1967 (5) TMI 11 - SC - Income Tax

Supreme Court remands case on managing agents' expenses to Appellate Tribunal for review.

Commissioner of Income-Tax, Bombay City I Versus Greaves Cotton And Company Limited

Commissioner of Income-Tax, Bombay City I Versus Greaves Cotton And Company Limited - [1968] 68 ITR 200 (SC) Issues Involved:1. Bona fide nature of the termination of the managing agency agreement.2. Admissibility of the compensation paid as a deductible expense under section 10(2)(xv) of the Indian Income-tax Act, 1922.3. Jurisdiction of the High Court in interfering with the findings of fact by the Appellate Tribunal.Issue-wise Detailed Analysis:1. Bona fide Nature of the Termination of the Managing Agency Agreement:The respondent-company terminated the managing agency agreement with Messrs. Karamchand Thapar & Brothers Ltd. and paid Rs. 18 lakhs as compensation. The Income-tax Officer, Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal all concluded that the termination was not bona fide and was done for extra-commercial considerations. They observed that the managing agents had a controlling interest in the respondent-company, and there was a conflict of interest. The High Court, however, found that the termination was in the interest of commercial expediency and was not done with any oblique motive. The Supreme Court held that the High Court erred in reappraising the evidence and interfering with the Tribunal's finding of fact, as it is not within the High Court's jurisdiction to do so under section 66 of the Income-tax Act.2. Admissibility of the Compensation Paid as a Deductible Expense:The respondent-company claimed the Rs. 18 lakhs paid as compensation to the managing agents as a deductible expense under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal rejected this claim, stating that the payment was not made wholly and exclusively for the purpose of the business. The High Court, however, concluded that the payment was made for commercial expediency and allowed the deduction. The Supreme Court noted that the question of whether an expenditure was incurred solely for business purposes is a mixed question of fact and law. The High Court should have confined itself to the facts found by the Tribunal and applied the correct legal principles to those facts, rather than reappraising the evidence.3. Jurisdiction of the High Court in Interfering with the Findings of Fact by the Appellate Tribunal:The Supreme Court emphasized that in a reference under section 66 of the Income-tax Act, the High Court is not a court of appeal and should not interfere with the Tribunal's findings of fact unless there is no evidence to support them or they are unreasonable or perverse. The High Court must accept the findings of fact reached by the Tribunal and apply the correct legal principles to those facts. The Supreme Court found that the High Court exceeded its jurisdiction by reappraising the evidence and setting aside the Tribunal's finding that the termination of the managing agency agreement was not bona fide.Conclusion:The Supreme Court set aside the judgment of the Bombay High Court and remanded the case to the Appellate Tribunal for rehearing. The Tribunal is directed to record a clear finding after considering all relevant material and evidence as to whether the Rs. 18 lakhs paid by the respondent-company to the managing agents is an admissible deduction under section 10(2)(xv) of the Indian Income-tax Act. The appeal was allowed in part, and the parties were directed to bear their own costs up to this stage.