Income-tax---

----Business expenditure---Must be wholly and exclusively for purpose of business---Commission paid to sole selling agent---Competition in market for sale of products---No experienced or qualified person employed by agent-- Goods stored only in assessee's godown---Agent not possessing physical resources necessary to carry out its duties---Finding that expenditure was not incurred wholly and exclusively for business---Valid finding of fact---Indian Income Tax Act, 1961., S.37(1).

G was the Chairman of the assessee-company. For the assessment year 1964-65, the assessee-company claimed deduction, in computing its profits, of the commission paid to the S.E. Corporation on account of their services as sole selling agents. The Corporation was owned by a charitable society of which G was the President. The electrodes manufactured by the assessee required an agency which was qualified and experienced enough to overcome competition in the market. The Appellate Tribunal found that the Corporation had not employed any person who was shown to possess the necessary experience and qualification, that it had no godown of its own and it used to draw the goods from the sales office of the assessee and that the Corporation did not have the physical resources necessary to have carried out its duties as they were claimed to have been done, and held that it was not proved that the expenditure had been incurred wholly and exclusively for the purpose of the assessee's business. On a reference

Held, affirming the decision of the Tribunal, that there was evidence on which the Tribunal could come to the conclusion that the assessee had not proved that the expenditure was incurred wholly and exclusively for the purpose of the assessee's business and that the finding of the Tribunal that the expenditure towards commission. paid to the Corporation was not incurred wholly and exclusively for the purpose of its business was a finding of fact arrived at on the basis of the evidence on record which could not be interfered with.

O.P. Vaish and S.K. Aggarwal for the Assessee.

B. Gupta and R.C. Pandey for the Commissioner.

JUDGMENT

B.N. KIRPAL, J.---Pursuant to a direction issued under section 256(2) of the Income Tax Act, 1961, by the Allahabad High Court, the Income-tax Tribunal has referred the following two questions to this Court:

"(1)Whether there was any evidence before the Tribunal to arrive at the finding that the applicant had not proved that the expenditure of Rs.55,322 representing the commission paid to M/s. Standard Electrode Corporation was an expenditure incurred wholly and exclusively for the purpose of business?

(2)Whether, on the facts and in the circumstances of the case and on the material on record, the Tribunal could have legally come to a conclusion that the amount of Rs.55,322 paid as commission to M/s. Standard Electrode Corporation did not represent an expenditure wholly and exclusively incurred for the purpose of business?"

Briefly stated, the facts are that the assessee made a claim for deduction of Rs.55,322 stated to have been paid as commission to one M/s. Standard Electrode Corporation (hereinafter referred to as ~ the "said Corporation"). This payment was alleged to have been made on account of the services stated to have been rendered by the said Corporation as a sole selling agent of the assessee.

The said Corporation was owned by Modi Charitable Funds Society of which Shri G.M. Modi was the President. The said Shri G.M. Modi was also the Chairman of the assessee-company.

In respect of the previous year ending October 31,, 1963, relevant to the assessment year 1964-65, there was no agreement in writing between the assessee and the Corporation appointing the said Corporation as the sole selling agent. However, a resolution was passed by the board of directors of the assessee-company on July 27, 1963, approving the said appointment. This appointment was ratified by the shareholders in the general meeting held on November 11, 1963, after the end of the accounting year. It also appears that the Government raised some queries under section 294 of the Companies Act and it then directed certain modifications in the terms of appointment while granting its approval in June, 1967.

The Income-tax Officer came to the conclusion that the so-called commission on sales was only a cloak for passing on some funds to the society and he, therefore, disallowed the expenditure as not being laid out wholly and exclusively for the purpose of the assessee's business.

An appeal was filed to the Appellate Assistant Commissioner. During the course of hearing,, the Appellate Assistant Commissioner allowed the Income-tax Officer to rely on the evidence quoted by him subsequent to the completion of assessment. Permission was also granted to the assessee to lead such further evidence as it desired in support of its claim. The Income-tax Officer brought to the notice of the Appellate Assistant Commissioner certain facts and, on the basis thereof and also after taking into consideration the contentions of the assessee, the appeal of the assessee was dismissed by the Appellate Assistant Commissioner by recording the following finding:

"(i)There was no evidence to show that the corporation rendered any service so as to describe the commission payment as one made on grounds of commercial expediency.

(ii)When the assessee started its manufacturing operations it appointed certain agents including Modi Agency. On its appointment thecorporation came to have its head office at Delhi. According to the statement of Garg referred to above, the corporation effected the following sales for the period 1-10-1963 to 31-10-1964 to Delhi parties:

(Rs.)

Thus, 99 per cent. of the sales were to Modi Agency. It was also admitted by the corporation that it had no godown at Delhi. Goods used to be drawn from the sales office of the assessee at Delhi.

(iii)Thus, the employees of the corporation were no more than bill preparing machines showing sales of goods received from the sale depot of the assessee at Delhi to Modi Agency. As regards the sales to outside parties, despatches were made directly by the assessee and the documents of title were negotiated by the assessee through its bankers and not through the bankers of the corporation. This much was clear from the letter of the chairman of the assessee-company dated 1-5-1965 to the Department of Company Affairs, Government of India.

(iv)The argument that the corporation was responsible for the bad debts, if any, had to be seen in the light of the fact that outstation sales were always effected against payments to be collected by the bankers. The assessee did not sell its goods on credit except to `Semi-Government bodies and very responsible parties' and the risk in the matter was more illusory than real.

(v) No agreement was executed with the corporation. The Company Law Board in its letter dated 1-6-1976 required the assessee to draw up an agreement to be entered into with the corporation on terms which were substantially different and send it for the approval of the Board. Instead of having done this, the corporation gave up the agency (according to the assessee) from August, 1967---about one year before the term was due to expire. It could hence be said that the Company Law Board did not approve of the agreement."

In the second appeal before the Tribunal, the contention of the see was reagitated. The Tribunal, however, came to the conclusion that:

"Material on record does not show that the Corporation did render services in fact to the assessee."

This conclusion was based on the following observations of the Tribunal:

"Evidently the sale of the electrodes manufactured by the assessee required an agency which was qualified and experienced enough to overcome the competition that the assessee stated it was facing in the market. But it is seen from the evidence on record that the head of the '``' staff of the corporation was Krishan Murari Garg who was paid a "1 salary of Rs. 400. Neither at the Calcutta office nor at the Delhi office ` of the corporation was any person employed who was shown to have possessed the necessary experience and qualifications for the difficult task of selling the assessee's new products successfully in the market against severe competition. Nor was there any claim before the authorities below that any other person supervised and advised the corporation on its duties during the relevant previous year: The claim made was that the corporation took over the goods from the assessee and arranged for their sale directly. But the authorities below have pointed out that the corporation had no godown of its own and an admission before the authorities below was that the goods used to be drawn from the sale office of the assessee-company at Delhi. We find the reasons recorded by the authorities below for disallowing the commission payment are by and large valid and to be based on material brought on record. The payment is seen to be made to a party which did not possess the necessary administrative set-up for acting as sole selling agents in a highly competitive line and that too for a product put on the market for the first time, and did not have the physical resources necessary to have carried out its duties in the manner in which they were claimed to have been done. This is, therefore, a case where the expenditure in question had not been proved by the assessee to have been incurred wholly and exclusively IA for the purpose of business."

The assessee filed an application under section 256(1) of the Act. The same was, however, dismissed. It is on the application filed under section 256(2) of the Act that the aforesaid two questions of law were referred.

Question No. 1 which has been referred is only concerned with the question as to whether there was any evidence before the Tribunal to arrive at the conclusion which it did. From the facts stated hereinabove, it is clear that there was evidence on which the Tribunal could come to the conclusion that the assessee had not proved that the expenditure in question was incurred wholly and exclusively for the purpose of business. For example, the Tribunal has taken note of the fact that no experienced or qualified person was employed either at the Calcutta or Delhi office of the Corporation nor did the Corporation have any godown in which the goods could be stored. On the contrary the goods were stored in the godowns of the assessee and the said Corporation used to take custody of the goods from there. It was also found that immediately on taking custody of the goods, the same would be transferred to the ultimate purchaser and the Corporation did not have physical resources necessary to carry out its duties in the manner in which they were claimed to have been done.

Learned counsel for the assessee has not been able to draw our attention to any evidence which could have led the Tribunal to a different conclusion. Question No.l, therefore, is answered in the affirmative and in favour of the Revenue.

As regards question No.2, the answer to the same is self-evident. We have already set out various facts and circumstances which were taken into consideration by the Revenue authorities including the Tribunal in arriving at the conclusion that the said expenditure of Rs. 55,322 was not incurred wholly and exclusively for the purpose of the business. This is a finding of fact arrived at on the basis of the evidence on record. This finding of fact cannot be interfered with in exercise of our jurisdiction which is a very limited one. It was contended by learned counsel for the assessee that, in the subsequent years, evidence was produced which indicated that services had been rendered by the Corporation. Each year is a self-contained year and, for the assessment year 1964-65; with which we are concerned in this case, there was no evidence other, than that which was considered by the Department and the Tribunal. On this evidence a conclusion of fact has been arrived at and the said finding cannot be said to be not based on any evidence.

Question No. 2 is also answered in the affirmative and in favour of the Revenue.

The respondents will be entitled to costs.

M.BA./2384/TOrder accordingly.