1. A the instance of the revenue, the following question has been referred to this court under section 66(1) of the Indian Income-tax Act, 1922 :
'Whether on the fact and in the circumstances of the case, the amount of Rs. 72,434 paid to Messrs. Ram & Co. was allowance as a deduction of determining the company's profits under section 10(2)(xv) of the Indian Income-tax Act, 1972 ?'
2. The assessee-company 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 product 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 the agency period was specified, but it was provided in clause that the agreement 'may be terminated by either party giving one month's notice of their intention to do so'. The assessee-company decided to terminate the agreement and discontinued the agency of the agent by the end of the year 1957. After the termination of the agreement the assessee paid to the agent a sum of Rs. 74,834.25 out of which Rs. 72,434.25 represented an amount equivalent to three times the largest agency commission paid to the agent in 1957 in the month of may of that year. The balance was in respect of rent for December, 1957, for office and godown premises as also amount paid to the landlord by way of brokerage for letting the premises to the new tenant. In respect of the assessment year 1959-60, corresponding to the previous year which ended on 30th June, 1958, the assessee claimed a deduction in respect of the amount of Rs. 74,834 as expenditure which was wholly and exclusively necessary for the purpose of the business and the Appellate Assistant Commissioner having confirmed disallowance of the said amount, the assessee-company filed an appeal before the Tribunal. The Tribunal took the view that the expenditure should be allowed as being permissible under section 10(2)(xv) of the Indian Income-tax Act, 1922. The considerations which weighed with the Tribunal were that :
(1) there was a clear precedent for the payment of such amount and the basis on which the payment was determined 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 maintain goodwill of a businessman, whether amongst his 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 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.
3. The Tribunal, therefore, took the view that having regard to the total volume of the company's business and with particular reference to the extent of business in the area in which the agent was operating, the payment was not in any sense extravagant of smacking of either any bounty or consideration other than those relevant to the smooth running of business. Being aggrieved by this decision of the Tribunal, the revenue asked for a reference of the question which is quoted above.
4. Mr. Joshi appearing on behalf of the revenue has relied on the decision of the Supreme Court in Gordon Woodroffe Leather Mfg Co. v. Commissioner of Income-tax : 44ITR551(SC) and the decision in Teekoy Rubbers (India) Ltd. v. state of Kerala : 60ITR350(Ker) .
5. The decision in Woodroffe Leather Mfg. Co., case : 44ITR551(SC) really turned on the question as to whether an amount of gratuity paid by the assessee was expenditure laid out or expended for the purposes of the assessee's business within the meaning of section 10(2)(xv) of Income-tax, 1922, and the Supreme Court on certain facts found in that case which were enumerated in the last but second paragraph of the judgment came to the conclusion that the facts did not satisfy the test whether the sum of money was expanded on the ground of commercial expediency and in order indirectly to facilitate the co-ordination of the business.
6. Now, it cannot be disputed that whether expenditure incurred in a particular case can be said to be money expended on the ground of commercial expediency and in order indirectly to 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.
7. 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 Investment Ltd. v. Commissioner of Income-tax : 20ITR1(SC) was satisfied on facts disclosed by the assessee. In Eastern Investment Ltd's case : 20ITR1(SC) the Supreme Court has laid down in the principles which must be borne 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 the Supreme Court were (page 4) :
'(1) Though the question must be decided on the facts of each case, the final conclusion is one of law;
(2) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned; and
(3) 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 the business.'
8. The last test has in terms been re-stated by the Supreme Court in Gordon Woodroffe Leather Mfg. Co.'s case : 44ITR551(SC)
9. The facts found in the instant case by the Tribunal indicate that on an earlier occasion when the agency of another agent was terminated in respect of the Lahore office, the Lahore agent was paid three months agency commission calculated at the highest monthly figure of commission attained in the course of his agency. Therefore, there was a precedent not only in respect of the payment to be made to an agent whose agency has been terminated but even with regard to the quantum. It is clear that on the termination of the agency of the agent, the work of distribution was to be undertaken by the assessee-company itself and if the assessee-company had to operate within the area which was originally worked by the agent as the agent of the assessee, the company was entitled to take steps for a proper transition from the distribution originally made by the argent to direct distribution to be made by the assessee. If in order to ensure such payment was clearly justified by commercial expediency, being necessary in order to facilitate the carrying on 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 products of the assessee-company went on without any let or hindrance on the part of the agent who had earlier worked in the same field. The finding reached by the Tribunal that the payment does not smack of any bounty or any extraneous consideration was clearly well founded because it is obvious that the company had clearly acted in the interest of business when this payment was made to the agent on the basis already determined in respect of the Lahore agent.
10. The decision of the Kerala High Court, on which reliance is placed, in Teekoy Rubbers (India) Ltd. v. state of Kerala : 60ITR350(Ker) . In our view, is clearly distinguishable. Apart from the fact that that case dealt with an ex gratia payment made to the employee which it held could not be supported on the ground of commercial expediency, it was further held in that case that no nexus between the payment and the future conduct of the business was established. It would appear from the decision that the case arose under the Kerala Agricultural Income-tax Act and the question was whether a deduction in respect of gratuity paid to the widow of a superintendent of the assessee's estate after his death could be deductible under section 5(j) of the said Act. Clause (j) section 5 of the Act reads as follows :
'Any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of deriving the agricultural income.'
11. This clause would 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.
12. In this view of the matter, the question referred must be answered in the affirmative and in favour of the assessee. Revenue to pay the cost of the assessee.