1.This reference relates to the assessment year 1960-61 corresponding to the accounting year ended on 31-3-1960. The assessee is a firm of partnership carrying on business as a dealer in certain edible articles and also acts as a distributor for the products of the Margarine and Refined Oils Co. (P) Ltd., Bangalore, for which it is remunerated by payment of commission. For the assessment year, the assessee returned a total income of Rs. 34,042, after deducting Rs. 20,199 as expenditure incurred by way of payment of brokerage. The claim for deduction was disallowed by the assessing authority, but allowed in part on appeal. The Appellate Assistant Commissioner considered that the brokerage claimed as having been paid worked out at 40 percent of the profit, and as, in his view, this was excessive, he fixed a remuneration of Rs. 300 per month to each of the four agents and disallowed the excess. The assessee took the matter on further appeal to the Tribunal but unsuccessfully. In the circumstances, the following question has been referred to us under S. 66(2) of the Income-tax Act, 1922:
'Whether on the facts and in the circumstances of this case, the disallowance of Rs. 5799 being part of the remuneration by way of commission paid to the four employees of the concern is justified'.
It is nobody's case that the four persons were employees of the concern. Apparently, the mistake has crept into the question on the assumption that they were employees. We shall proceed to consider the question regarding the four persons as agents and not as employees. Under S. 10(2)(xv) the assessee is entitled to deduction of any amount expended b him wholly and exclusively for the purpose of the business. Once the reality of the expenditure for that purpose is accepted, no further question can arise, and the assessee will be, as a matter of right, entitled to deducted of the amount expended for that purpose. It is not for the Revenue to embark upon business considerations and the reasonableness or otherwise of the quantum of expenditure. It is of course open to the Revenue in finding the reality of the expenditure and the purpose for which it is incurred to go into the facts and see whether at all the amount claimed was expended and for the purpose of the business. In fact, it is the duty of the Revenue when the assessee claims deduction under that provision, to investigate the material and give a finding. Even if they failed to give a finding it should be taken that they accepted the reality of the expenditure and the purpose for which it is given, when in point of fact, they allowed a part and disallowed the rest of the claim. In other words, the jurisdiction of the Revenue under S. 10(2)(xv) is confined to deciding the reality of the expenditure, namely, whether the amount claimed for deduction was factually expended or laid out, and whether it was wholly and exclusively for the purpose of the business. Once that conclusion is reached in favour of the assessee, deduction of the amount should follow as a matter of course.
(2) This Court in Newton Studios Ltd. v. Commissioner of Income-tax, Madras, : 28ITR378(Mad) observed with reference to S. 10(2)(xv):
'The Income-tax Act does not clothe the taxing authority with any power or jurisdiction to determine the reasonableness of the amount so fixed and paid by the assessee. The only test for the deductibility of such remuneration is whether the expenditure has been incurred solely and exclusively for the purpose of the business. If the reality of the payment is challenged or is in dispute different considerations arise; so also in cases where the tax authorities are able to point to some consideration other than the purpose of the business as accounting for any portion of the payment made'.
We respectfully agree with these observations. The two relevant facts for the purpose of deduction under S. 10(2)(xv) are the reality of the expenditure and the purpose for which it is expended. The reasonableness of the expenditure can only be gone into for the purpose of determining whether in fact the amount was spent. For instance, in this case, the Revenue could well have found that it was not 40 per cent of the total profit that was expended but only less. In the absence of such a finding or when it is found that the 40 per cent of the profit was incurred for the purpose of the business, was incurred for the purpose of the business, there is no alternative for the Revenue but to give deduction of the entire amount.
(3) In this case, as we said, the Income-tax Officer disallowed the expenditure in toto. But the Appellate Assistant Commissioner allowed in part. In the years prior to the accounting year, the agreement for payment of remuneration to the agents would appear to have been oral. But somehow in November 1959, an agreement was entered into in writing as to the payment of remuneration. The four agencies are described, two of them as agencies for canvassing purchasers of certain articles, and the rest as agency for packing and the agency for delivery. The terms of agreement between the assessee and the agents are that the firm was to provide them with work and payment of remuneration was to be at the rate of one anna six pies per article sold in the firm. Neither the tribunal nor the Appellate Assistant Commissioner recorded a finding that the remuneration as stipulated in the agreement was not paid or that the payment was not incurred exclusively and wholly for the purpose of the business. The disallowance in part by the Appellate Assistant Commissioner was on the basis that in his view the payment of forty per cent of the profits as commission was rather excessive. That as we said is not a permissible reasoning, if the reality of the expenditure and the purpose for which it is incurred are accepted. The Tribunal merely accepted that reasoning.
(4) In our view, a proper disposal of the appeal would have been for the Tribunal to find whether the agreement of agency with each of the four persons was a fact, whether payment of commission to each of them as claimed by the assessee was true, and whether payment of commission to the four persons was an expenditure incurred by the assessee wholly and exclusively for the purpose of the business. If these points are found in favour of the assessee, no further question can arise as to reasonableness or otherwise of the quantum of the commission paid, for it is entirely for the assessee to decide it.
(5) We answer the question referred to us in favour of the assessee, but in the expectation that the Tribunal will dispose of the appeal afresh in the light of the observations contained in this judgment. No costs.
(6) Reference answered.