Decided on March 17,1982



Anand Prakash, - (1.) THE first dispute in this appeal is with regard to the disallowance of commission of Rs. 23,878 claimed by the assessee-company as having accrued and arisen during the previous year under consideration. THE assessee is a company which was incorporated on 28-12-1976. Its accounting period ended on 31-12-1977. Its main object is to export goods from India to outside countries. With a view to accomplish the above object, it appointed many agents in foreign countries, the details of which have been given at page 1 of its paper book. Agreements were entered into by the assessee with them. A copy of the agreement with Misr Import & Export Co., Cairo, has been filed before me and it was stated on behalf of the assessee that other agreements are similar. It appears from the aforesaid agreement that the agent was to develop and expand the sale of the products of the assessee within the territory for which it was appointed (Clause 3), that the principal (i.e., the assessee) was to deliver the products ordered by the agent on board of the vessel at Calcutta or any other Indian port against irrevocable letter of credit by the customers in favour of the principal or any other terms of payment agreed upon by the principal (Clause 4), that the principal was to allow the agent a commission at the stipulated rate in consideration of the services rendered by the agent on the f.o.b. value of the products on all such sales against orders secured directly by the agent and orders received directly by the principals and such commission "will be payable to the agent only upon full realisation of the sale proceeds of the exported materials" (Clause 6). THE agreements with other agents as noted earlier were on similar lines.
(2.) During the accounting period under consideration, the assessee-company exported goods of the f.o.b. value of Rs. 4,64,724 on which commission of Rs. 29,900 became payable. The realisations during the accounting period out of the aforesaid f.o.b. value were of Rs. 1,30,290 only, corresponding commission on the realised value worked out to Rs. 6,883. The assessee claimed that the entire commission of Rs. 29,900 should be allowed to it as deduction while computing the income of the assessee for the year under consideration but the ITO allowed to the assessee only Rs. 6,883. The remaining amount, i.e., Rs. 23,878, was disallowed by him as not having become due by the assessee during the year under consideration. On appeal, the learned Commissioner (Appeals) has upheld the order of the ITO by observing, inter alia, as follows : I have looked into the terms of the agreement copy which has been placed in the assessment records. It is seen that commission is payable to the agent only upon full realisation of the sale proceeds of the exported materials within one month from the realisation of the sale proceeds in a manner approved by the Exchange Control Authority. In view of the terms of the agreement I agree with the view of the ITO that the liability for payment of Rs. 23,878 was not incurred during the relevant year. The addition is, accordingly, confirmed. The assessee's counsel challenges the above finding of the learned Commissioner (Appeals) and submits that Clause (6) of the agreement referred to above did not determine the accrual of the commission income to the agents. That income accrued and arose to them as soon as they placed orders on the assessee-company and the assessee-company in compliance with the said orders placed goods on the ships (free on board) in question. The goods were being loaded only when irrevocable letters of credit had been opened in favour of the assessee and the realisation of such letters of credit was a matter of course. The agent had no role in getting these moneys realised. His only duty was to procure the orders and place them with the assessee-company. With the procurement of the said orders and their compliance, his services were completed and the commission due to him accrued and arose. He had nothing further to do to earn it. The stipulation in Clause "(6) of the agreement, referred to above, was not that the commission would accrue and arise to the agent after the payment had been realised ; rather it stipulated that commission will not be payable to the agent unless full realisation of the sale proceeds of the exported materials had been made. This was due to the insistence of the Reserve Bank of India that the commission be not paid till the value of the goods exported had come in. This stipulation, according to the learned counsel for the assessee, had nothing to do with the point of time at which the commission due to the agent accrued against the assessee-company. The learned Commissioner (Appeals) should, therefore, have allowed the assessee's claim as the assessee was admittedly maintaining its accounts on mercantile basis and payment was no consideration in this system for determining as to whether or not an expenditure had in fact been incurred.
(3.) ON behalf of the revenue, the order of the learned Commissioner (Appeals) was stoutly supported and it was pointed out that an expenditure could be said to have been incurred only when the person who could claim the payment of the said expenditure had acquired the right in law to file a suit against the assessee-company to enforce his claim in a court of law. In the present case, the agents could not file a case in a court to get the commission from the assessee till all the payments were received by the assessee in India. The accrual of liability could not, therefore, have resulted till the sale proceeds had come into India. In rejoinder, the learned counsel for the assessee submitted that the test as to whether or not an expenditure had been incurred under the mercantile system of accounting was not as to whether a person had acquired a right to file a suit in a court of law but as to whether the services for which the amount in question was payable, had been rendered. Services had admittedly been rendered by the agents during the previous year under consideration and, therefore, the commission should have been allowed in entirety during the previous year under consideration.;

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