TMI Blog1968 (7) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee-company), formed in the year 1946. By an agreement dated February 18, 1945, the assessee-company appointed the firm of M/s. Agarwal Brothers of Agra as its managing agent. M/s. Agarwal Brothers were to be paid managing agency commission equivalent to 12 1/2% of the net profits of the assessee-company besides office allowance of Rs. 1,000 per month. Initially the assessee-company started manufacturing commercial glasses which were not paying. The assessee-company earned small profits in the calendar years 1946 and 1947 and incurred losses in the subsequent three years. Profits for the calendar years 1951, 1952 and 1953 were negligible. In view of this, M/s. Agarwal Brothers relinquished their right to the remuneration of Rs. 72,000 representing their office allowance, Rs. 3,117 representing their managing agency commission and Rs. 43,975, interest on loans advanced by it to the assessee-company, during the aforesaid period. From 1954 onwards the assessee-company switched on to the manufacturing of scientific glasses with the result that its sales as well as profits increased considerably. On July 8, 1956, the assessee-company passed the following resolution : " Unanimousl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of business carried on during the year under consideration. The assessee-company filed an appeal before the Income-tax Appellate Tribunal. The Tribunal upheld the decision and held that the payment of Rs. 60,000 amounted to double remuneration for the same set of services, once under the terms of the agreement and again as special remuneration and that it could not be covered by section 10(2)(xv) of the Act. The Tribunal held that, even if it were assumed that the payment was permissible expenditure, it was permissible for the year in which the obligation to remunerate for the services rendered was incurred, as the company maintained its account on mercantile system and that there was no question of the same being allowed in a distant year. Referring to the second purpose for which the remuneration was said to have been paid, the Tribunal held that the remuneration was paid in appreciation or as a reward for the past sacrifices and that the word "sacrifices " implied that it was made without legal obligation to do so and without any claim for the expectation of compensation, reward or remuneration and was thus outside the purview of section 10(2)(xv). The Tribunal also he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a direct and immediate benefit to the trade but voluntarily and on the grounds of commercial expediency and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade." This test was quoted with approval by the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income-tax. In Eastern Investments Ltd. v. Commissioner of Income-tax the Supreme Court, while construing section 12(2) laid down the following principles as relevant : " (a) though the question must be decided on the facts of each case the final conclusion is one of law:... (b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned :... (c) it is enough to show that the money was expended 'not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business' :... (d) beyond that no hard and fast rule can be laid down to explain what is meant by the word 'solely'." These principles are relevant while construing section 10(2)(xv) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain with the exception of the managing director. In 1951, by a resolution of the board of directors, it was decided to restore the cut in the salary of the managing director with effect from 1933 and to pay him dearness allowance and bonus, etc. The resolution mentioned that the payment was made in consideration of the meritorious service of the managing director. The sum paid to the managing director amounting to Rs. 66,990 was claimed by the mills as business expenditure. On these facts the High Court held that : " ... as no reason was given for not restoring the cut in the salary of the managing director earlier and then for restoring it in his case alone from 1933 and as the managing director was still in the service of the mills and there was no evidence of any claim made by him for the payment and the resolution of the board of directors also showed that the payment was made voluntarily in consideration of the meritorious service of the employee, the payment was not made in discharge of a liability or on grounds of commercial expediency. The amount was not allowable as business expenditure. " The counsel contended that in the present case also the assessee-company paid Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... past services was bound to secure goodwill and efficient working in future and that this should be taken as facilitating the business of the assessee-company. We have given our careful consideration to the submissions made on behalf of the assessee-company but have not felt persuaded to accept them. In our opinion, the decision of the Madhya Pradesh High Court in Kalyanmal Mills Ltd. v. Commissioner of Income-tax does not disclose any wrong application of the principle enunciated by the Supreme Court. In our opinion, a reward for past services, without anything more, need not necessarily be construed differently in the cases of persons continuing in service and persons quitting service, although difference in other facts and circumstances may warrant different decisions in such cases. We have no hesitation in rejecting the contention of the assessee that the Madhya Pradesh High Court did not properly apply the principle enunciated by the Supreme Court. As for the case before us, we consider it proper to recall a few facts appearing in the decisions of the income-tax authorities. Before the Income-tax Officer the claim for deduction was made principally on the ground that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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