1. In this reference made by the Tribunal under section 66(1) of the Indian Income-tax Act, 1922, the following question has been referred to us for our opinion at the instance of the assessee :
'Whether, on the facts and in the circumstances of the case, the amount of Rs. 26,288 paid by the assessee-company to Shri Khopkar was deductible in determining its profits for the year 1959-60 ?'
2. The assessee is a private limited company doing business in chemicals and textile auxiliaries. It appears that one Shri A.M. Khopkar, who was previously in the employ of M/s. Amritlal & Co. Pvt. Ltd., joined the service of the assessee-company and in the year of account he was working as the manager of the assessee-company drawing a salary of Rs. 400 per month. In the middle of the year, i.e., June 12, 1958, he addressed a letter to the chairman of the assessee-company requesting him to sanction commission on sales at the rate of 2 1/2%, which, according to him, was what he was required to disburse in one form or another in the interest of the company's business. The board of directors at their meeting held on 15th September, 1958, passed a resolution sanctioning payment of commission at the rate of 2 1/2% on sales to Shri Khopkar with a view to reimburse him in regard to expenditure on account of entertainment, presents and commission to diverse customers of the company in the interest of the company's business. On September 24, 1958, an agreement was entered into between the company and Shri Khopkar according to which the company agreed to pay commission at the aforesaid rate on sales beginning with the year 1958 till the termination of the agreement. It appears that in the year of account the company paid Rs. 26,288 to Shri Khopkar; it also deducted tax at source from this amount and paid it to the Government. In the assessment proceedings the assessee-company claimed the said expenditure as allowable deduction in ascertaining its profits as also on the ground that the said expenditure had been wholly and exclusively laid out for the purpose of business of the company. The Income-tax Officer disallowed the whole of the commission in the company's assessment; he took the view that the assessee-company had parted with the amount of Rs. 26,288 with the oblique purpose of reducing the profit of the assessee-company. He found that as compared to the monthly remuneration that was paid to the company to Shri Khopar the commission of Rs. 26,288 to him was palpably out of proportion to the services rendered by him. Shri Khopkar was, therefore, summoned and examined. He claimed that the commission was not utilised for any investment but was duly spent for procuring business but he did not have any proof of expenditure. According to him, the payments were mostly made to third parties as secret commission to canvas sales on the company's behalf and by its very nature no receipt could be obtained from the recipients and that although he was in a position to give away their names, it was not advisable or discreet to do so. The Income-tax Officer on an appreciation of material that was placed before him recorded a finding that the assessee had parted with the so-called commission of Rs. 26,288 with the oblique purpose of reducing the profit and thereby it had avoided the tax liability to that extent. He, accordingly, disallowed the claim for deduction. The Appellate Assistant Commissioner, to whom the assessee carried an appeal, confirmed the Income-tax Officers' view on the ground that the expenditure had not been proved and that the payment of this nature could not be treated as having been incurred wholly or exclusively for the purposes of business. The assessee carried the matter in second appeal to the Tribunal and the Tribunal dismissed the appeal and confirmed disallowance principally on the ground that there was not even indirect evidence of any expenditure having been incurred by Shri Khopkar on behalf of the company. At the instance of the assessee, therefore, the question set out at the commencement of the judgment has been referred to us for our opinion.
3. Mr. Dwarkadas contended before us that having regard to the correspondence that was exchanged between Shri Khopkar on the one hand and the chairman of the assessee-company on the other, the resolution passed by the board of directors and the agreement that was entered into between the company on the one hand and Shri Khopkar on the other, the taxing authorities as well as the Tribunal should have held that this expenditure was allowable as one having been made wholly or exclusively for the purpose of business, especially when the payment of secret commission to customers for pushing up the sales of chemicals manufactured by the company was a well-known phenomenon. Secondly, he contended that the taxing authorities as well as the Tribunal were in error in not allowing the deduction on the ground that details of the expenditure, or the purpose for which such expenditure had been incurred had not been furnished by the assessee in the assessment. He pointed out that the assessee was not really concerned and would not be in a position to prove as to who were the parties to whom either entertainment was granted or presents were given or commission was paid by Shri Khopkar and all that the assessee could prove was that it had made payment to Shri Khopkar for the purpose of entertaining persons and payment of secret commission. He, therefore, urged that the expenditure should be regarded as an allowable one either under section 10(1) or section 10(2)(xv) of the Act.
4. It is not possible for us to accept any of these submissions of Mr. Dwarkadas for more than one reason. In the first place, the manner in which Shri Khopkar has written his letter dated June 12, 1958, to the chairman of the board of directors of the assessee-company and the manner in which the resolution of the board of directors has come to be passed unquestionably leads to an inference that the letter was addressed and the relevant resolution that was passed, both were inspired things. In any case the letter does not seem to be an ordinary letter of demand made by an employee upon the employers to reimburse him in respect of expenditure incurred by him for the company. In his letter dated June 12, 1958, addressed to the chairman of the board of directors of the assessee-company, Shri Khopkar has stated thus :
'I beg to bring to your notice the fact that I have been incurring expenditure on account of entertainment and commission (at times in the form of presents) in order to push the sales of the company which is yet in its infancy and entering upon this activity since February, 1958, last only. You are fully aware of the fact, how this expenditure has got to be incurred in order to win over constituents. It is thus clear that this expenditure is laid out wholly and necessarily in the interest of the company's business and in the course of my duties as a manager of the company. I shall be grateful to the board if they will be pleased to sanction commission on the sales of at the rate 2 1/2% per cent. which is what I am required to disburse in one form or another.'
5. It is rather surprising that Shri Khopkar, who was a science graduate and appointed to a managerial post for the assessee-company, could think of writing to the chairman to the effect that : 'It is thus clear that this expenditure is laid out wholly and necessarily in the interest of the company's business ...' From the language employed it leaves no room for any doubt in our mind that the request was an inspired one made for the purpose of achieving the desired result. Even the resolution dated September 15, 1958, recites that in view of the fact that Shri Khopkar had to expend various sums on account of entertaining, presents and commission to the diverse customers of the company in the interest of the company's business, commission at the rate of 2 1/2 per cent. on the sales be sanctioned with a view to reimbursing him in regard to such expenditure incurred by him wholly and necessarily in the performance of his duties as such manager and that an agreement in this behalf be entered into with him. The agreement dated September 24, 1958, is also almost in similar terms.
6. But, apart from the aforesaid aspect of the matter, the real question is as to whether the assessee-company could be said to have proved that it had incurred this expenditure of Rs. 26,288 in the year of account wholly and exclusively for the purpose of its business. Mr. Dwarkadas is right in his contention that the assessee-company may not desire to produce the material giving the particulars or details as to the persons or customers in whose favour such expenditure by way of entertainment, presents or commission had been incurred and all that the assessee-company was required to prove was that it had incurred that expenditure by making payment to Shri Khopkar and this was done when the receipt of that amount by Shri Khopkar had been proved by the assessee-company before the Income-tax Officer when Shri Khopkar was examined. In our view, it is true that particulars or details as to the persons or customers for whom this expenditure had been incurred by Shri Khopkar could not be insisted upon but the initial factum of expenditure having been incurred by the assessee-company for this particular purpose had to be proved by the assessee and it is in this regard that the taxing authorities as well as the Tribunal have recorded a finding that the assessee-company has failed to discharge this burden. In fact, before the Appellate Assistant Commissioner a specific contention was made by counsel, who appeared for the assessee-company, that the Income-tax Officer had not disputed the fact of payment to Shri Khopkar and that the expenditure could not be disallowed merely on the ground that detailed information as to how it was expended could not be produced. It was with reference to such an argument that was made before the Appellate Assistant Commissioner that the Appellate Assistant Commissioner has observed as follows :
'When such a large expenditure is incurred complete proof should be given particularly when the appellant is a limited company. My finding is that the expenditure has not been proved and, therefore, cannot be allowed.'
7. He has undoubtedly gone on to give another reason as to why he confirmed the disallowance, namely, that payment of this nature (secret commission) could not be treated as having been wholly and exclusively incurred for the purpose of business. This latter ground may not be available to reject the claim of the assessee-company but the first ground given by the Appellate Assistant Commissioner is sufficient to disallow the claim of the assessee-company. The Appellate Assistant Commissioner has categorically recorded a finding that the expenditure has not been proved and, therefore, cannot be allowed. In other words, the Appellate Assistant Commissioner was not satisfied upon the mere statement of Shri Khopkar made before the Income-tax Officer that he received the amount from the assessee-company and that the expenditure had been incurred by the assessee-company for the purposes indicated in the resolution or the agreement. The Appellate Tribunal has recorded a clear finding in that behalf in these terms :
'The real rub in this claim is that there is not even an indirect evidence of any expenditure incurred by Shri Khopkar on behalf of the company. We would, therefore, uphold the disallowance.'
8. In other words, irrespective of the question as to whether details of the expenditure claimed to have been made by Shri Khopkar had been furnished or not furnished, the Tribunal has recorded a finding of fact that there is not even indirect evidence of any expenditure incurred by Shri Khopkar on behalf of the company. In other words, the finding is clear that the assessee-company has failed to discharge the burden that Rs. 26,288 which was purported to have been paid to Shri Khopkar had been expended by the assessee-company for entertainment,presents and commission to push up sales as suggested by the assessee-company. It would not be possible for us to go behind this finding of fact recorded against the assessee-company. It is, therefore, clear that the claim for deduction that was made by the assessee-company was rightly disallowed.
9. In the result, the question that has been referred to us is answered in the negative and against the assessee.
10. Assessee will pay the cost of the reference to the department.