Contractual novation defeated commission deduction where the original liability was replaced by a revised agreement with only actual expenses payable.

A claimed selling commission was disallowed because the assessee's original contractual liability had been extinguished by a later mutual revision of the agreement. The parties agreed that the selling agent would charge only actual expenses incurred, and the Court treated this as novation, so no real liability to pay the commission survived in law. Mere mercantile book entries could not revive a liability that no longer existed, and a later unilateral or conditional claim for deduction was ineffective. The commission was therefore not deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922, and the claim failed.

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Issues: Whether the amount of Rs. 2,04,947 paid as selling commission was allowable as a deduction in the assessment for the assessment year 1955-56.

Analysis: The assessee maintained mercantile accounts, but the decisive question was whether a real liability to pay the commission survived when the parties, by mutual consent, revised the agreement and the selling agent agreed to charge only actual expenses incurred. The earlier contractual liability was treated as having been wiped out by novation connected with the same commercial negotiations. Mere original book entries were not conclusive, because the legal effect of the subsequent agreement was that the liability no longer subsisted. The later unilateral or conditional claim to deduction could not revive a liability that had been made non-existent in law. The Court distinguished cases where income or liability had already accrued and was later surrendered unilaterally, and treated the present case as one of contractual variation for commercial expediency.

Conclusion: The commission was not an allowable deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922, and the answer was against the assessee and in favour of the revenue.

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