HARIHAR COTTON PRESSING FACTORY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference raises a question of some importance and interest relating to the meaning and import of the expression 'commission' in section 10(4)(b) of the Income -tax Act. The reference came up for hearing before Mr. Justice Tendolkar and myself on September 19, 1957, and as we felt that the Tribunal had not applied its mind to one aspect of the case and dealt with the question whether the rebate in question had been paid for any commercial consideration, we directed that it should submit a supplementary statement of the case setting out the facts on which it had reached its conclusion. The material facts may be briefly stated. The assessee is a partnership firm and runs a cotton pressing factory at Kosamba in Surat District. Four of its five partners are co -operative societies. The two assessment years are 1954 -54 and 1954 -55. During the relevant accounting years, the assessee -firm pressed no cotton for anyone except four of its partners and no bales were pressed on behalf of the 5th partner during either of those two years. It appears that to protect the interest of the cotton dealers in the area there exists an association, namely, the Surat District Cotton Dealers' Association, which has a voice in the matter of fixation of pressing charges and does so with a view to regulating the charges to be made by owners of cotton presses. For the two reasons under consideration, the rates fixed at Kosamba were Rs. 12 -8 -0 and Rs. 13 per bale. A good deal of argument has been presented because of a very peculiar method of keeping accounts maintained by the firm. That method is a hybrid one and requires to be stated in some detail. It may be mentioned that the correctness or bona fides of the system of accounts or what has been done by the partners has not been challenged by the Revenue. It will be convenient to explain that method of book -keeping by an illustration. In Samvat year 2008 (assessment year 1953 -54) one of the partners Motiram Raghavji got pressed in all 1,789 bales. In an anamat account of the partners - and not the 'Pressing Bandhiyari Account' of the firm - Motiram Raghavji was charged for pressing his bales at the rate of Rs. 12 -8 -0 and the whole amount of of Rs. 22,362 -8 -0 at the rate of Rs. 12 -8 -0 per bale for 1,789 bales was credited anamat account. At the end of the year that account was debited with Rs. 22,362 -8 -0 and corresponding entries were made in the 'Pressing Bandhiyari Account' as follows : (a) Rs. 19,679 at Rs. 11 per bale for 1,789 bales credited to the account called 'Pressing Bandhiyari Khata', (b) Rs. 2,683 -8 -0 per bale for 1,789 bales credited to 'advance account' for the benefit of Motiram Raghavji.

(2.) IT is of some consequence to notice that for the first time an entry relating to the pressing Bandhiyari Account at the end of the year, and that entry shows that the pressing charges received from Motiram Raghavji were in effect Rs. 19,679 because rebate was given at Rs. 1 -8 -0 per bale and the rebate amounted to Rs. 2,683 -8 -0. It is not necessary to discuss what an anamat account can be. The real account obviously can be the 'Pressing Bandhiyari Account' and when we look at that account, it clearly shows that the charges in the illustrative case amounted to Rs. 19,679 and Rs. 2,683 -8 -0 was the rebate or discount given to Motiram. The position as regards the others partners in both the years is similar in the books of account maintained by the assessee -firm. The amount of rebate aggregated in the first year to Rs. 11,575 in respect of the four partners and was taken to the 'Upaja Kharch Account', i.e., Income and Expenditure Account. The amounts of rebates, which were ultimately entered in the 'advance account' in respect of all the partners aggregated to Rs. 9,689 in the first year and Rs. 40,383 in the second year. The rebates were calculated at Re. 1 -8 -0 per bale in the first year and Rs. 3 -6 -0 per bale in the second year. It was some time towards the end of the year that the partners passed a resolution agreeing to give rebate to persons, who got their bales pressed and the rebates were at the rate of Re. 1 -8 -0 and Rs. 3 -6 -0 per bale respectively and it is these amounts of Rs. 9,689 and Rs. 40,388 which formed the subject -matter of dispute between the Revenue and the assessee firm and it is these sums which are the subject -matter of this reference.

(3.) WHEN the reference came up before Mr. Justice Tendolkar and myself, we felt that a supplemental statement of the case was necessary. That was not in respect of the argument relating to the applicability of section 10(4)(b) but to the argument relating to section 10(2)(xv). Obviously, if the rebate did not fall within section 10(2)(xv), it was unnecessary to determine whether the right to the allowance as a business expense was taken away by section 10(4)(b). The first question raised on the reference at the instance of the assessee was whether certain rebate granted to four out of five partners of the assessee firm was an admissible deduction in computing the profits of the assessee having regard to the provisions of section 10(2)(xv) read with section 10(4)(b) of the Indian Income -tax Act. The second question raised at the instance of the Income -tax Commissioner appeared to us to be in two parts : the first part involving an argument that the rebate was a distribution of income already earned, and, therefore, did not fall within section 10(2)(xv). The facts with regard to the first part were sufficient to enable us to determine that question, but with regard to the latter part of the question we were of the view that the matter should be remanded to the Tribunal. We were informed that the assessee head led evidence to show that there was a practice on the locality to give such rebates and the rebates had to be given to deep up business. There was mention in the order of the Appellate Assistant Commissioner to such evidence. The Appellate Assistant Commissioner had expressed the view that the general practice had not been established but there was nothing in the order of the Tribunal of the nature of finding on that point by the Tribunal.