COMMISSIONER OF INCOME TAX Vs. TEJAJI FARASRAM KHARAWALA LIMITED

JUDGEMENT

(1.) THE question which arises on this reference is whether a certain amount received by the assessee during the accounting year, Samvat year 2004 (that is, 13th November, 1947, to 1st November, 1948), which is the previous year of the assessee for the asst. year 1949 50, is wholly exempt from tax under S. 4(3) (vi) of the IT Act. The assessee is a private Limited company of which at the material time there were four shareholder, 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 M/s Tejaji Farasram Kharaawla, 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 1/2per cent commission on the net sale proceeds of the dye stuffs sold by him or 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 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 M/s Tejaji Farasram Kharawala and the agreement dated 29th October, 1928, was, therefore, treated as an agreement between Ciba (India) Limited and M/s Tejaji Farasram Kharawala. On 20th August, 1935, Ciba (India) Limited wrote a letter to M/s Tejaji Farasram Kharawala which was in the following terms :

(2.) THE selling agency of Messers. Tejaji Farasram Kharawala was thereafter continued on these terms and M/s 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 dying master, agents, etc., which they might be required to meet. This continued up to 24th October, 1947, when the assessee, by an agreement of that date, took over the business of M/s 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 1/2 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 dying 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 asst. 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 S. 4(3) (vi). The contention was negatived by the ITO but the AAC upheld it and treated the entire amount of Rs. 1,90,538 as exempt from tax under S. 4(3) (vi). The CIT thereupon carried the matter in appeal to the Tribunal. Before the Tribunal, two contentions were advanced on behalf of the CIT challenging the applicability of S. 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 S. 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 dying masters, agents, etc., which the assessee had to incur in the performance of its duties. It was then contended on behalf of the CIT that even if the other conditions of S. 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 organization of Ciba (India) Limited and was, therefore, entitled to claim the benefit of the exemption granted by S. 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 S. 4(3) (vi). Here ended what we may call the first chapter in the history of this case.

(3.) THE Tribunal, however, refused to refer this question to this High Court but instead referred the following question :