1. This is a reference under Section 66(I) of the Indian Income Tax Act, 1922 (hereinafter referred to as the Act) by the Income Tax Appellate Tribunal, Delhi Branch 'B', by which the following question of law has been referred to us for our answer :--
'Whether on the facts and in the circumstances of the case, the Tribunal was right in disallowing the payment of Rs, 60,000 under Section 10(2)(xv) and/or Section 10(1) ?'
2. The material facts are these: The assessee is the Dholpur Glass Works Ltd. a public limited company (hereinafter referred to as the assessee company) formed in the year 1946. By an agreement dated 18-2-1945 the assessee-company appointed the firm of M/s. Agarwal Brothers of Agra as its Managing Agents. M/s. Agarwal Brothers were to be paid managing agency commission equivalent to 12 1/2 per cent of the net profits of the assessee-company besides office allowance of Rs. 1,000 per month. Initially the assessee-company started manufacturing commercial glasses which were not paying. The assessee company earned small profits hi the calendar years 1946 and 1947 and incurred losses in the Subsequent three years. Profits for the calendar years 1951, 1952 and 1953 were negligible. In view of this, M/s. Agarwal Brothers relinquished their right to the remuneration of Es. 72,000 representing their office allowance, Rs. 3,117 representing their managing agency commission and Rs. 43, 975 interest on loans advanced by it to the assessee company during the aforesaid period. From 1954 onwards the assessee company switched on to the manufacturing of scientific glasses with the result that its sales as well as profits increased considerably.
3. On July 8, 1956, the assessee-company passed the following resolution :--
'Unanimously resolved as a special resolution that out of the net profits of the Company prior to 31-3-56 the managing agents of the company be and are hereby paid a sum of Rs. 60,000 over and above their usual remuneration to which they are entitled to, as detailed below on account of;
(1) Recognition of their past services and putting the factory on sound footing.
(2) Their past sacrifices as per wishes of the Board or Directors in forgoing their remuneration of Rs. 72,000 from 1948 to 1953 and interest on loans advanced to the Company by them for several years from 1948 to 1951 as also their commission in the years 1946 and 1947.
Rs. 40,000 out of the profits of the calendar year 1955 and that necessary entries for payment of this sum be passed in the books of the Company as at 31-12-55.
Rs. 20,000 out of the profits from 1-1-56 to 31-3-56.'
In its assessment year 1957-58, the assessee company claimed Rs. 60,000 as a permissible deduction. The assessee company contended before the Income-tax Officer that the said payment was made to earn the goodwill of the managing agents which was a matter of commercial expediency, and thus it was a permissible deduction. The Income-tax Officer disallowed the said claim on the following grounds :--
'(i) That it was not paid as per the terms of the managing agency agreement:
(ii) That the reasons for the payment of this amount contained in the resolution viz. 'putting the factory on sound footing' denoted a benefit of a lasting nature which made the payment an expense of a capital nature:
(iii) That the firm of M/s. Agarwal Brothers cannot be said to have forgone its claim for office expenses inasmuch as its office was situated in the factory premises and it did not incur any separate expenses out of its pocket for the same:
(iv) That the payment was not made on any commercial footing and cannot be said to be wholly and exclusively for the purpose of the business:
(v) That the payment was made out of the net profits or the company and was not charged to the profit and loss account.'
4. The assessee company preferred an appeal against the said disallowance before the Appellate Assistant Commissioner. TheAppellate Assistant Commissioner disallowed the same on the ground that the payment had been made for something which had happened in the past and it had not been incurred for the purpose of business carried on during the year under consideration. The asses see-company filed an appeal before the Income-tax Appellate Tribunal. The Tribunal upheld the decision and held that the payment of Rs. 60,000 amounted to double remuneration for the same set of services, once under the terms of the agreement and again as special remuneration and that it could not be covered by Section 10(2)(xv) of the Act. The Tribunal held that even if it were assume! that the payment was permissible expenditure it was permissible for the year in which the obligation to remunerate for the services rendered was incurred, as the company maintained its account on mercantile system and that there was no question of the same being allowed in a distant year.
5. Referring to the second purpose, for which the remuneration wns said to have been paid, the Tribunal held that the remuneration was paid in appreciation or as a reward for the past sacrifices and that the word 'sacrifices' implied that it was made without legal obligation to do so and without any claim for the expectation of compensation, reward or remuneration and was thusoutside the purview of Section 10(2)(xv). The Tribunal also held that the claim was not permissible under Section 10(1).
6. The assessee-company felt aggrieved by the decision of the Appellate Tribunal and moved for referring the question of law to this Court and the Tribunal has consequently made the present reference.
7. A reference to Section 10(2)(xv) of the Act makes it clear that in order to claim successfully a deduction, the assessee must prove that the expenditure was laid out or expended 'wholly and exclusively' for the purpose of business, profession or vocation and that the expenditure was not in the nature of capital expenditure or personal expenses. It may be pointed out at the outset that before 1st April, 1939, in Section 10(2)(xv) the expression used was any expenditure not being in the nature of capital expenditure 'incurred solely for the purpose of earning such profits or gains', and that it was in the year 1939 that Section 10(2)(xv) was amended and the words 'wholly and exclusively laid out for the purpose of business etc.' were substituted to bring the Act in line with the corresponding United Kingdom Statute. The clause as it existed before the amendment was considered by the Privy Council in Tata Hydro-Electrical Agencies, Ltd., Bombay v. Commissioner of Income-tax, Bombay Presidency and Aden and Lord Macmillan speaking on behalf of the Privy Council pointed out the difficulty in dealing with cases under Clause in the following words-
'Their Lordships recognise and the decided cases show how difficult it is to discriminate between expenditure which is, and expenditure which is not, incurred solely for the purpose of earning profits or gains.'
The words used in the amended clause appear no doubt wider than the words 'solely for the purpose of earning such profits' as it existed before 1939, yet the difficulty pointed out by the Privy Council still persists. What money can be said to be wholly and exclusively laid out and expended for the purpose of business etc. has to be decided on consideration of commercial expediency which in the very nature of things cannot admit of the application of a rigid test. However, Judges had formulated general and broad tests in this connection.
8. We may in this connection refer to the following observations made by Viscount Cave, L. C., in Atherton v. British Insulated and Helsby Cables Ltd. (1926) 10 Tax Cas 355 at p. 191 H. L. (Palkhiwala's Income Tax 5th Edition, Vo. I, p. 390).
'A sum of money expended, not of necessity and with a view to a direct and im-mediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade.'
This test was quoted with approval by the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income-tax, West Benga : 20ITR1(SC) . In Eastern Investments Ltd. v. Commr. of Income Tax, West Bengal : 20ITR1(SC) the Supreme Court while construing section 12 (2) laid down the following principles as relevant :--
(a) though the question must be decided on the facts of each case the final conclusion is one of law.....
(b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned.....
(c) 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 of the business.....
(d) beyond that no hard and fast rule can be laid down to explain what is meant by the word 'solely'.
These principles are relevant while construing Section 10(2)(xv). For the general principles governing the subject of allowance or deduction under Section 10(2)(xv) reference may be also made to the Supreme Court decisions in Commissioner of Income, tax v. Chandulal Keshavlal and Co., : 38ITR601(SC) , Commissioner of Income-tax v. Royal Calcutta Turf Club, : 41ITR414(SC) and Gordon Woodroffe Leather Mfg. Co. v. Commissioner of Income-tax : 44ITR551(SC) .
9. The Supreme Court in Commissioner of Income-tax, Kerala v. Malayalam Plantation Ltd., Quilon : 53ITR140(SC) considering the proper scope of the expression 'for the purpose of the business' and after noticing a number of English and Indian decisions summed up the position as follows :--
'The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits.' Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of its assets and property from expropriation, coercive process or assertion or hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business: it may comprehend many other acts incidental to the carrying on of a business. However, its limits are implicit in it.'
These cases and others which were referred to us at the Bar and which we have not chosen to refer, make it clear that each case must turn upon its own facts and the decisions in other cases can be useful as illustrations of the general principles. We may say the same thing a little differently by observing that the principles may appear to be well settled and the difficulty and the difference arise in connection with the application of the principles to the facts of the individual cases.
10. The learned counsel for the respondent pointed out that the nearest case to the present controversy is the one that was decided by the Madhya Pradesh High Court in Kalyamnal Mills Ltd. v. Commissioner of Income-tax, Madhya Pradesh : 57ITR261(MP) . In that case, the assessee mills cut down the salaries of all its employees and members of staff in 1933. The cut was restored in 1941, in the case of all its officers and staff except the managing director. Subsequently dearncss allowance and bonuspayments were made to officers and mem-ers of staff once again with the exception of the managing director. In 1951 by a resolution of the board of directors it was decided to restore the cut in the salary of the managing director with effect from 1933 and to pay him dearness allowance and bonus, etc. The resolution mentioned that the payment was made in consideration of the meritorious services of the managing director. The sum paid to the managing director amounting to Rs. 66,900 was claimed by the mills as business expenditure. On these facts the High Court held that 'as no reason was given for not restoring the cut in the salary of the managing director earlier and then for restoring it in his case alone from 1933 and as the managing director was still in the service of the mills and there was no evidence of any claim made by him for the payment and the resolution of the board of directors also showed that the payment was made voluntarily in consideration of the meritorious service of the employee, the payment was not made in discharge of liability or on grounds of commercial expediency. The amount was not allowable as business expenditure.'
11. The counsel contended that in the present case also the assessee company paid Rs. 60,000 to the managing agents only as a reward for past services and that it was not the assessee's case that the payment was made with a view to facilitate business in future and consequently, the case should be decided on the principle laid down by the Madhya Pradesh High Court in : 57ITR261(MP) .
12. In answer, the assessee's counsel submitted that the Madhya Pradesh High Court relied upon the Supreme Court decision in : 44ITR551(SC) but did not notice the distinguishing features of the case before the Supreme Court. The facts in that case were that one J. H. Phillips who was the Director of the assessee company and was also an employee in the managing agent company, resigned from his office. The Board of Directors passed a resolution that his resignation be accepted and in appreciation of hislong and valuable services to the company he be paid a gratuity of Rs. 50,000 out of which the appellant company was to pay Rs. 40,000 and the Managing Agent Company the balance of Rs. 10,000. The amount of Rs. 40,000 paid to T. H. Phillips was claimed as deduction under Section 10(2) (xv) of the Act. The matter went up to the Supreme Court and the claim for deduction was disallowed. In rejecting the claim, the Supreme Court observed as follows :--
'In our opinion the proper test to apply in this case is, was the payment made as a matter of practice which affected the quantum of salary or was there an expectation by the employee of getting a gratuity or was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. But this has not been shown and therefore the amount claimed is not a deductible item under Section 10(2)(xv).'
The counsel for the assessee pointed out that in the case, before the Supreme Court, J. H. Phillips had already resigned and there was no question of his continuing in service and facilitating the business of the assessee company. In the case before the Madhya Pra-desh High Court : 57ITR261(MP) the employee was still in service and the principles laid down by the Supreme Court should not have been applied. It was further submitted by him that in the present case also the managing agents continued as managing agents and that the reward for their past services was bound to secure goodwill and efficient working in future and that this should be taken as facilitating the business of the assessee company.
13. We have given our careful consideration to the submissions made on behalf of the assessee-company but have not felt persuaded to accept them. In our opinion, the decision of the Madhya Pradesh High Court in : 57ITR261(MP) does not disclose any wrong application of the principle enunciated by the Supreme Court. In our opinion, a reward for past services, without anything more, need not necessarily be construed differently in the cases of persons continuing in service and persons quitting service, although difference in other facts and circumstances may warrant different decisions in such cases. We have no hesitation in rejecting the contention of the assessee that the Madhya Pradesh High Court did not properly apply the principle enunciated by the Supreme Court.
14. As for the case before us, we consider it proper to recall a few facts appearing in the decision of the Income-tax Authorities Before the Income-tax Officer the claim for deduction was made principally on the ground that the payment was to secure the good-will of the managing agents. The assessee did not contend further that the good-will was sought to be secured for the purpose of promoting the business of theassessee-company. The managing agents were entitled to commission on profits and had adequate incentive to facilitate the business of the assessee-company and there is no evi-dence that any special incentive was needed for the purpose. The Appellate Assistant Commissioner observed, 'The assessee has not claimed that it is in settlement of old dues. It could not do so because no such liability existed in the balance-sheet.' Similarly, the Appellate Tribunal observed that 'it is not the case of the assessee before us that but for this payment the Managing Agents would have refused to continue as agents and that this was a bait to persuade it to continue as an agent in the ultimate benefit of the company. Throughout before the Income Tax Tribunals the assessee-company neither contended nor led evidence to show that the special payment was necessary to offer any special incentive to the managing agents and to facilitate the asses-see's business. It was before this Court that the assessee-company took this stand for the first time. The learned counsel for the assessee, argued that the reward of the past services and incentives for future works are so integrally connected with each other that this Court should liberally construe the entire transaction and hold that the special remuneration was paid to facilitate the business of the assessee-company. In the exercise of our advisory jurisdiction, we do not feel justified in permitting the counsel to develop the case on new lines.
15. On the evidence and findings of the Tribunal below we see no reason to differ from the findings of the Appellate Tribunal that the expenditure was not wholly and exclusively laid out for the purpose of the business. Having regard to this finding, we consider it unnecessary to deal with the other two questions debated at the Bar, namely, (i) whether the expenditure is in the nature of capital expenditure, and (ii) whether the expenditure can be deemed to have been incurred in the accounting year. The expenditure thus does not fall within section 10(2)(xv) of the Act and the Tribunal was right in disallowing the claim.
16. Our answer to the question is thusin the affirmative.