P.B.MUKHARJI, J. - (1.) THE question asked on this Income-tax Reference is as follows : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,56,806 was wholly and exclusively laid out for the purpose of business and as such allowable as a business expenditure ?"
(2.) THE assessee is the Aluminium Corporation of India Ltd. of 7, Council House Street, Calcutta. THE statement of the case relates to the asst. yr. 1955-56, the corresponding previous year being the financial year ended on March 31, 1955. By an agreement dated 30th Dec., 1949, the assessee appointed M/s J.K. Alloys Ltd. as the sole selling agent for selling its aluminium products. THE agreement was effected for a period of 5 years from 1st April, 1950. Under the terms of the agreement the selling agents were to receive the commission on all sales either effected by the agents themselves or by the principals directly. Clause 6 of the agreement states as follows : "That the principal will allow the agents discount in the manner indicated hereunder on sale of all products of the principal effected by the agents either by themselves or through sub-agents appointed by them or directly by the principal themselves." THEn follows specific items like ingots, sheets and circles, expanded metal, utensils and anodised and alloy goods, shots-all made of aluminium--with different rates of discount written against each item. In the relevant year of account a sum of Rs. 1,56,806 was paid by the assessee to J.K. Alloys Ltd. as selling agents in terms of the above agreement. THE whole question now turns upon this sum of Rs. 1,56,806. THE ITO disallowed the claim for deduction of the amount on the ground that the payment had not been made on business consideration. He came to certain significant findings of facts. THEy are in the language of the order of the ITO as follows : "It is stated that M/s J.K. Alloys Ltd. are sole selling agents of company's products. Selling agency commission is paid to M/s J.K. Alloys Ltd. because the assessee gets expert opinion in regard to marketing of its manufactured articles from the above party. Thus commission is paid to M/s J.K. Alloys Ltd. not because sales are effected through them but it is paid for technical advice relating to sales matter received from them. THE assessee has absolutely no evidence to show the extent and type of expert opinions received from their sole selling agents. In order to find out whether the assessee actually derives benefits by making these payments they were asked to submit evidence regarding services rendered by M/s J.K. Alloys Ltd. In response to the above query it has been stated that the problems relating to the sales matter are numerous and complicated and, therefore, the company believes that exchange of correspondence regarding these matters would be meaningless and wasteful. It has been stated further that the sole selling agents discussed the matter with company's staff and indicated the lines on which to proceed. It is contended that in order to minimise delay and expenditure the company follows a practice of discussing the sales problems directly with their selling agents over the table and coming to a decision." On these facts, the ITO came to the following conclusion : "It is really surprising that the assessee is making huge payments as selling agency commission and it is not able to produce any evidence what so ever regarding the nature and extent of services rendered by the sole selling agents. I have already stated that sales are not effected through sole selling agents but the company is making sales direct to its customers. It is ridiculous that the assessee will pay more than Rs. 1-1/2 lakhs simply to get advice regarding market conditions. By paying much lesser amount the company could have engaged a technical expert having sound knowledge of sales and other allied matters. On the facts and circumstances of the case, it appears to me that this payment has been made not on business considerations, but some extraneous considerations have influenced the company to make these payments. Keeping in view the above points, I hold that this is not an expenditure laid out wholly and exclusively for the business of the company and therefore this cannot be allowed as a deduction." Reading this order, it appears that the decision of the ITO is based on certain facts. Now it appears that these facts have not been controverted in the subsequent proceedings that were brought up by the assessee. On appeal to the AAC, the AAC agreed with the ITO that payment had been made for some extraneous consideration, and further held that the agreement had not been acted upon. He emphasised the fact that the ITO had requested the assessee to produce all the details of the commission and sales with reference to the services rendered by the sole selling agents which entitled them to such payments and also evidence regarding the actual performance of such services. He quotes the reply of the assessee's officer, Sri Subramaniyam, who gave a note, wherein it was stated by the assessee that "as the problems have been so very numerous and complicated, exchange of correspondence from one table to another in the same premises would have been meaningless. THE sole selling agents could discuss the matter with our staff and indicate the lines on which to proceed and they were always available on spot for guidance and discussion." THE AAC also records the fact that Sri Bagadthey for the assessee had stated that he would furnish a written statement, but subsequently he did not do so. THE AAC also records Sri Bagadthey's admission that all sales were effected by the assessee in its own name for the reason that the assessee desired to retain the goodwill for such sales and also wanted the contracts for sales to be always in its own name. He also records the further fact urged by Sri Bagadthey that the sole selling agency commission was adjusted against each sale as and when it took place and not at the end of the year and that in support of it a credit note book was shown to the AAC. THE AAC has also noted Sri Bagadthey's statement that the existence of this selling agency commission was brought to the notice of the Industrial Finance Corporation. THE AAC thereafter records the undisputed facts in this case, viz., (1) that the sales were effected directly by the assessee, (2) that no sales were effected by the selling agents and (3) that there is no evidence in support of the assessee's contention that the selling agents did effect sales in pursuance of the aforesaid agreement. On these facts admitted, the AAC, confirming the findings and order of the ITO, came to the following conclusion : "In the absence of any evidence, it is not possible to accept the appellant's representative's contention. It is clear that the agreement has not been acted upon." He then further proceeds to dispose of the assessee's contention in the following terms : "With regard to Sri Bagadthey's contention that the appellant could not be expected to maintain a record of the services rendered by the selling agents, especially when there is no dispute between the contracting parties, it seems to me that he is really begging the question. As I have stated earlier it is for the appellant to prove that the payment was made or the expenditure incurred wholly and exclusively for the business. The question is what were the considerations for which the payment was made. Ordinarily, if the sales had been effected by the sole selling agents, commission would be due to them. But the sales have been actually effected by the appellant. Though Sri Bagadthey contends that the selling agents have effected sales, he has not an iota of evidence in support of that contention. He merely relies on the agreement and, in the absence of any disputes between the two contracting parties, I do not think that Sri Bagadthey's argument regarding the absence of motive to reduce the profit is relevant inasmuch as no motive has been attributed in the assessment order. The only question is whether the payment was made wholly and exclusively for the business. The ITO has held that it was made for considerations other than business and not connected with it. In the circumstances of the case, I cannot but hold that the ITO was justified in disallowing this claim." The assessee having lost both before the ITO and the AAC, appealed to the Tribunal. The Tribunal came to a different conclusion saying : "In our opinion, the amount of commission, viz., Rs. 1,56,806, paid by the appellant (assessee) to M/s J.K. Alloys Ltd. was wholly laid out for the purpose of business and was an admissible charge against the appellant's income assessable for the year 1955-56." It is that decision of the Tribunal which the Revenue is challenging in this reference. The main ground of the challenge of the Revenue is that this is a decision which is not supported by any fact or any evidence what so ever. Mr. Pal, appearing for the Revenue, contends that the mere fact of an agreement to pay commission is not enough to prove that the expenditure under the agreement has been made or laid out "wholly and exclusively for the purpose of such business" within the meaning of s. 10(2)(xv) of the IT Act. There is substance in the contention made on behalf of the Revenue on the facts of this case. The Tribunal puts its decision in the following terms : "There is no dispute that the amount in question was actually paid as commission to M/s J.K. Alloys Ltd. It is also common ground that all the sales during the year were effected directly by the appellant and no sales were effected by the selling agents. On these facts, the AAC concluded that the agreement had not been acted upon and that the payment was made for some extra commercial considerations. We are afraid we are unable to concur with the AAC. The mere fact that no sales were effected during the year of account by the selling agents themselves does not, necessarily, mean that the agreement was not acted upon. In fact, cl. 6 of the agreement quoted above explicitly refers to the fact that the agents shall be entitled to the payment of the discount even if all the sales were effected directly by the principals themselves. The agreement has not been impugned by the Department as a sham and collusive transaction in fact, the entire selling agency commission paid to M/s J.K. Alloys Ltd. had all along been allowed by the Department as an admissible expenditure in the hands of the assessee up to the assessment for the year 1954-55. Evidently, the agreement in question had been entered into bona fide and had been acted upon. If the selling agents had committed breach of any of the covenants in the year of account, it was open to the principals to terminate the agency by resort to the forfeiture clause quoted above. The principals did not, however, forfeit the agency as, manifestly, there was no breach of any covenant. The mere fact that in the year of account no sales were made by the selling agents did not amount to a violation of any of the terms of the agreement. In point of fact, as already noted, the agreement contemplates that the selling agents would be entitled to the discount at the stipulated rates even on direct sales effected by the principals. CIT, therefore, accrued to the selling agents on all sales effected by the principals in the relevant previous year."
(3.) IN our judgment, the Tribunal took a view which is not supported by any fact. The Tribunal certainly was right in saying that the mere fact that no sales were effected did not show that the agreement was not acted upon or that it was sham or collusive and that cl. 6 of the agreement itself permitted commission being earned without sales being effected by the agents. But it is not that "mere fact" which was the foundation of the orders of the ITO and the AAC. They found more facts which are quoted above and which were not upset by the Tribunal. The Tribunal apparently was of the view that the very fact that there was an agreement entitling the agent to earn commission without doing any work was enough to show that this sum was expended or laid out wholly or exclusively for the purpose of the business. That is a view which we find unable to accept. This was the very point which was decided by the Supreme Court in Swadeshi Cotton Mills Co. Ltd. vs. CIT (1967) 63 ITR 57(SC). The Supreme Court there points out that the question whether an amount claimed as expenditure was laid out or expended wholly or exclusively for the purpose of the assessee's business is to be decided on the facts and in the light of circumstances of each case. But the conclusion on the admissibility of an allowance was one of law. The Supreme Court particularly points out there that "merely because of the existence of an agreement between the assessee and his employee for payment of a certain remuneration and the fact of actual payment, the ITO is not bound to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might be such an agreement in existence and the payment might have been made, it is still open to the ITO to consider all the relevant factors and determine for himself whether the remuneration paid to the employee or any portion thereof is properly deductible under s. 10(2)(xv) of the IT Act. The observation of Ramaswami J. at pp. 60-61 of that report in Swadeshi Cotton Mills Co. Ltd. vs. CIT (1967) 63 ITR 57 (SC), clearly brings out the ratio of this decision. The learned judge at page 60 observes : "It is an erroneous proposition to contend that as soon as an assessee has established two facts, viz., the existence of an agreement between the employer and the employee and the fact of actual payment, no discretion is left to the ITO except to hold that the payment was made wholly and exclusively for the purpose of the business." This is exactly the mistake which the Tribunal made in holding that because the agreement of an agency was there in the present case and because the payment was made thereunder, therefore, it must be taken to be an expenditure made or laid out wholly and exclusively for the purpose of the assessee's business. On the basis of the Supreme Court decision in this case, we are bound to hold that the Tribunal was wrong and the Tribunal's decision must be set aside in this case. Similar views were taken, as pointed out by the Supreme Court, in Aspro Ltd. vs. CIT of Taxes (1936) 4 ITR 264 (PC), a decision of the Privy Council and by the Bombay High Court in Jethabhai Hirji and Co. vs. CIT (1949) 17 ITR 533 (Bom). In a recent decision of the Division Bench of this Court in Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1968) 67 ITR 56 (Cal), to which I was a party, the view taken was the same and it was laid down there that, for the purpose of deduction under s. 10 (2)(xv) of the IT Act, mere legal liability was not enough. There had to be an expenditure which, in fact, must be laid out and expended wholly and exclusively for the purpose of the business. The Tribunal, in the present case, it must be stated, had not had the benefit of the decision of the Supreme Court in Swadeshi Cotton Mills Co. Ltd. vs. CIT (supra), delivered on 20th Sept., 1966, because the Tribunal gave its judgment on 25th July, 1963. Mr. Mitter appearing for the assessee based his argument on the agreement dt. 30th Dec., 1949, and its clauses. We have already noticed cl. 6 of that agreement. But we must here point out that cl. 7 of the agreement expressly provided "that the agents shall keep proper books of accounts in which they will record all sales made by the principal, its representatives and/or agents in that behalf." Except what has been termed as credit note, the agents have not in this case produced any "proper books of the account" in support of the assessee's claim, nor were they called for by the assessee or produced. Mr. Mitter for the assessee also emphasised the fact that the Revenue authorities did not come to the conclusion that the whole agreement was a sham or collusive transaction. No doubt that is true, but what they did say is that the agreement was not acted upon. What is necessary for the Revenue is to come to a finding whether the particular sum has been expended wholly and exclusively for the purposes of business. If that fact is not established, then the claim for deduction under s. 10(2)(xv) cannot obviously be allowed on the very terms and language of that section. Throwing a document or an agreement in the face and saying that the payment has been made under this agreement does not make it an expenditure wholly and exclusively for the purpose of business. No doubt an agreement as a document is a cogent factor or a cogent piece of evidence, but the fact of the money being spent wholly and exclusively for the purpose of business has still got to be established, agreement or no agreement, before a claim for deduction can be allowed under s. 10(2)(xv) of the IT Act. There is no such evidence in the present case as stated both by the ITO and confirmed by the AAC that there was not an "iota" of evidence. The primary fact to be proved and established under s. 10(2)(xv) of the IT Act is that the sum claimed as a deduction was expended or laid out wholly and exclusively for the purpose of business of the assessee. That is a question of fact to be proved by cogent evidence. A written agreement or a written document under which such payment is made is a piece of evidence only and does not conclude this question or the fact which is to be established.;