1. This reference at the instance of the Commissioner raises the question whether a certain payment made by the assessee to his agent is an admissible item of expenditure under section 10(2)(xv) of the Income-tax Act, 1922. The question arises out of an assessment made on the assessee as an individual for the assessment year 1961-62, the relevant account year being the calendar year 1960. The assessee was a partner in a firm called Messrs. Halar Salt and Chemical Works since 1950. The firm underwent several changes in its constitution from time to time and during the previous year relevant to the assessment year in question, the constitution of the firm was as set out in a partners deed dated 2nd November, 1959, executed by and between the partners. This partnership deed came into force from 1st November, 1959, and under the partnership deed the firm consisted of four partner of whom the assessee was one and two minors were admitted to the benefits of the partnership. The assessee had 30 percent. share in the profits and losses of the partnership and the accounts of the partnership were maintained according the Samvat year. Clauses 8, 11 and 12 of the partnership deed, according to the English translation, read as follows :
'8. The bankers of the partnership firm will continue to be the same. Accounts in any other banks can be opened when necessary. The bank accounts will be operated by signatures of any two partners or by the representative or power of attorney holder of any of the partners.
11. That whatever resolutions that may be required to be passed will be passed by a majority of votes and the number of votes will be according to the profit sharing proportion. And the business can be conducted in view of such resolutions.
12. That the day to day business of the partners will be carried on by the partners themselves or by the agents appointed by them, and whatever remuneration that may be required to be paid to such agents will be borne by the partner appointing such agent.'
2. Now it may be pointed out at this stage that the assessee was right up to some date in the accounting year, resident in Mombasa and a power-of-attorney was, therefore, executed by him in favour of one Somchand on 28th November, 1951, appointing Somchand to be his attorney to act for him and represent him in the business and to sign or execute or concur in signing or executing all necessary papers and documents necessary to preserve the rights and privileges of the partnership with the Government, local authority or municipality or any other department of the Government. Soon after the execution of the partnership deed dated 2nd November, 1959, the assessee enterd into an agreement with Somchand on 24th December, 1959. It was recited in the agreement that the assessee was then residing in British East Africa and a power of attorney was therefore executed by the assessee in favour of Somchand for the purpose of attending to the work of the partnership on behalf of the assessee whenever necessary but no remuneration was settled to be payable to Somchand and, therefore, in order to avoid any dispute in the future as also for the purpose of authorising Somchand to act on behalf of the assessee and to attend to the day to day business of the partnership, the agreement was entered into between the assessee and Somchand. The services agreed to be rendered by Somchand were as set out in clause 1 of the agreement :
'1. The party of the second part is to look after the interest of the party of the first part in M/s. Halal Salt & Chemical Works and as a holder of power-of-attorney he is to work and look after the day to day affairs of the said firm on behalf of the party of the first part. He is to attend the meetings of partners and to see that the interest of the party of the first part is not adversely affected, and to keep the party of the first part well posted with the affairs of the firm and to reproduce, wherever and whenever necessary opinions and views of the party of the first part under his guidance and instructions.'
3. The agreement provided that in consideration of the aforesaid services to be rendered by Somchand, the assessee shall pay to Somchand ten per cent. of his share of profits in the firm, subject to a minimum of Rs. 15,000. Pursuant to the agreement Somchand acted as agent of the assessee and rendered the services specified in clause 1 of the agreement and for these services the assessee paid to Somchand the minimum remuneration of Rs. 15,000 for Samvat year 2016. This payment of Rs. 15,000 was claimed by the assessee as a deductible expenditure under section 10(2)(xv) in the course of his assessment proceedings for the assessment year 1961-62, the relevant account year being the calendar year 1960. The Income-tax Officer disallowed the expenditure on the ground that it was not laid out or expended wholly and exclusively for the purpose of the assessee's business and the disallowance was confirmed by the Appellate Assistant Commissioner. The assessee carried the matter in appeal to the Tribunal and the Tribunal disagreeing with the view taken by the income-tax authorities held that the expenditure of Rs. 15,000 was laid out or expended wholly and exclusively for the purpose of the assessee's business and was, therefore, an allowable item of expenditure under section 10(2)(xv). This view taken by the Tribunal is challenged on the present reference.
4. Now it is well-settled by the decisions of the Supreme Court that the question whether an amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of the assessee's business has to be decided on the facts and in the light of the circumstances of each case and the test which has to be applied for this purpose is the test of commercial expediency. The question has to be decided not on an abstract or academic view of what is proper expenditure laid out or expended wholly and exclusively for the purpose of one's business but on consideration of commercial expediency and principles of ordinary commercial trading. The expenditure need not be fruitful nor is it necessary that the expenditure must be incurred as of necessity with a view to direct and immediate benefit to the business; it is sufficient if the expenditure is incurred voluntarily on the ground of commercial expediency in order indirectly to facilitate the carrying on of the business. It is in the light of these principles that we must examine the facts of the present case and see whether the expenditure could be said to be laid out or expended wholly and exclusively for the purpose of the assessee's business.
5. The partnership as constituted under the partnership deed dated 2nd November, 1959, came into being from 1st November, 1959, and under clause 3 of the partnership deed the assessee had 30 per cent. share in the profit and losses and as provided in clause 4 he was liable to invest a sum of Rs. 3,00,000 in the partnership. Clause 11 provided that the decisions in regard to the affairs of the partnership would be taken by a majority of votes and the number of votes which each partner would be entitled would be in proportion to his share in the profits of the firm. If, therefore, the assessee did not attend to the business of the partnership, he would have no voice in the decisions regarding the affairs of the partnership and the affairs of the partnership would be carried on according to the decisions taken by the other three partners. The assessee who had as large a share as 30 per cent. in the profits and losses of the partnership and whose financial stake in the partnership amounted to over Rs. 3,00,000 would, therefore, be quite justified by any standards of commercial expediency in considering it essential that in order to protect and safeguard his interests in the partnership, he should participate in the making of decisions regarding the affairs of partnership and attend to the day to day business of the partnership. Moreover, clause 12 of the partnership deed required that the day to day business of the partnership should be attended by the partners or their duly authorised agents and there was thus an obligation on the assessee either to attend himself to the day to day business of the partnership or to do so by a duly authorised agent. Now the assessee was at the date of the partnership deed residing in Mombasa situate in British East Africa and he could not, therefore, possibly attend to the day to day business of the partnership or attend the meetings of the partners for the purpose of taking decisions in regard to the affairs of the partnership. It was in these circumstances that the assessee entered into the agreement dated 24th December, 1959, with Somchand in order to see that there was a duly authorised agent to attend to the day to day business of the partnership on his behalf and to protect and secure his interests in the partnership. The assessee agreed to pay Somchand 10 per cent. of his share in the profits of the partnership subject to a minimum remuneration of Rs. 15,000 for the services to be rendered by him. Now it was not the case of the revenue that this agreement was a sham or bogus transaction and no payment was in fact made to Somchand nor was it the case of the revenue that the remuneration agreed to be paid by the assessee was excessive. It was also not suggested on behalf of the revenue that there were any extra commercial considerations which prevailed with the assessee in entering into this agreement with Somchand. The agreement was dictated purely by considerations of commercial expediency for the purpose of the business of the assessee and the payment of remuneration to Somchand for the services to be rendered by him must, therefore, be held to be laid out or expended wholly and exclusively for the purpose of the assessee's business.
6. The revenue, however, pointed out that Somchand was acting as the power of attorney holder for the assessee for about eight years since 1951 without remuneration and urged that if Somchand could look after and protect the interests of the assessee in the partnership without remuneration for a period of eight years, how did it suddenly become necessary to remuneration Somchand for the service to be rendered by him from and after 1st November, 1959. But this argument fails to take into account several considerations. In the first place, it must be noted that prior to the agreement dated 24th December, 1959, Somchand merely held a power of attorney from the assessee and he had, therefore, authority to act on behalf of the assessee and to represent him in the business of the partnership but he was under no obligation to do so. And, moreover, as the recital in the partnership deed shows, the authority conferred on Somchand under the power of attorneys was exercisable only if fond necessary. However, now under the agreement dated 24th December, 1959, Somchand bound himself to attend to the day to day business of the partnership and to render various other services set out in clause 1 of the agreement and it stands to reason that Somchand would not accept the obligation to render these services unless he was remunerated for the same. The position was fundamentally different under the agreement dated 24th December, 1959, from what it was prior to that date. Furthermore, we do not know what were the terms of the partnership agreement which preceded the partnership deed dated 2nd November, 1959, what was the position of the assessee vis-a-vis the partnership under those partnership agreements. The mere fact that no remuneration was paid to Somchand prior to 1st November, 1959, for the occasional services which were rendered by him pursuant to the authority conferred on him under the power of attorney cannot, therefore, have any bearing on the expediency or otherwise of payment of remuneration to him under the agreement dated 24th December, 1959.
7. It is no doubt true that the assessee came down to India some time during the course of the accounting year and settled down in Bombay. But we do not think that makes any difference in the position. When the agreement dated 24th December, 1959, was made, the assessee was in British East Africa and at that date the assessee was not in a position to attend personally to the business of the partnership and the agreement was, therefore, justified by considerations of commercial expediency. The assessee could certainly put an end to the agreement by giving two months' notice but such notice, provided clause (3), must expire with the end of the accounting year of the partnership and it was, therefore, not open to the assessee to put an end to the agreement before the close of Samvat year 2016, even if at any time during the Samvat year 2016, it was found that it was not necessary to have an agent for the purpose of attending to the day to day business of the partnership. Moreover, it may be noted that even when the assessee came down to India, he settled in Bombay while the business of the partnership was carried on at Jamnagar and Calcutta. The assessee could in these circumstances legitimately claim that he was unable to attend to the day to day business of the partnership and do look after and protect his interest in the partnership and it was, therefore, expedient for him from the commercial point of view to appoint a duly authorised agent for the purpose. The payment of Rs. 15,000 to Somchand under the agreement dated 24th December, 1959, therefore, satisfies the test of commercial expediency and must be held to be laid out and expended wholly and exclusively for the purpose of the assessee's business with in a meaning of section 10(2)(xv).
8. This conclusion which we reach on principle is fortified by the decision of the Bombay High Court in Commissioner of Income-tax v. New Digvijaysinhji Tin Factory'. That case related to the same firm with which we are concerned in the present case. The question which arose in that case was whether payment of remuneration made by the assessee, who was a partner in the firm, to two agents for attending to the day to day business of the partnership on behalf of the assessee was an allowable deduction in computing the business profits of the assessee and dealing with that question S.T. Desai J., as he then was, said :
9. The short question that we have to consider is whether in a case where it is incumbent on a partner to attend to the management and affairs of the partnership business and he finds he is unable or disabled to do so and if the other partners permit him to have some other person to discharge his duty by the firm or so to say deputies for him can he or can he not say that the remuneration paid to that person is a legitimate expenditure Can it be said in such a case that the agreed payments he may bona fide make to such person are no more than appropriation of profits. We see no difficulty in reaching the conclusion that in such a case the payments that would be made would be legitimate deductions sunder section 10.'
10. In the case before us it was incumbent on the assessee, by reasons of clause 12 of the partnership deed, to attend to the management and affairs of the partnership business and he was unable to do so. These observations, therefore, apply wholly to the facts of the present case, though we may point out that, in our view, it is not essential that a partner should be under an obligation to attend to the management of the partnership business, in order that he may be entitled to claim as a permissible deduction expenditure incurred by him in paying remuneration to an agent appointed for that purpose of attending to the management of the partnership business on his behalf. The Bombay High Court was considering a case where it was incumbent on the partner to attend to the management of the partnership business and that is why the learned judge mentioned that circumstance and replied upon it but that does not mean that the expenditure cannot be admissible where it is not incumbent on the partner to attend to the partnership business. Every case must be decided on its own facts in the light of the principles of commercial trading and commercial expediency and even if an expenditure is incurred voluntarily on the ground of commercial expediency in order indirectly to facilitate the carrying on of the business, that would be sufficient to bring the case within section 10(2)(xv).
11. Our answer to the question referred to us is, therefore, in the affirmative. The Commissioner will pay the costs of the reference to the assessee.
12. Question answered in the affirmative.