Khanna, J. - (1.) This appeal on certificate granted by the Allahabad High Court is directed against the judgment of that Court whereby it answered the following two questions referred to it under Section 66 (1) of the Indian Income Tax Act, 1922 (hereinafter referred to as the Act) against the appellant and in favour of revenue:"(1) Whether on the facts and on a true and proper interpretation of the agreement dated 31-7-1956, between the British India Corporation and the appellant company, the letters of Sri Kailash Nath Agarwal, the letters of Managing directors, the sum of Rupees 43,333/- retained by the British India Corporation and adjusted by it to the credit of Sharma and Co. was the assessable income of the appellant company (2) Whether on the facts and circumstances of the case, the sum of Rs. 43,333/- represented an expenditure under Section 10 -
(2.) The matter relates to the assessment year 1956-57. The appellant is a private limited company and Kailash Nath Agarwal is one of its directors. As per agreement dated July 31, 1956 the appellant was appointed with effect from April 1, 1955 the sole selling agent of the Kanpur Cotton Mills for the sale of yarn and cloth manufactured by the said mills. The Kanpur Cotton Mills is owned by the British India Corporation (hereinafter referred to as BIC). Prior to the appellant's appointment Sharma and Co., a partnership firm, was functioning as the sole, selling agent of the Kanpur Cotton Mills. The amount due by Sharma and Co. to the Kanpur Cotton Mills as on March 21, 1955 was Rs. 8,39,350/15/6 inclusive of interest. On March 23, 1955 a letter was addressed on behalf of Sharma and Co. to the Managing Director of BIC stating that an agreement had been entered into with Kailash Nath Agarwal whereby Sharma and Co. had agreed to give up the sole selling agency of the Kanpur Cotton Mills. The Managing Director of BIC was requested to appoint Kailash Nath Agarwal or any firm or company formed by him for this purpose as the sole selling agent in place of Sharma and Co. Reference was also made in that letter to an agreement between Sharma and Co. and Kailash Nath Agarwal in the following words: " As you will notice from the agreement with Sri Kailash Nath Agarwal we are entitled to receive one seventh of the commission due to the new selling agency or to a sum of Rs. 50,000/- per annum whichever is greater till your dues with interest are fully liquidated. We do hereby authorise you to retain this amount thus becoming due to us out of the commission payable to the agency and adjust the same to our firm's account with the Corporation." On the same day, i.e. March 23, 1955 Kailash Nath Agarwal addressed a letter to the Managing Director of BIC informing him of the agreement with Sharma and Co. and requesting for the grant of sole selling agency to the appellant. The letter concluded as follows: " I hereby authorise you in case you are pleased to grant your sole selling agency to my said firm to retain one-seventh of our commission for adjustment in the account of M/s. Sharma and Co. with minimum of Rupees 50,000/- per annum till your dues against them are cleared with interest." The Managing Director of BIC later on that day, i.e. March 23, 1955 addressed a letter to Sharma and Co. accepting its resignation from the sole selling agency of the Kanpur Cotton Mills and about the appointment of Kailash Nath Agarwal or his nominee as the sole selling agent in succession to Sharma and Co. In regard to the liquidation of dues from Sharma and Co. the Managing Director of BIC wrote: " As agreed between Shri Kailash Nath Agarwal and yourselves we shall deduct one seventh of the commission or Rs. 50,000/- whichever is greater out of the commission earned by the new sole selling agents and credit the same to your account with us till our dues against you standing today at Rs. 8,39,350/15/6 are completely liquidated with interest thereon at 6%." On June 31, 1956 an indenture was executed by BIC and the appellant relating to the appointment of the appellant as the selling agent of the Kanpur Cotton Mills for the sale of yarn, cloth and cotton manufactures with effect from April 1, 1955. In this indenture the appellant ratified the agreement entered into by Kailash Nath Agarwal with Sharma and Co. on March 23, 1955 and authorised BIC "to give effect to the said agreement generally and in particular to ratain an amount equal to one-seventh of the trade discount of 1 3/4% due to the sole selling agents with a minimum of Rs. 50,000/- per annum so that the amount payable to the sole selling agents shall be the amount payable at the rate of 1 3/4% minus the aforesaid amount retained by the corporation as payable to M/s. Sharma and Co." Clauses 12 and 13 of the indenture were as under: " Clause 12 That in the event of the dissolution of M/s. Sharma and Co. before the complete repayment of their liability the sole selling agents agree that the corporation may continue to retain an amount equal to one-seventh of the trade discount of 1 3/4 % or Rs. 50,000/- whichever is greater and adjust it towards such dues of M/s. Sharma and Co. as may then be standing. Clause 13 That the authority given above to the corporation to retain and adjust a part of the trade discount towards the outstanding against M/s. Sharma and Co. will not be revocable and will be binding on the sole selling agents, their successor, or assigns only so long as they act as the corporation's sole selling agents and will be deemed to be a condition on which the sole selling agency has been granted to the agents. The agents will have no claim whatsoever to any such amounts retained out of their normal trade discount and adjusted in the account of M/s. Sharma and Co. as if the amount so retained was not payable to them."
(3.) During the year under reference, the commission as per terms of the indenture dated July 31, 1956 payable to the appellant amounted to Rs. 2,06,283. Out of this amount. Rs. 43,333 were retained by BIC under the contract for adjustment against the outstanding dues of Sharma and Co. in accordance with the terms of the indenture. In its statement of account the appellant credited the full amount of commission of Rs. 2,06,283 to its profit and loss account. The sum of Rupees 43,333 was, however, shown as a deduction therefrom. During the assessment proceedings, the Income Tax Officer disallowed the above deduction. The order of the Income Tax Officer in this respect was upheld by the Appellant Assistant Commissioner in appeal as well as by the Income Tax Appellate Tribunal in second appeal. On application filed by the appellant, the Tribunal referred the questions reproduced earlier to the High Court. The High Court, as stated above, answered the two questions against the appellant.;