COMMISSIONER OF INCOME TAX PUNJAB HARYANA J AND K H P AND UNION TERRITORY OF CHANDIGARH Vs. PANIPAT WOOLLEN AND GENERAL MILLS CO LTD

JUDGEMENT

(1.) These are appeals by the Revenue by special leave against the order of the High Court of Punjab and Haryana dated January 20,1970 answering the questions referred to the High Court by the Tribunal in favour of the assessees/respondents and against the Revenue. The appeal arises in the following circumstances.

(2.) M/s. Panipat Woollen and General Mills Co. Ltd hereafter referred to as 'the assessee-Company' had two Department -(1) for spinning of yarn from raw and waste wool and (2) for spinning of yarn from imported wool tops. The second Department which carried on the operations of spinning of yarn from imported wool tops was started some time in the year 1952. Weaving operations were however, carried on in both these Departments. One of the Departments was known as M/s Panipat Woollen Mills,Kharar while the other one was known as M/s Navin Woollen Mills. It is said that the assessee-company was running at and constant loss as a result of which in 1952 the assessee -Company decided to instal a plant for manufacture of worsted yarn from imported wool tops by raising a loan of Rs.7 Lakhs from the Industrial Finance Corporation. The plant went into production in September 1952. The assessee-Company appointed M/s Murlidhar Chiranjilal as the sole selling agents for the worsted yarn on payment of 2% commission. Subsequently on December 15, 1953, the assessee-Company entered into an agreement with M/s Saligram Premnath under which the latter were appointed as the sole selling agents on certain specified conditions, the important of which being that the agents were to finance the assessee-Company to the extent of Rs. 2,50,000/- and the assessee-Company agreed to pay 6% interest on the advances to be made by the agents and further agreed to pay 2% commission on the net proceeds of sales of goods in India. Before expiry of this agreement another agreement was entered into by the assessee-Company with the agents on October 20. 1955. under which the agents were to get 6% interest on all the advances made by them 1 1/4% commission on net sales and 50% commission on net sales of the worsted plant. What is more was that the agents agreed to a deduction of 50% of the loss incurred by the assessee-Company from their remuneration. There were a number of other conditions with which we shall deal later. The selling agents M/s. Saligram Premnath advanced a sum of Rs. 6,26,847/- and Rs. 8,71,573/- and received Rs. 37,157/ -and Rs.73,787/- as 50% commission on the net profits of the worsted plant in the course of two years, namely assessment years 1956-57 ending on March 31, 1956 and 1957-58 ending on March 31, 1957. The assessee-Company accordingly in its return for the year 1956-57 claimed the amount of Rs. 37,157/ and Rupees73,787/- for the assessment year 1957-58 as a deduction under the provisions of Section 10 (2) (xv) of the Income Tax Act, 1922. The case of the assessee was that the two amount mentioned above being in the nature of commission paid to the selling agents would be deemed expenses incurred by the Company in order to earn profits and would, therefore fall within the ambit of Section 10(2) (xv) of the Income Tax Act, 1922 -hereafter referred to as 'the Act'. The Income-tax officer, however disallowed the deduction and held that the deduction claimed was actually a division of profits after the profits had come into existence and had been ascertained and therefore could not be claimed as a valid deduction under the provisions of the Act. The assessee-Company went up in appeal to the Appellate Assistant Commissioner who accepted the plea of the assessee-Company and held that the payment was a permissible deduction it was incurred for the purpose of the assessee's trade in order to facilitate the business of the assessee. The Revenue then went up in appeal before the Tribunal which after considering the facts and the law on the subject upheld the contention of the Revenue and held that the sums in question were not legal deductions as contemplated under Section 10 (2) (xv) of the Act but amounted to application of profits after they were earned. The Tribunal further held that the agreement dated October 20, 1955. amounted to a joint venture for the distribution of profits between the assessee-Company and the selling agents after the profits were ascertained. The assessee-Company then approached the Tribunal for making a reference to the High Court and the Tribunal accordingly referred the following two questions to the High Court for its opinion.

(3.) The High Court in reversing the order of the Tribunal mainly relied on what it described the surrounding circumstances under which the alleged payments were made to the selling agents by the assessee-Company as spelt out from the agreement entered into by the assessee-Company with the selling agents. The main point which was argued before the Tribunal as also before the High Court was that the cumulative effect of the interpretation of the various clauses of the agreement dated October 20, 1955 unmistakably revealed that in the garb of an agency the parties entered into a joint venture for distributing the net profits after being ascertained between themselves and that is why there was an express provision in the agreement by which the agents agreed to share the losses to the extent of 50% which were to be deducted from the remuneration payable to the agents. The Tribunal held that the agreement amounted to a joint venture resulting in division of net profits and there-fore the amount paid to the agents could not be claimed by the assessee-Company as a deduction under Section 10 (2) (xv) of the Act as it was not incurred for the purpose of the business or for earning profits. The High Court held that the mere fact that the agents agreed to share the profits and the losses would not take the case of the assessee beyond the ambit of S 10 (2) (xv) of the Act in order to show that the payments made to the agents were not expenses incurred for the purpose of the business. The High Court laid special emphasis on the fact that the Revenue could not examine the question of the commercial expediency of the businessman to incur expenses or earn profits in a particular manner. The High Court accordingly found that the agreement per se was a contract of agency and not a joint venture and accordingly the High Court accepted the plea of the assessee-Company.