1973-VIL-436-PAT-DT
Equivalent Citation: [1974] 95 ITR 664
PATNA HIGH COURT
Date: 24.04.1973
JAMSHEDPUR MOTOR ACCESSORIES STORES
Vs
COMMISSIONER OF INCOME-TAX, BIHAR AND ORISSA.
BENCH
Judge(s) : NANDLAL UNTWALIA., S. K. JHA.
JUDGMENT
UNTWALIA C.J. As per the direction of this court given under section 66(2) of the Indian Income-tax Act 1922, hereinafter. called "the Act", the Income-tax Appellate Tribunal, Patna Bench, has stated a case and referred two questions of law for the opinion of this court. The facts may be conveniently stated from the statement of case. The assessee is a Hindu undivided family. It carried on business as a dealer in TataMercedes-Benz Chassis, motor spare parts petrol, mobil, tyres, tubes, etc. The principal place of business of the assessee was at Jamshedpur. It had also a branch at Cuttack where the business was run under the name and style of "Utkal Automobiles". This reference relates to the assessment year 1957-58, the corresponding accounting period being Sambat year 2012.
The assessee filed a return showing an income of Rs. 45,426. The Income-tax Officer determined the assessee's income from his business at Rs. 1,37,991. Two additions made by the Income-tax Officer are in dispute in this case. A sum of Rs. 10, 117 was paid by the assessee out of the share of his profits to Sarvasri D. M. Patel and R. M. Patel. The assessee had taken an advance of Rs. 12,500 from each of the two persons adoresaid in the year 1952, when it started its business. At that time the assessee was in urgent need of capital, according to him, for running an automobile agency and, therefore, it borrowed the funds from these two persons. According to the assessee, it was agreed that it would pay 12 1/2 per cent. of the net profits to each of these creditors who were not to charge any interest from it. The Income-tax Officer rejected the claim of the assessee. He, however, considered that the creditors were entitled to payment of interest at 6 per cent. per annum and to the extent of Rs. 1,500 he allowed the claim of the assessee ; the balance of Rs. 8,617 was disallowed.
At Cuttack the assessee had employed one Sri B.M.Parikh. He was drawing a salary of Rs. 4,200 per annum. The assessee had paid to Parikh over and above the salary a sum of Rs. 8,545 as commission at the rate of Rs. 100 per truck. The assessee claimed that since the commission was paid for the services rendered by the employee it was a deduction allowable under section 10(2)(x) of the Act. The Income-tax Officer negatived the claim of the assessee on the ground that there was no written agreement under which the assessee had undertaken to pay the commission at the rate of Rs. 100 per vehicle to its employee and that the assessee had paid commission to other parties and brokers.
The assessee took up the matter in appeal before the Appellate Assistant Commissioner. The appeal was dismissed and the addition made by the Income-tax Officer as to the two amounts aforesaid was maintained. The assessee went up in second appeal before the Appellate Tribunal. Before the Tribunal a statement of fact was filed in which were embodied the terms of agreement between the assessee and the two financiers. The Appellate Tribunal refused to believe that an agreement of the kind relied upon by the assessee could be oral and not in writing. It was also found that there was nothing on the record to show that the assessee was placed in such a bad position that it could not raise money through normal commercial or banking channels. In the alternative, the Tribunal opined that even if such an arrangement was in fact entered into, the assessee could be expected to have availed of the earliest opportunity to discharge such an onerous obligation. The Tribunal thought that it would be reasonsable under the circumstances of the case to allow the assessee an interest payment at the rate of 12 per cent. per annum. Instead of a sum of Rs. 3,000 and thus the amount in dispute now is Rs. 7,117 on account of the sahre of profit paid to the two financiers. In regard to the amount of commission paid to Parikh the Tribunal states in the statement of case that he was already paid a salary of Rs. 350 per month. The assessee had paid commission to other parties and brokers in connection with the sales of the vehicles. The Mercedes truck had a reputation of its own in the market and was readily saleable ; therefore, it did not justify payment of
commission at the rate of Rs. 100 per vehicle. Since the employee was looking after the assessee's business in a capable way it considered justified to allow him a bonus payment to the tune of Rs. 1,400 as being incurred wholly and exclusively for the purpose of the business. The two questions referred for determination by this court are :
"(1) Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in not allowing a sum of Rs. 7,117 paid to D. M. Patel and R. M. Patel under section 10(2)(iii) or under section 10(2)(xv) of the Indian Income-tax Act, 1922?
(2) Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in not allowing commission on sale to an employee to the extent of Rs. 7,145 under section 10(2)(x) of the Indian Income-tax Act, 1922 ?"
I shall briefly refer to the finding of the Income-tax Officer in regard to the two amounts. He says that the profits paid to these two parties from year to year far exceeded the usual rate of interest of 6 per cent. to which they could normally be said to have been entitled on the loans advanced by them. Therefore, in the opinion of the Income-tax Officer there did not appear any business necessity as such for which such a large slice of the assessee's profit could be made over to them. In that view of the matter he allowed 6 per cent. interest which came to Rs. 1,500 for the sum of Rs. 25,000 advanced by the two financiers. Out of the total sum of Rs. 10,117 the balance of Rs. 8,617 was added back. The Appellate Assistant Commissioner came to the conclusion that the payment did not appear to have enured to the benefit of the assessee's business. They did not appear to have been made in accordance with the commercial expediency or in accordance with the principles of ordinary commercial trading, rather there was reason to presume that a part of the payment was ex gratia. Even if it be accepted that there was a verbal understanding it did not stand to reason why the assessee did not consider it commercially expedient to pay off the loan and to free itself of the onerous liability. He, therefore, held that the payment to the extent it exceeded interest payable on the loans at the usual rates did not constitute allowable expenditure.
The finding of the Appellate Tribunal recorded in paragraph 17 of its order is that it did not believe that the minute details as were mentioned in the statement filed before the Tribunal could not have been reduced to writing. There was no material on the record to show that the assessee was in such a bad way that it could not raise money through normal commercial or banking channels. Even if such an arrangement were in fact entered into it was expected that this kind of onerous obligation would have been discharged at the earliest opportunity. It was too much, according to the Tribunal, to assume that the creditors were to share the profits of the new business started after the advancement of the money in Orissa. The Tribunal, therefore, held that the payment of 25 per cent. of the net profits of the business in lieu of interest was not proved to be genuine. Since, in the case of unsecured loans the rate of interest payable may be as high as 12 per cent. it directed deduction of Rs. 3,000 from the total sum of Rs. 10,117.
In regard to the other item the finding of the Income-tax Officer is that there was no written agreement between the assessee and Sri Parikh for payment of the commission of Rs. 100 per vehicle. There did not seem to have been any necessity for payment of such commission from the business point of view and hence it was not allowable as a business expenditure. The entire sum of Rs. 8,545 was disallowed. The Appellate Assistant Commissioner on the grounds adverted to earlier in this judgment maintained the disallowance of the sum of Rs. 8,545. When the matter went up to the Tribunal it allowed a deduction of Rs. 1,400 but disallowed the balance of Rs. 7,145. The reason given by the Tribunal is that in the absence of evidence of a particular type of service rendered by the employee the alleged agreement to pay Rs. 100 per vehicle could not be said to be a genuine business arrangement for giving additional remuneration to the employee. But considering that a bonus payment to the employee is justified it allowed a sum of Rs. 1,400 and disallowed the balance of Rs. 7,145.
In order to answer the two questions referred for determination of this court it is necessary to bear in mind the law on the point. In Easier Investments Ltd. v. Commissioner of Income-tax, the Supreme Court has pointed out that though such questions must be decided on the facts of each case the final conclusion is one of law. It, is not necessary for the assessee to show that the expenditure was a profitable one or that in fact any profit was earned. It is enough to show that the money was expended not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order in directly to facilitate the carrying on of the business. Beyond these tests no hard and fast rule can be laid down to explain what is meant by the word "solely" in section 12(2) of the Act which is at par with section 10(2)(xv). The transaction in question which was for consideration before the Supreme Court was found to have been voluntarily entered into in order indirectly to facilitate the carrying on of the business of the company and was made on the ground of commercial expediency. It was, therefore, held to have fallen within the purview of section 12(2) of the Act. In Madura Knitting Company v. Commissioner of Income-tax the Madras High Court has pointed out at page 793 :
"It should be taken as well-settled now that, when a claim is preferred by an employer under section 10(2)(x) of the Act, the reasonableness or otherwise of the payment to an employee is to be judged, not with reference to any subjective standards of the assessing authority, but with reference to commercial expediency and with specific reference to the factors listed in clauses (a), (b) and (c) of the proviso to section 10(2)(x)."
In Dharamvir Dhir v. Commissioner of Income-tax, huge amounts of the profits were paid to the trust which had financed the business of the assessee. Sometimes the payment made went up to 400 per cent. of the amount advanced. The Appellate Tribunal found that the average amount of loan advanced by the trust to the assessee in 1946 was Rs. 18,100 and the High Court, on a reference, held that this was a case of a joint adventure between the assessee and the trust on the arrangement that they shall divide the profits in specified proportions and that, therefore, the amounts paid by the assessee to the trust were not allowable expenditure. The Supreme Court reserved the decison. It found that the record showed that the advances were very considerable in the first year. The payments, in a commercial sense, were an expenditure wholly and exclusively laid out for the purpose of the assessee's business and they were, therefore, deductible revenue expenditure. In order to justify the deduction the sum given must be for reasons of commercial expediency. It might be voluntary but so long as it was incurred for the assessee's benefit, e.g., for the carrying on of his business, the deduction would be allowable. In Commissioner of Income-tax v. Walchand and Co. Private Ltd., in the assessment years 1953-54 and 1954-55 was found that the assessee had increased the amount of remuneration of its directors and officers. A portion of the increase was allowed by the Tribunal but a portion was disallowed. In that connection Shah J. (as he then was), delivering the judgment on behalf of the court, said at page 384 :
"But for partially rejecting the claim for allowance of the amount paid, no reasons were recorded. If the Tribunal was satisfied that the expenditure was laid out or expended wholly and exclusively for the purpose of the business of the assessee there was no reason why the full amount expended should not have been allowed. It is open to the Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assesee in the character of a trader or that it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee. When a claim for allowance under section 10(2)(xv)
of the Income-tax Act is made, the income-tax authorities have to decide whether the expenditure claimed as an allowance was incurred voluntarily and on grounds of commercial expediency. In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue."
The principle laid down in the case of Walchand & Company was referred to with approval in a later decision of the Supreme Court in J. K. Woollen Manufacturers v. Commissioner of Income-tax by Ramaswami J. delivering the judgment on behalf of the court. Applying the principles aforesaid for answering the two questions referred to this court it would be noticed that the two financiers had advanced Rs. 12,500 each to the assessee in the year 1952, as the assessee needed the money then. Every year 12 1/2 per cent. share in the profit was being paid to the two financiers by crediting the amounts in their respective accounts, thus enhancing the amount of loan every year. The department was accepting this arrangement in the past years and the amounts of profit paid to the two financiers were treated as the sums expended wholly and exclusively for the purpose of the business. It would further be found that no interest was being charged by or paid to these two financiers. The Tribunal or none of the departmental authorities found that the payments were fake. Merely because there was no agreement in writing the arrangement between the parties, if otherwise it was fit to be believed and as it was evidenced by the entries in the books of account, could not be disbelieved. It was not for the Tribunal to suggest whether from the business point of view the assessee ought to have paid interest to the financiers or should have paid the share in the profit. Payment to financiers by giving shares in the profits is not common. The Tribunal does not say that such a method of payment is unknown to law. If the financiers were good enough to allow the assessee to use the amounts of profits also as loan which was being added every year, then it was not for the department or the Tribunal to suggest whether the assessee ought to have paid off the loan because it was an onerous obligation. Keeping in view the amount of profit assessed which was rupees one lakh and odd payment of a sum of Rs. 10,000 to the two financiers cannot be said to be so onerous from the commercial point of view that there could be a justification for disallowing the sum. I, therefore, answer the first question in favour of the assessee and hold that on the facts and circumstances of the case the Appellate Tribunal was not justified in disallowing a sum of Rs. 7,117 paid to
D. M. Patel and R. M. Patel ; the amount was deductible under section 10(2)(xv) of the Act.
Coming to the payment on account of commission to Parikh it has to be pointed out again that the payment has not been disbelieved. Parikh was an employee managing the entire Cuttack business of the assessee. It was for the assessee to decide what would be the form of payment to Parikh. It agreed to pay a sum of Rs. 350 per month on account of his salary and in order to induce him to look after the assessee's business properly and efficiently and to push up the sales of the trucks it also agreed to pay a sum of Rs. 100 per truck by way of commission. Merely because there was no written agreement the arrangement and the oral agreement relied upon by the assessee could not be discarded. It was evidenced by the entries in the books of account. It may well be that Mercedes trucks are well-known brands of trucks but yet it is well-known in business world that if there is no efficient management for the sale of these well-known varieties of commodities or articles the sale will go down Efficient management is required to push up the sales even of well-known brands of articles. If there is fall in efficiency, efficient management of inferior articles will affect the sale of the famous articles also. The Tribunal had no justification to reduce the amount of Rs. 8,545 paid on account of commission by the assessee to Parikh Its view was contradictory when it allowed a sum of Rs. 1,400 on account of able service but disallowed the rest of the sum. By allowing a sum of Rs. 1,400 the Tribunal accepted the assessee's position that Parikh required some incentive commission or bonus. That position being accepted the matter as to what amount was payable to Parikh ought to have been adjudged, from the assesssee's point of view and not from the department or Tribunal's point of view. It has to be emphasised that unless there is a limitation put by the law on the amount of expenditure a lesser amount than the amount expended cannot be allowed merely because the assessing authority thinks that the assessee could have managed by paying a lesser amount as a prudent businessman. The test of prudence by substituting its own view in place of the businessman's has not been approved by the Supreme Court in the decisions referred to above. That being so, I answer the second question also in favour of the assessee and hold that, on the facts and circumstances of the case, the Appellate Tribunal was not justified in disallowing commission on sale to the employee, Parikh, to the extent of Rs. 7,145 ; the whole of the amount was allowable under section 10(2)(x) of the Act.
The reference is accordingly answered, wholly in favour of the assessee. It must have the costs of the reference. Hearing fee Rs. 100 only.
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