TMI Blog1977 (11) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... had entered into an agreement of agency with a company by name Ram Co., Faiz Bazar, Delhi Gate, Delhi, for the purposes of distribution of food and pharmaceutical products of the assessee-company within certain territorial limits specified in the agreement. Ram Co., who would hereinafter be referred to as the " agent ", was to be paid 5% of the net value of the goods excluding the value of additional freight charges, if any, octroi or terminal tax, if any, as invoiced by the agent. As provided in clause 3 of the agreement, it was to come into force on 1st of December, 1947. No duration of the agency period was specified, but it was provided in clause 3 that the agreement " may be terminated by either party giving one month's notice of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned was the very basis which was adopted on an earlier occasion, (2) the magnitude of payment was quite reasonable, (3) the payment was more in the nature of a token payment for friendly parting with an agent when the parting was necessitated on purely economic grounds, (4) such payment helps to maintain goodwill of a businessman, whether amongst his customers, his employees or his business connections, and (5) such payment would smoothen the transition from agency distribution to direct distribution and it would dissuade the agent from making a nuisance of himself on the strength of his business contacts and knowledge of the tricks of trade. The Tribunal, therefore, took the view that having regard to the total volume of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o facilitate the co-ordination of the business of the assessee-company must be determined on the facts and circumstances as they appear in each case. It will, therefore, have to be considered on the facts of the present case whether the test laid down by the Supreme Court as far back as in 1951 in Eastern Investments Ltd. v. Commissioner of Income-tax [1951] 20 ITR 1 was satisfied on facts disclosed by the assessee. In Eastern Investments Ltd.'s case [1951] 20 ITR 1 the Supreme Court has laid down the principles which must be born in mind while determining the question as to whether the assessee is entitled to deduction as allowable expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The three principles laid down by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the agent to direct distribution to be made by the assessee. If in order to ensure such proper transition, payment had to be made to the erstwhile agent, such payment was clearly justified by commercial expediency, being necessary in order to facilitate the carrying oil of the business. The Tribunal, in our view, was more than justified in taking into consideration the fact that if the agent parted with good relations with the principal assessee-company, then this would dissuade him from making a nuisance of himself on the strength of his business contacts and knowledge of the tricks of trade. In other words, it is obvious that the object of making this payment to the agent was to see that the work of direct distribution of the product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show that on the terms of the clause the expenditure incurred had to be exclusively for the purpose of deriving the agricultural income. In other words, a nexus has to be established between the payment and the agricultural income. Clause (xv) of section 10(2) of the Indian Income-tax Act, 1922, is differently worded and on the construction which is now well established, all that has to be found is whether the payment was justifiable on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business which is a much wider terminology than that found in clause (j) of section 5 of the Kerala Agricultural Income-tax Act. In this view of the matter, the question referred must be answered in the affirm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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