assessee-company in the assessment years 1956-57 and 1957-58 respectively?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal rightly disallowed the assessee-companys claim for deduction of the payment of Rs. 37,157 and Rs. 73,787, under Section 10(1) and Section 10(2)(xv) of the Indian Income-tax Act, 1922, in the assessment years 1956-57 and 1957-58, respectively?"
2. The assessee is Messrs. Panipat Woollen and General Mills Co. Ltd., Kharar. It had two units. The first unit was engaged in the spinning of yarn from raw and waste wool and was known as the Panipat Woollen Mills. The second unit was engaged in the spinning of yarn from imported wool tops and was known as the Navin Woollen Mills. The second unit was started in the year 1952. Weaving was also done in both of these units. The company from its inception was running in loss. In 1952, it decided to instal a plant for the manufacture of worsted yarn from imported wool tops. For this purpose a loan of rupees seven lakhs was raised from the Industrial Finance Corporation, New Delhi. This plant went into production in September, 1952. The original sole selling agents of the assessee-company for the sale of worsted yarn were Messrs. Murlidhar Chiranjilal. They were getting two per cent. as their commission on the sale of worsted yarn. The selling agents did not have straight dealings with the company. The company, therefore, terminated their agency. Thereafter, on the 15th of December, 1953, the assessee-company appointed Messrs. Saligram Prem Nath as their sole selling agents for the sale of worsted yarn. The new agents undertook to finance the company to the extent of rupees two lakhs and fifty thousand. The advances were to bear interest at the rate of 6 per cent. In addition to this, the agents were entitled to two per cent. commission on net proceeds of sales of goods in India. Before the agreement dated the 15th of December, 1953, was to expire, a second agreement was entered into between the said sole selling agents of the company on the 20th of October, 1955. The period of agency fixed in the new agreement was two years commencing from the 1st of January, 1956. The agency was non-transferable. The agents were also prohibited from undertaking any work from any other woollen worsted mills in India in any manner. It is really this agreement on which the fate of the reference hinges. It will be proper to mention its relevant clauses. The relevant clauses are:
"3(ii) Programme for the manufacture of goods will be made from time to time by the company in consultation and with the consent of the agents.
6(i) The agents shall invest full amount for the working of the worsted plant to the full possible capacity, beginning from the purchase of tops to the completion of the yarn sales including wages, powers, stores, and repairs and maintenance, etc. Such investments and expenses incurred on tops, manufacturing, bank charges, transport, insurance and octroi will be debited to the account of the company.
6(vi) The agents will be authorised to get the tops and goods insured. Such insurance charges will be payable by the company. Freight, octroi and coolie charges incurred up to the godowns of the agents will be payable by the company. After the goods have reached the godowns all expenses including the rent on godowns and other expenses of the shop, etc., of the agents will be paid by the agents out of their commission.
6(vii) From the time of purchase of tops to the point of sale of goods, tops, waste and other goods in the godowns of the agents bankers shall be in the custody of the agents-bankers. The
