V.G. Oak, C.J. - (1.) THE question for consideration in this income-tax reference is whether expenditure incurred by the assessee in paying commission to its selling agent is deductible under Section 10(2)(xv) of the Indian Income-tax Act, 1922, hereinafter referred to as "the Act". Jaswant Sugar Mills Ltd., Meerut, is the assessee. This is a company manufacturing sugar and other products. THE assessment years are 1951-52, 1952-53 and 1953-54. THErelevant accounting periods ended on May31, 1950, May 31, 1951, and May 31, 1952, respectively.
(2.) THE assessee-company decided to appoint National Finance Ltd., as selling agent. THE assessee wrote a letter to this effect on December 20, 1947. An agreement of selling agency was executed on October 1, 1948. THE agreement provided for payment of commission to the selling agent at the rate of 21/2 per cent. THE Government introduced control on the sale of sugar in August, 1949. THE assessee-company had to supply sugar to dealers in accordance with the directions of the Government. THE assessee-company paid full commission to the selling agent in spite of the fact that the Government had introduced control on the sale of sugar. When the Income-tax Officer took up assessment for the three assessment years, he took the view that it was not necessary to pay commission for the sale of controlled sugar. He, therefore, disallowed the expenditure to the extent of commission paid on the sale of controlled sugar. He also fixed the rate of commission on the sale of free sugar at the rate of 11/2 per cent. instead of the rate of 21/2 per cent. under the agreement. When the assessee took up the matter in appeal before the Appellate Assistant Commissioner, he raised the rate of commission on the sale of free sugar from 11/2 per cent. to 2 per cent. But he agreed with the Income-tax Officer that no commission was payable with respect to the sale of controlled sugar. When the assessee took up the matter in further appeal before the Appellate Tribunal, the Tribunal took the view that in view of the control imposed by the Government on the sale of sugar, the assessee-company should have terminated the selling agency agreement by giving three months' notice to the selling agent. However, the Tribunal modified the assessment in favour of the assessee in two ways. Firstly, the Tribunal held that the selling agent was entitled to receive commission on the sale of free sugar at the full rate of 21/2 per cent. Secondly, the Tribunal agreed to allow commission at the full rate of 21/2 per cent. during the period of notice (three months). The net result was that the Tribunal disallowed the commission to the extent of Rs. 92,883, Rs. 1,18,946 and Rs. 59,089 for the three assessment years respectively. At the instance of the assessee, the Tribunal has referred the following question of law to'this court: "Whether, on the facts and in the circumstances of the case, the commission of Rs. 92,883, Rs. 1,18,946 and Rs. 59,089 paid to the selling agents--National Finance Ltd.--in the three assessment years 1951-52. 1952-53, and 1953-54, respectively, was an expense incurred wholly and exclusively for the purposes of the assessee-company?" if not "What portion, if any, was incurred as an expenditure wholly and exclusively for the purposes of the business of the assessee-company ?"
(3.) ANNEXURE "A-1" to the statement of the case is a copy of the letter, dated December 20, 1947, addressed by the assessee-company to Messrs. National Finance Ltd. In that letter the assessee indicated that it was agreeable to appoint National Finance Ltd- as its sole selling agent for sugar. Annexure "A" to the statement of the case is a copy of the agreement, dated October 1, 1948, between the assessee-company and the selling agent (Messrs. National Finance Ltd.). By paragraph 1 of the agreement, the second party was given the privilege of selling and securing orders for sugar. Clause 12 of the agreement provided for payment of commission. Clause 12 ran thus: "The manufacturer agrees to give, and the agent agrees to accept, for his services rendered in selling and securing orders for the products a commission at the rate of two and a half per cent. calculated at the net value of the product supplied after deducting all expenses...." ;