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TMI Blog1975 (8) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... er. Apparently, the firm " Indo-Metal Industries " was not satisfied with the way in which V. C. Ramalingam & Sons was promoting the sales. The selling arrangement was, therefore, terminated from December, 1953. Indo-Metal Industries thereafter entered into an agreement with a firm known as Metalware & Co. It may be mentioned herein that Ramanlal Kamdar, the working partner, has three brothers by name, Amritlal, Chandulal and Rashiklal. The respective wives of Amritlal, Chandulal and Rashiklal were Sarada, Kusum and Kanchan. The four ladies, viz., the wives of Ramanlal and his brothers, started a firm known as Metalware and Co. with a capital of Rs. 10,000 and with its office at No. 123, Big Street, Triplicane. Chandulal was to be in charge of the management and supervision of the activities of this firm. In the agreement entered into on 24th December, 1953, with this firm it was provided that the agency firm was to store the goods in its branches and was to be the custodian ensuring the safety of the materials. The agency-firm was not to deal in goods similar to those manufactured by the assessee-firm. The agency firm was to be in charge of all the sale proceeds realised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission was increased from 5% to 10%, it might not be possible for them to continue the agency. On 1st April, 1959, an agreement was entered into between the assessee and the agency firm increasing the commission from 5% to 10%. The Income-tax Officer was allowing as deduction the amount of commission paid to the agency firm up to and including the accounting year 1958-59 relevant for the assessment year 1959-60. In the assessment for 1960-61 the Income-tax Officer noticed that on the turnover similar to the earlier year the assessee had earned a profit of 55.6% in this year as against 47% in the earlier year. He observed that Ramanlal, who was the sole proprietor of the business till 1st April, 1956, appointed a firm consisting of his wife and the wives of his brothers as his "sole selling agents " and that the entire affairs of this firm were conducted by Chandulal Kamdar, his brother, who was already working in his own business and subsequently became a partner with him. In his view, the deduction claimed on account of the agency firm was entirely fictitious. He, therefore, disallowed a sum of Rs. 1,07,214 which was the commission due according to the revised terms from 1st Apr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 10%. In effect, he disallowed one-half of the commission claimed as deduction. The assessee appealed to the Tribunal for the assessment year 1960-61 and the department appealed against the order of the cancelling the reassessment for the earlier years and also against the allowance of 50% of the commission as claimed for 1960-61. The appeals came to be heard together. As far as the earlier years were concerned, the Tribunal agreed with the Appellate Assistant Commissioner in the matter of cancellation. Nothing more turns on them, as the present reference does not cover the earlier years. As far as the year under reference was concerned, the Tribunal's view was that the department had not made out a case for rejecting the assessee's entire claim for deduction of the agency commission. It pointed out that the agency agreement had been entered into at a time when the assessee-firm consisted of two partners, viz., Narayana Chettiar and Ramanlal. Narayana Chettiar was a stranger to all the partners of the agency firm. It did not see anything wrong in Chandulal continuing to take interest in the agency firm and also in the assessee-firm. It was observed that the department had not br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim having regard to the language of section 10(2)(xv) of the 1922 Act or section 37 of the 1961 Act for the assessee to say that, when once the agency firm was found to be genuine and had rendered services, the question of reasonableness of the commission was beyond the purview of the income-tax authorities or the Tribunal. The question of deductibility of the remuneration or commission paid in any given case has been considered by the Supreme Court on a number of occasions. In Commissioner of Income-tax v. Chari and Chari Ltd. a limited company, which was carrying on business in hides and skins, tobacco and other commodities and as managing agent of companies, was appointed as its agent by the Central Government for buying, checking, weighing, leaf drying, storing, transporting, retaining and reselling tobacco in accordance with its directions to be issued from time to time. One of the directors of the assessee-company was placed in special charge of this work, which had to be done both at Guntur and at Madras Port. The company agreed to pay him 30% of the net profit earned under the terms of the appointment of the Central Government as his remuneration. For the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee. " In that case the Supreme Court agreeing with the High Court upheld the allowance of the remuneration as claimed by the assessee. In other words, the disallowance of a part of the remuneration paid to the directors and executive officers was not accepted. The same principle has been reiterated in J. K. Woollen Manufacturers v. Commissioner of Income-tax. On the other line, there are cases decided by the Supreme Court which have upheld the disallowance. In Swadeshi Colton Mills Ltd. v. Commissioner of Income-tax (No. 1) a company amended its articles and provided for payment to the directors of a commission of 1% of the net profits in addition to their monthly remuneration of Rs. 100 till then in force. The allowability of the percentage of the net profits to the directors was in question. The Tribunal found that the directors had not rendered any special service, that the remuneration of Rs. 100 per month was not considered by the directors to be inadequate in earlier years and that the increase in the profits of the company was due to the control of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement was only a make-believe arrangement or a device to minimise the tax liability. After reiterating the principles laid down in Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax (No. 1), the Supreme Court held that the findings of the Tribunal were findings of fact and that it was a case where the assessee, by adopting a device, had made it to appear that the income which belonged to it had been earned by some other person. This question has been considered by a Bench of this court in Commissioner of Income-tax v. Raman and Raman Ltd. That was a case where a managing director and a director were voted substantial remuneration. The remuneration so paid to them was disallowed by the income-tax authorities. But the Tribunal allowed it in full. In upholding the order of the Tribunal, this court observed at page 348 as follows : " We accept the principle that for eligibility of an allowance under section 10(2)(xv), there should be a nexus between the expenditure and the purpose of the business and the expenditure should have been wholly and exclusively laid out for that purpose. The first part of this proposition may not raise any problem of complexity, for its deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mself the expenditure to be incurred for the purpose of carrying on his business. It would be difficult to evolve any formula as such in cases of this kind and the question of disallowance has to be considered from the point of view of a businessman and in the light of all the facts and the circumstances of each case. Applying the principle mentioned above, we may consider the justification made by the Tribunal for the disallowance. The fact that the assessee-firm has not asked for increase in the earlier years is neither here nor there. The increase has to be asked for at some particular point of time and it cannot be denied merely because it had not been put up at any earlier point of time. The genuineness of the selling agency firm is not in dispute here and cannot be in dispute especially because it has dealt in other goods for substantial amounts and earned substantial profits for several years. The fact that it has rendered services has all along been recognised including the year under consideration, as otherwise the remuneration as claimed in the earlier years or a part of the claim in this year would not have been allowed. In our opinion, it is illogical to say that 10% ..... X X X X Extracts X X X X X X X X Extracts X X X X
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