COMMISSIONER OF INCOME TAX, BOMBAY NORTH, AHMEDABAD Vs. TEJAJI FARASRAM KHARAWALA LTD
LAWS(GJH)-1963-9-28
HIGH COURT OF GUJARAT
Decided on September 06,1963

Commissioner Of Income Tax, Bombay North, Ahmedabad Appellant
VERSUS
Tejaji Farasram Kharawala Ltd Respondents

JUDGEMENT

- (1.) The question which arises on this Reference is whether a certain amount received by the assessee during the accounting year2004 ( that is 13th November 1947 to 1st November 1948 ) which is the previous year of the assessee for the assessment year 1949-50 is wholly exempt from tax under section 4(3)(vi) of the Income-tax Act. The assessee is a Private Limited Company of which at the material time there were four shareholders three of them being Directors. The assessee was incorporated on 28th October 1946 and commenced business on 24th October 1947 by acquiring from the joint family firm of Messrs. Tejaji Farasram Kharawala the business of selling agency of Ciba (India) Limited which was until then being carried on by the joint family firm. One Tejaji Farasram Kharawala was appointed selling agent by Ciba (India) Limited for sale of certain kinds of dye-stuffs in the territory described as the Ahmedabad District under an agreement dated 29th October 1928. It was provided by this agreement that Tejaji Farasram Kharawala shall act for Ciba (India) Limited for sale of certain kinds of dye-stuffs for and on behalf of Ciba (India) Limited and that Ciba (India) Limited shall pay to Tejaji Farasram Kharawala 12 1/2 per cent commission on the net sale proceeds of the dye-stuffs sold by him for Ciba (India) Limited. This commission of 12 1/2 per cent included all contingency expenses which Tejaji Farasram Kharawala might have to incur in connection with the performance of his duties as selling agent of Ciba (India) Limited. It appears that the selling agency of Ciba (India) Limited was taken by Tejaji Farasram Kharawala as Manager and Karta of the joint Hindu family which was carrying on business in the name of Messrs. Tejaji Farasram Kharawala and the agreement dated 29th October 1928 was therefore treated as an agreement between Ciba (India) Limited and Messrs. Tejaji Farasram Kharawala. On 20th August 1935 Ciba (India) Limited wrote a letter to Messrs. Tejaji Farasram Kharawala which was in the following terms: With reference to the conversation we had lately with your Mr. Bhagwanlal in connection with your commission we wish to confirm hereby that same is to be understood as follows:- 7 % your own commission. 5% being compensation in lieu of the contingency expenses you have to meet such as commission to Dyeing Masters Agents etc. etc. The selling agency of Messrs. Tejaji Farasram Kharawala was thereafter continued on these terms and Messrs. Tejaji Farasram Kharawala received 7 1/ 2% per cent as and by way of their own commission and 5 per cent as and by way of compensation in lieu of the contingency expenses such as commission to Dyeing Masters Agents etc. which they might be required to meet. This continued upto 24th October 1947 when the assessee by an agreement of that date took over the business of Messrs. Tejaji Farasram Kharawala including the selling agency of Ciba (India) Limited together with the full benefit of the agreement dated 29th October 1928 as modified from time to time. The assessee thereafter acted as selling agent of Ciba (India Limited on the same terms and conditions and received 7 per cent as and by way of commission and 5 per cent as and by way of compensation in lieu of contingency expenses such as commission to Dyeing Masters Agents etc. During Samvat Year 2004 the amount received by the assessee in respect of 5 per cent came to Rs. 1 90 538 and an expenditure of Rs. 1 32 512 was incurred by the assessee relatable to the purpose for which 5 per cent was granted by Ciba (India) Limited. The assessee in its assessment for the assessment year 1949-50 contended that the entire amount of Rs. 1 90 538 received by the assessee from Ciba (India) Limited during the account year was exempt from tax under sec. 4(3)(vi) The contention was negatived by the Income-tax Officer but the Appellate Assistant Commissioner upheld it and treated the entire amount of Rs. 1 90 538 as exempt from tax under section 4(3)(vi). The Commissioner thereupon carried the matter in appeal to the Tribunal. Before the Tribunal two contentions were advanced on behalf of the Commissioner challenging the applicability of section 4(3)(vi) to the facts of the case. The first contention was that 5 per cent did not represent a special allowance specifically granted to the assessee for the purpose of meeting any particular expenses within the meaning of section 4(3)(vi). This contention was rejected by the Tribunal which took the view that 5 per cent was a special allowance specifically granted to the assessee for meeting contingency expenses such as commission to Dyeing Masters Agents etc. which the assessee had to incur in the performance of its duties. It was then contended on behalf of the Commissioner that even if other conditions of section 4(3)(vi) were satisfied the assessee could not yet invoke the section in its favour since the assessee did not hold any office or employment of profit as required by the section. The Tribunal rejected this contention too holding that the assessee being the selling agent of Ciba (India) Limited for a particular territory was the holder of an office of profit in the organisation of Ciba (India) Limited and was therefore entitled to claim the benefit of the exemption granted by sec. 4(3)(vi) in respect of the amount of Rs. 1 90 538 received from Ciba (India) Limited. The Tribunal accordingly exempted the entire amount of Rs. 1 90 538 from tax under sec. 4(3)(vi). Here ended what we may call the first chapter in the history of this case.
(2.) The second chapter commenced with an application by the Commissioner to the Tribunal for referring to the High Court a question of law which according to the Commissioner arose out of the order of the Tribunal. The question which the Commissioner wanted to be referred by the Tribunal to the High Court was: Whether on the facts of the case a portion viz. 5 of the selling agency commission of 12 1/2% received by the assessee Company from M/s. Ciba Ltd. in the course of carrying on the selling agency business is exempt from tax under sec. 4(3)(vi) of the Act The Tribunal however refused to refer this question to the High Court but instead referred the following question: Whether the assessee Company held an office or employment of profit within the meaning of sec. 4(3)(vi) of the Indian Income-tax Act The reference to the High Court was numbered Income-tax Reference No. 28 of 1954. The Reference at this stage comprised only one question namely that referred by the Tribunal. The Commissioner thereupon took out a Notice of Motion praying that the Statement of the Case be referred back to the Tribunal with a direction to raise and refer to the High Court the aforesaid question which the Tribunal had refused to refer or such other question or questions as to the High Court might appear appropriate in the circumstances of the case either in substitution of the question referred by the Tribunal or in addition thereto as the High Court might think fit. The Reference came up for hearing and final disposal before a Division Bench of the High Court of Bombay consisting of Chagla C. J. and Tendolkar J. and the Notice of Motion was also placed for hearing along with the Reference. The Notice of Motion was dismissed by the High Court and the Reference was disposed of by the High Court by deciding the question referred to it by the Tribunal in favour of the assessee. The High Court took the view that the question referred by the Tribunal was covered by the decision in Tejaji Farasram Kharawala v. Commissioner of Income-tax Bombay, 1948 16 ITR 260 and the Reference was decided in favour of the assessee on the basis of that decision. We shall have occasion to point out later that in fact the decision in Tejaji Farasram Kharawalas case could not possibly apply to the question referred by the Tribunal for that question was neither argued nor decided by the High Court in that decision. But that is a matter to which we shall advert a little later. The Notice of Motion having been dismissed and the Reference having been decided in favour of the assessee the Commissioner made an application to the High Court for leave to appeal to the Supreme Court. The application was rejected by the High Court whereupon the Commissioner preferred an application to the Supreme Court for special leave to appeal against the judgment and order of the High Court dismissing the Notice of Motion and deciding the Reference in favour of the assessee. Special leave was granted by the Supreme Court and the appeal came up for hearing before the Supreme Court on 5th November 1960. Prom the judgment of the Supreme Court it appears that the dismissal of the Notice of Motion was attacked on behalf of the Commissioner and it was contended that the question which the Commissioner wanted to be referred by the Tribunal to the High Court on the Notice of Motion was a question which arose out of the order of the Tribunal and that the High Court should have directed the Tribunal to state a case and refer the same. A preliminary objection was raised on behalf of the assessee to this contention of the Commissioner and it was urged that inasmuch as the application for special leave to appeal to the Supreme Court was time-barred in so far as it was directed against the order dismissing the Notice of Motion the appeal should not be entertained against the dismissal of the Notice of Motion. The preliminary objection was negatived by the Supreme Court and on the merits the Supreme Court came to the conclusion that the contention of the Commissioner was right and that a mandamus should have been issued by the High Court directing the Tribunal to state a case on the question set out in the Notice of Motion. The Supreme Court concluded the judgment by passing the following order : In the result the appeal is allowed and the case is remitted to the High Court to direct the Tribunal to state a case on the question raised in the Notice of Motion and to decide the question accordingly. Costs will be costs in the Reference. The Order of the Supreme Court was thereafter drawn up in the following terms: ....THIS COURT HOLDING that on the facts of the case the question of law viz. whether on the facts of the case a portion viz. 5 of the selling agency commission of 12 1/2% received by the assessee company from Messers. Ciba Ltd. or the portion thereof which was not expended in the course of the carrying on of the selling agent business is exempt from tax under section 4(3)(vi) of the Act DOES arise for consideration out of the order dated the 12th November 1953 of the Income-tax Appellant Tribunal Bombay Bench B in I. T. A. No. 4901 of 1952- 53 DOTH in allowing the appeal ORDER:- 1. That the judgment and order dated the 15th February 1955 of the Bombay High Court dismissing the Notice of Motion in Income-tax Reference No. 28 of 1954 be and is hereby set aside and that the said High Court no restore to its file the aforesaid Income-tax Reference No. 28 of 1954 and no therein make an Order directing the Income-tax Appellate Tribunal Bombay Bench B to state a case for the opinion of the High Court on the question raised in the Notice of Motion and indicated hereinabove viz. Whether on the facts of the case a portion viz. 5 of the selling agency commission of 12 1/2% received by the assessee Company from Messers. Ciba Ltd. or the portion thereof which was not expended in the course of the carrying on of the selling agency business is exempt from tax under section 4(3)(vi) of the Act and that the said High Court no on receipt of the said statement of the case no hear and dispose of the Reference in accordance with law. 2. THAT the costs of this appeal SHALL be costs in the Reference. By the time the order was made by the Supreme Court the State of Bombay was bifurcated and the matter therefore came to this Court. Pursuant to the order of the Supreme Court this Court restored Reference No. 28 of 1954 and made an order in the Reference directing the Tribunal to state a case for the opinion of this Court on the question specified in the order of the Supreme Court and the Tribunal accordingly stated a case for the opinion of this Court as directed by the order.
(3.) The Reference is therefore now before us and we are called upon to dispose it of in accordance with law. The question which we have to answer on the Reference is a comprehensive one and takes in various approaches and the learned Advocate General accordingly advanced before us three different contentions covering practically all the approaches to the question. The first contention urged by the learned Advocate General was that even if all the conditions of section 4(3)(vi) were satisfied the assessee was entitled to exemption only in respect of the sum of Rs. 1 32 512 which was actually expended out of 5 per cent received by it from Ciba (India) Limited. The contention was that on a true construction of section 4(3)(vi) the exemption which could be claimed under the section did not extend to the entire amount of the special allowance which might have been granted to the assessee for meeting expenses wholly and necessarily incurred in the performance of the duties of the office or employment of profit but was confined only to such part of the special allowance as was actually expended by the assessee for the purpose. The learned Advocate General frankly conceded that in view of the decision of the High Court of Bombay in Tejaji Farasram Kharawalas case it was not possible for him to press this contention but at the same time he did not wish to give it up since the case might proceed to a higher Court. In this case the High Court of Bombay construed section 4(3)(vi) and held that if the object or purpose for which a grant is made is to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit the assessee is entitled to exemption in respect of the whole of the grant under section 4(3)(vi) and it is not necessary for the assessee to prove further that he had expended the grant for the purpose for which it was given. We may point out that as a result of this decision the Legislature amended section 4(3)(vi) by adding at the end of the section the words to the extent to which such expenses are actually incurred for that purpose - so as to make it clear that what was intended to be exempted under the section was not the whole of the special allowance but only such part of it as was actually expended for the purpose but the amendment came into force from 1st April 1955 and the section with which we are concerned in the present Reference is the unamended section which was construed by the High Court of Bombay in this decision. This decision therefore binds us and following it we reject the present contention of the learned Advocate General.;


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