1. The answer to the question in this reference tests on the three pronouncements of the Supreme Court in Calcutta Co. Ltd. v. Commr. of Income-tax : 37ITR1(SC) , New Jehangir Vakil Mills Ltd. v. Commr. of Income-tax : 37ITR11(SC) and Indian Molasses Co. v. Commr. of Income-tax : 37ITR66(SC) the assessee Company is the Managing Agent of three other Companies, and the managed Companies are Fertilisers and Chemicals Ltd., Aluminium Industries Ltd., and Forest Industries Ltd. The assesses company keeps the accounts according to the mercantile system and debits the respective managed companies with what be due towards the managing agency commissions at the end of the year. For the assessment years 1123 and 1124, whose previous years would be 1122 and 1123, the assessee showed the commission amounts from the Forest Industries Ltd. to be Rs. 10,167 and Rs. 9,973/-.
There is no dispute concerning these assessment years. For the next assessment year, whose accounting year would be 1124, M.E., Rs. 13,050 were shown as the commission from Fertilisers and Chemicals Ltd., Rs. 7,500/- from Aluminium Industrials Ltd. and nothing from the Forest Industries Ltd. Further the assessee prayed out of the aforesaid Rs. 20,140/-to deduct Rs. 7,750/-, which was claimed to have been waived in favour of the Forest Industries Ltd. out of what was due from the Company on account of the commissions for the period prior to the assessment year.
2. This plea for the deduction was put forward as the amount being a bad debt, but when the appeal came up to the Appellate Tribunal, the claim was also urged on the basis of its being the revenue expenditure under Section 10(2)(xv) of the Income-tax Act. The Tribunal has held that the release neither would amount to a bad debt, nor would be covered by Section 10(2)(xv). An application under Section 66(1) of the Income-tax Act having been refused, the assessee applied to the Travancore High Court under Section 66(2), and the learned Judges held that in the circumstances of the case the Appellate Tribunal's finding about the claim not being deductible as a bad debt was a question of fact and the Tribunal could not be asked to refer it. They, however, thought that the claim of waiver being covered by Section 10(2)(xv) raised a question of law and directed the following question to be stated ;
'Whether under the facts and circumstances of the case, the balance of managing agency commission of Rs. 7,750/- waived by the assessee in the year of account would be expenditure within the meaning of Section 10(2)(xv) of the Indian Income-tax. Act to be deducted for arriving at the assessable income.'
3. The statement of facts was sent end the reference came for hearing before a Division Bench, which on 14-7-1958, thought that for answering the question there must be definite findings by the Appellate Tribunal on two points. These the learned Judges held were whether relinquishing the amount was in the relevant account years, and for commercial expediency, and the Tribunal was directed to submit its finding on them. The findings on the points have since been returned and show the waiver not to be in the relevant accounting period, nor for commercial expediency. We think these findings are such as not to be binding. It is clear from paragraph 4 of the earlier statement, that the waiver was in the relevant period, for the para contains the following passage ;
'According to that method it received sums of Rs. 10,167 and Rs. 9,973 from the Forest Industries Ltd. in the assessment years 1123 and 1124. For the assessment year 1950-51 (accounting year 1124 M.E. to which the reference relates, the assessee did not receive any managing agency commission from the above referred Forest Industries Ltd. Out of the total debit of Rs. 20,140/- ....... the assessee collected only Rs. 12,390/- and waived the balance of Rs. 7,750/-.'
That the Forest Industries Ltd. were not making commercial profits and had been for years suffering heavy losses is not disputed. That the assessee Company has given up the amount is not held to be incorrect. Indeed in the order of the Appellate Assistant Commissioner extracts from the Directors' report are given, where the waiver till such time the company was able to pay dividend to the members is acknowledged with gratefulness of the Directors for that gesture. Moreover what has been waived had been admittedly not mentioned in any of the returns for the early assessment years and there is therefore no question of something being taken out from the years closed for purposes of assessment.
The amount is claimed as a fresh expenditure in the new accounting year, Out of what had been treated as accrued and we do not see how this act in these circumstances can be treated as being without the particular accounting year. Nor the expediency of the expenditure is for the Department to judge, and the subsequent events have justified the confidence, for the assessee company is now profitably carrying the agency of the managed comnany that also is now profitably runing the business. In this connection Tata Sons Ltd. v. Commr. of Income-tax : 18ITR460(Bom) may be usefully referred to. The assessee there was the managing agent and was entitled to receive commission on the net profits of the managed Company. During the relevant year the assessee voluntarily paid money towards the bonus, which the managed Company paid to some of its officers and claimed the amount as expenditure under section 10(2)(xv).
This was allowed and it was held that the question whether money was wholly laid out for the purpose of the business must be determined upon principles of ordinary commercial trading. In the reference before us the Appellate Tribunal in returning the finding has thus omitted to apply the correct test and ascertain whether the waiver in the case was wholly gratuitous or for some improper and oblique purpose. That is nobody's case and the waiver was therefore not outside the course of business. It follows that this part of the Appellate Tribunal's finding also cannot be accepted.
4. The answer to the question referred to us must therefore depend on how far the surrender of legal right is covered by the word 'expenditure' in Section 10(2)(xv). In this connection the observation of Hidayattulla, J., in : 37ITR66(SC) appears to be decisive. There the learned Judge dealing with a claim for deduction under the same clause has observed :
'To be an allowance within Clause (xv), the money paid out or away must be (a) paid out wholly and exclusively for the purpose o the business and further (b) must not be (i) capital expenditure, (ii) personal expense or (iii) an allowance of the character described in Clauses (i) to (xiv). But whatever the character of the expenditure, it must be a paying out or away, and we are not concerned with the other qualifying aspects of such expenditure stated in the clause either affirmatively or negatively.'
5. The learned Advocate for the Department has rightly relied on the aforesaid observation in support of his argument, that to justify the claim for deduction under Section 10(2)(xv) there must be absolute parting of something and not a conditional surrender of a chose in action. He argues that the extracts in the Appellate Commissioner's order show the waiver to be till the managed company be able to pay dividend and such a relinquishment cannot be treated as an expenditure. We think the argument must succeed. But the assessee's Advocate has argued that should such spending be treated as not covered by the provision, no assessee would be entitled to claim the benefit of the clause where he be following the mercantile system of accounts.
The apprehension that keeping accounts according to the mercantile system would result in every adjustment on the ground of commercial expediency being disallowed is hardly justified, for the assessee in proper cases would be allowed deductions under Section 10(1) of the Income-tax Act. In this connection we would refer to : 37ITR1(SC) where the assessee sold lands for building purposes undertaking to develop them by laying out roads, providing a drainage system and installing lights etc. In the relevant accounting year Rs. 29.392 was shown as price of the land, and Rs. 24,809 had been debited as estimated expenditure for the developments, even though no part of that amount was actually spent.
The Department bad disallowed the expenditure, but the Supreme Court held that the aforesaid amount represented the estimated amount which would have to be expended by the assessee in the course of carrying on its business and was incidental to the business. The Supreme Court further held that having regard to the accepted commercial practice the amount was deductible, though there was no specific provision for it under Section 10(2) of the Income-tax Act, yet there was 110 provision against it, express or implied, under Section 10(2).
It follows that deduction can be allowed to an assessee under Section 10(1) notwithstanding the restricted meaning of the word 'expenditure' in Section 10(2)(xv) and such a meaning would cause no hardship. In the reference before us, however, the assesses cannot claim the benefit of Section 10(2)(xv) because what has been waived is not covered by the word 'expenditure' according to the observations of the Supreme Court in the two cases cited above. We cannot direct any further statement of the case as no claim before the Appellate Tribunal was ever made on Section 10(1) of the Income-tax Act, and having regard to the observation in : 37ITR11(SC) the High Court's jurisdiction is to direct only such questions of law as arise out of the order of the Appellate Tribunal.
It follows that no case can be asked to be referred stating a question whether the assessee can be given the deduction under Section 10(1), nor the present question can be so modified. It further follows that; the question as it stands must be answered against the assessee and is accordingly answered. Let the answer be sent to the Department, who will be entitled to costs of this reference, the Counsel's fee being fixed at Rs. 100/-.