1. The assessee is a private limited company. It is carrying on business of manufacture of ayurvedic and herbal medicines. It is also exporting its products on commission basis. In this appeal there are only two grounds.
2. The first ground relates to disallowance of travelling expenses of a sum of Rs. 3,456. The ITO applied Rule 6D(2) of the Income-tax Rules, 1962. The Commissioner (Appeals), however, on the other hand, following a decision of the Chandigarh Bench in IT Appeal No. 807 (Asr.) of 1979 in the case of ITO v. Nagesh Hosiery Mills, held that Rule 6D(2) will not apply in the case of persons not in the category of employees. This is the first grievance of the revenue.
The allowance in respect of expenditure incurred by an assessee in connection with travelling by an employee or any other person within India outside the headquarters of such employee or other person for the purposes of the business or profession of the assessee shall not exceed the aggregate of the amounts computed as hereunder :- (a) in respect of travel by rail, road, waterway or air, the expenditure actually incurred ; (b) in respect of any other expenditure (including hotel expenses or allowances paid) in connection with such travel, an amount calculated at the following rates for the period spent outside such headquarters : In this case the expenditure is in respect of directors of the company.
The directors are not paid any salary and it is admitted that they are not employees. Therefore, clauses (i) and (ii) will not apply. The only point is whether the directors would come under 'any other person' occurring in Clause (iii). The assessee's argument before us is that by applying the Rule of ejusdem generis, the words 'any other person' must be understood as persons in the category or similar to the category of employees and since directors in this case are not to be considered employees, Clause (iii) will not apply. We are of the view that this argument proceeds on a slightly wrong premise. At the outset we must observe t hat the Chandigarh Bench has taken a correct view with great respect on the facts of that case. That is the case where a partnership was involved. The expenditure was incurred by the partners. It can, therefore, be justified on the basis that the expenditure was incurred by the assessee himself as after all a partnership is nothing but a compendious name for the partners together constituting the same.
Therefore, the decision of the Chandigarh Bench that partners would not come under the category of employees is quite justified and that has no application to a case where we are dealing with a matter relating to a limited company which is a juridical entity. Shri Mohan Lal, however, stressed that the same principle of interpretation, namely, ejusdem generis principle should be applied in construing the words 'any other person'but we are afraid the principle, first of all, cannot be extended to each and every case. Secondly, even if that principle is applied, directors would come under the category of 'any other person'.
Two basic categories have been made by the rule making authority. The first is the category of employees and the second is the category of persons other than employees, who are working for the company or in any way connected with the company. Therefore, it is difficult to accept the argument of Shri Mohan. Lal that directors would not come under the category of 'any other person'. In this connection we would like to refer a few passages from Maxwell On The Interpretation of Statutes (Twelfth edition) by P. St. J. Langan : But the restricted meaning which prima facie attaches to the general word in such circumstances is rejected when there are adequate grounds to show that it has not been used in the limited order of ideas to which its predecessors belong. The ejusdem generis doctrine is by no means an absolute one and if it can be seen from a wider inspection of the scope of the legislation that the general words ought to be construed generally, they are so construed notwithstanding that they follow more particular expressions. (p.
303) The learned author referred to some of the English cases accepting the above principle at pages 304 and 305. We, accordingly, reject the contention of the assessee and hold that Rule 6D(2) has been rightly applied by the ITO. The relief given by the Commissioner (Appeals) is, therefore, withdrawn. The first ground of the revenue succeeds.
4. The second ground relates to disallowance of commission of Rs. 23,520. The facts are not very much in dispute. The assessee entered into agreements with its agents for sale of its drugs. The essential terms as brought out in the specimen copy of the agreement, so far as the duties of the commission agents are concerned, are as follows : (i) Handing over the community health visitor ayurvedic composite drug kits after taking delivery from 1st part to respective Chief Medical Officers in good condition.
(ii) Obtaining of the acknowledgements and receipts from the respective Chief Medical Officers for the community health visitor ayurvedic composite drugs kits delivered to them.
(iii) Submission of bills to the Joint Director (Small Pox), Medical and Health Services (NSEP), Uttar Pradesh, Lucknow, with relevant papers.
(iv) Obtaining payment from Joint Director (Small Pox) and send draft to 1st party.
(v) Will get the goods inspected by the Chief Medical Officer or by anybody so authorised by him in this behalf.
(vi) Explain the respective community health visitors about the medicines contained in the ayurvedic composite drugs kits.
The ITO on considering the question of the claim of the assessee for allowance of commission paid to the agents found that out of six duties mentioned to be performed by the agents, two have not been actually performed. They are items (v) and (vi). The reasons given by the ITO may be extracted from his order : For the above duties 6 per cent commission was allowed to them.
While as per agreement with the Government the medicines are to be supplied to the CMOs in good condition. For this purpose the assessee has to send his agent to get them checked and to get the acknowledgement receipt for the respective CMOs. Provisions of Sub-rule (vi) of the agreement not in any way entails to visit respective Community Health Centre about the medicines contained in the kits and as such it appears to be an extra commercial consideration. The assessee also admitted during the course of assessment that the beneficiaries obtained payments direct from the director, medical health. In the circumstances no duties were performed by the agents as noted down in condition No. (v). Hence, the agents are not entitled for payments with regard to condition No. (v) which they did not perform and No. (vi) which was not obligatory on their part in view of an agreement with the Government.
It is further clear. from the order of the ITO that he disallowed one-third of the commission since he agrees that other services were performed by the agents.
When the question of rendering commercial services by the various commission agents to the appellant is not disputed by the ITO and when the commission payment is verifiable, having been paid to the various agents by the cheques, there is no justification to uphold the action of the ITO.5. The learned departmental representative placed before us the relevant agreement and also the order of the ITO in extenso. According to him, when some of the services were not actually rendered (in fact it was not actually disputed), there is full justification for disallowing a part of the commission. Mr. Bharati referred to the decision in Lachminarayan Madan Lal v. CIT  86 ITR 439 and relied on the following observations of the Hon'ble Supreme Court : ...Although there might be such an agreement in existence and the payments might have been made, it is still open to the Income-tax Officer to consider the relevant factors and determine for himself whether the commission said to have paid to the selling agents or any part thereof is properly deductible under Section 37 of the Act.
(p. 446) According to Mr. Bharati, the words 'any part thereof would indicate that a proportionate disallowance is possible. We do not think that is the meaning to be attributed. All that their Lordships were to consider was whether any amount or a part of the amount can be allowed on finding out whether the payments were genuine or not and to what extent. That observation has no application whatsoever to a case where admittedly the agents rendered services.
Secondly, the approach of the ITO which is sought to be supported by Mr. Bharati is erroneous. Agents were appointed stipulating the types of services which they have to r ender. They are obliged to render all those services. It may be that the occasion does not arise to extract all the services. The fact, however, remains that they rendered the services agreed to as per the agreement. They are paid commission for such services. In fact they are bound to perform all the services mentioned in the agreement. They must be ready to render such services.
It is for rendering all the services or any other services to be rendered at any time when so demanded, that the commission has been stipulated to be paid. Therefore, there can be no justification for disallowing any part of the commission having regard to the terms of the agreement and the fact that services were in fact, rendered by the agents. It may be also mentioned that in the past commission was allowed in full with no objection and we are not able to appreciate as to why on the same set of facts a portion of the commission has been disallowed. We would also like to point out a decision relied on by Shri Mohan Lai. That is the decision of the Supreme Court in the case of CIT v. Maharasthra Sugar Mills Ltd.  82 ITR 452. No doubt there the question was about the payment of managing agency commission.
A part of it was sought to be disallowed on the ground that the managing agency also related to sugarcane cultivation, the income from which is not taxable as it is agricultural income. Proportionate commission paid was sought to be disallowed but their Lordships of the Supreme Court held that the entire commission has to be allowed. There is not much of similarity between this case and the case before us but the principle behind the decision can be extended to a case of the present nature before us. We are clearly of the opinion that the commission is allowable.