TMI Blog1970 (1) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... d., Kharar. It had two units. The first unit was engaged in the spinning of yarn from raw and waste wool and was known as the Panipat Woollen Mills. The second unit was engaged in the spinning of yarn from imported wool tops and was known as the Navin Woollen Mills. The second unit was started in the year 1952. Weaving was also done in both of these units. The company from its inception was running in loss. In 1952, it decided to instal a plant for the manufacture of worsted yarn from imported wool tops. For this purpose a loan of rupees seven lakhs was raised from the Industrial Finance Corporation, New Delhi. This plant went into production in September, 1952. The original sole selling agents of the assessee-company for the sale of worsted yarn were Messrs. Murlidhar Chiranjilal. They were getting two per cent. as their commission on the sale of worsted yarn. The selling agents did not have straight dealings with the company. The company, therefore, terminated their agency. Thereafter, on the 15th of December, 1953, the assessee-company appointed Messrs. Saligram Prem Nath as their sole selling agents for the sale of worsted yarn. The new agents undertook to finance the company t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in godowns, the same will be debited to the account of the worsted plant. 6(ix) The accounts of the worsted plant will be maintained separately in an office situated near the worsted plant and the agents will have free access to the account books. 6(x) The management of the working of the worsted plant will be carried on for achieving best results from the plant by the company in consultation with, and with the advice of the agents. 6(xi) The tops will be purchased by the company with the mutual consultation and consent of the company and the agents. 7(i) The agents shall be allowed a commission of 1 1/4% (one and a quarter per cent.) on the net proceeds of sales of all goods. Such commission shall be chargeable, upon money actually credited to the company, and not on outstanding debts, if any. Besides, agents will get 50% (fifty per cent.) commission on the net profits of the worsted plant. The net profits will be ascertained after deducting all the manufacturing expenses, interest, insurance, depreciation and selling commission, etc. For allowing annual depreciation on the value of the machinery and building and lands, commencing from the date on which manufacturing act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee that the amounts claimed as permissible deductions could not be granted. According to the Tribunal, on a true reading of the agreement between the assessee and its agent, it was a case of a joint venture and the 50 per cent. commission paid to the agent was in fact his share of the net profits. For arriving at this finding, support was derived from the fact that the assessee and its agent had agreed to share the losses as well. The assessee was dissatisfied with the Tribunal's decision and moved it under section 66(1) and asked for a reference of certain questions of law arising out of the order of the Tribunal for the opinion of this court. The Tribunal granted the application and has referred the questions already mentioned in the opening part of this order for our opinion. The short question that requires determination is as to whether the two amounts in question can be allowed as a deduction under section 10(2)(xv) or they are chargeable to income-tax in the hands of the assessee as his net profits. The contention of the assessee is that they are permissible deductions and not chargeable to income-tax, whereas the contention on behalf of the department is that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided, whereas, in fact, allowable depreciation under the Act was different from the one fixed under the agreement. It has also been found that as soon as the period of the second agreement with the agents came to an end, the agency was terminated. It is after keeping in view these considerations that the question has to be determined, whether the amount of 50 per cent. commission under clause 7(i) of the agreement was an expenditure laid out or expended wholly and exclusively for the purposes of such business within the meaning of section 10(2)(xv). Before the Tribunal the department's case was that the instant case fell within the rule laid down by the Privy Council in Pondicherry Railway Co. Ltd. v. Commissioner of Income-tax, whereas the case of the assessee was that it really fell within the ambit of the decision of the Supreme Court in Dharamvir Dhir v. Commissioner of Income-tax. In such like cases it is very difficult to categorically say that a particular case falls within the rule of one case or the other and this fact was highlighted by their Lordships of the Supreme Court in Gotan Lime Syndicate v. Commissioner of Income-tax wherein it was observed as follows : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see-company. But that will not by itself make them either partners or co-adventurers for sharing of the profits. The agreement in essence remained an agreement whereby the relationship between the parties was that of principal and an agent and not of principal and principal. The main contention is that the net profits, to be worked out for the purposes of clause 7(i) of the agreement was a special fund. The net profits had not been worked out on any mercantile principle or in accordance with the Income-tax Act to determine the taxable income for the purposes of the Act. It was a fund arrived at only for the purposes of working out their commission and after that it had no meaning. If the terms of clause 7(i) are closely examined, it will appear that there are a large number of deductions permissible under section 10 which are not taken into account while determining the net profits for the purposes of that clause. This will be apparent from the two assessment years in question which take into account the deductions under sections 10(2)(v), 10(2)(vi) and 10(2)(x). It will also be clear that the determination of net profits under clause 7(i) was not done on any mercantile usage or pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remuneration by way of commission representing a percentage of profits for services to be rendered to the company. The only profit for purposes of commission was to be arrived at on conventional basis and not on the basis upon which the company would ascertain its profits for commercial purposes or the basis upon which it would ascertain its profits for income-tax purposes. Though the later consideration may not be of much importance but the fact remained that the fund on the basis of which 20 per cent. profit had to be worked out was calculated on conventional basis. In these circumstances, the question arose whether such payment had been made for the purposes of earning profits or was the division of profits between the two adventurers. "Now in the present case, there is nothing approaching a purchase of a share of profits in that sense. It is not cash that passes in exchange for these profits, it is services ; and the badge of such a contract is remuneration for services, and, therefore, the first thing that this remuneration would certainly not be is a share of profits purchased by the employee. Again, I quite accept the proposition that the mere circumstance by itself that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal of approval of the Supreme Court. It was observed by their Lordships of the Supreme Court in Travancore Sugars and Chemicals Ltd. v. Commissioner of Income-tax, that : "It is not easy to distinguish whether an agreement is for the payment of price stipulated in instalments or for making annual payments in the nature of income. The court has to look not only into the documents but also at the surrounding circumstances so as to arrive at a decision as to what was the real nature of the transaction from the commercial point of view. No single test of universal application can be discovered for a solution of the question. The name which the parties may give to the transaction which is the source of the receipt and the characterisation of the receipt by them are of little consequence. The court has to ascertain the true nature and character of the transaction from the covenants of the agreement tested in the light of surrounding circumstances." It will also be useful to refer to the decision of the Supreme Court in J.K. Woollen Manufacturers v. Commissioner of Income-tax, wherein it was observed : "In applying the test of commercial expediency for determining that question, re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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