TaxTMI 
TaxTMI 
1960 (2) TMI 1
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....e cloth, yarn of other goods manufactured and sold by the company and 15 per cent. on the amount of bills for charges of ginning and pressing and dyeing or bleaching and on the amount of labour bills and other works done in the running of the factory. The commission was exclusive of other charges such as adat, interest, discount, brokerage, etc. The amount of commission was to be credited in the account of the managing agent every six months and it was entitled to interest at the rate of six per cent. per annum on the amount so credited. There were other conditions in the agency agreement which are not necessary for the purposes of this case. The total commission for accounting year 1950 was a sum of Rs. 3,09,114. Sometime during the accounting year, at the oral request of the board of directors of the managed company, the managing agent agreed to accept a sum of Rs. 1,00,000 only as its commission which was credited to the account of the managing agent in the books of the company at the end of the year 1950. The Income-tax Officer and the Appellate Assistant Commissioner held that the amount which accrued as commission to the managing agent was Rs. 3,09,114 and that amount was tax....
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.... of strengthening the financial position of the managed company and in its interest that the chairman of the board of directors had requested and the managing agent had agreed to accept rupees 1 lakh as commission. The Income-tax Appellate Tribunal submitted a supplementary statement of case dated May 3, 1954, in which it said (1) that there was no oblique motive in accepting Rs. 1,00,000 instead of rupees 3 lakhs odd as commission and that the remission was bona fide. It was also remarked that it was not even faintly suggested by the Department that what was given up by the managing agent from the commission was done with some dishonest motive ; (2) the amount foregone by the managing agent was an expenditure incurred wholly and exclusively for the purpose of the business of the managing agent ; (3) that when the appeal was decided by the Appellate Tribunal it did not have the slightest doubt in its mind that the commission was foregone for business considerations ; and (4) that the amount was given up or expended for reasons of commercial expediency. A very significant paragraph in the supplementary statement of the case was paragraph 4 which stated : " It was assumed that wha....
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....of about rupees 2 lakhs which was foregone by the managing agent was wholly and exclusively laid out for the purpose of the managing agent's business and emphasis was laid on the finding of the Appellate Tribunal in its order dated February 26, 1953, that in the past the commission had been given up by the managing agent in the interest of the managed company and that if the managing agent's commission or part thereof was foregone in the interest of the managed company it was not an allowable expenditure under section 10(2)(xv). It was also argued that there was no evidence in support of the finding that the amount was expended for the benefit of the managing agent and that even if as a result of the amount being foregone the managing agent was helped because it benefited the managed company, then section 10(2)(xv) would not be attracted ; in other words the question had to be looked at from the point of view of the direct concern of the managing agent and not of remoter or indirect result which may flow as a result of the benefit to the managed company and in each case the question on each set of facts is whether the benefit is to the assessee, i.e., the managing agent, or to some....
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....id out for the purpose of trade of the assessee company as the machinery and plant were not used for those purposes and the deductions claimed were therefore not admissible. It was argued in that case that by the agreement the assessee company had secured not only the right to receive up to the sum specified but also that the American company would have an incentive to send business to the assessee company in order that, its profits should reach that specified figure and therefore the expenditure was deductible. But it was held that in order to be so deductible it had to be for the benefit of the trade which immediately concerned the assessee company. It was also held that if it was of such a nature then the deduction was prima facie a proper one even though it might inure to the benefit of a third party and the matter had to be tested from the point of view of the assessee company. The learned Solicitor-General relied upon a passage in the judgment at page 741 : " they (the Commissioners) find that there was a reflex result of this agreement which inured to the benefit of the appellant company but I think in terms they indicate that that result was not a direct result but a ....
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....es were held by the shareholder or by an outsider. The test laid down by this case, therefore, was that in the absence of fraud or an oblique motive and if a transaction is of a nature which is entered into in the course of business of the assessee and is commercially expedient then it does become a deductible allowance. If as a result of the transaction the assessee benefits it is immaterial that a third party also benefits thereby. At page 5 Bose, J., observed : " In the absence of a suggestion of fraud this is not relevant at all for giving effect to the provisions of section 12(2) of the Income-tax Act. Most commercial transactions are entered into for the mutual benefit of both sides, or at any rate each side hopes to gain something for itself. The test for present purposes is not whether the other party benefited, nor indeed whether this was a prudent transaction which resulted in ultimate gain to the appellant, but whether it was properly entered into as a part of the appellant's legitimate commercial undertakings in order indirectly to facilitate the carrying on of its business. " In Odhams Press Ltd. v. Cook the assessee company had acquired all the shares in a subsi....
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....s as compiler and vendor of ' Everywoman's ' ? " The cases we have discussed above show that it is a question of fact in each case whether the amount which is claimed as a deductible allowance under section 10(2)(xv) of the Income-tax Act was laid out wholly and exclusively for the purpose of such business and if the fact-finding tribunal comes to the conclusion on evidence which would justify that conclusion it being for them to find the evidence and to give the finding then it will become an admissible deduction. The decision of such questions is for the Income-tax Appellate Tribunal and the decision must be sustained if there is evidence upon which the Tribunal could have arrived at such a conclusion. Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial tr....