SRINIVASAN J. - The question referred for the decision of this court is :
'Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim sum of Rs. 23,200 paid to Keshavlal Talakchand as a valid deduction in the computation of its total income under section 10(2) of the Act ?'
The assessee is a public limited company carrying on business of spinning cotton. In the calendar year 1953, the previous year for the assessment year 1954-55, an agreement was entered into by the assessee with one Keshavlal Talakchand, said to be a yarn dealer of Bombay . On foot of this agreement, the assessee obtained a loan of two lakhs of rupees from the Bombay dealer. Over and above the interest of nine per cent. per annum on the loan, the assessee agreed in effect that he would pay a sum representing two per cent. on the mills prices of the yarn produced and sold by the assessee mill. The agreement made it appear as if all the production of the assessee mill to the extent of rupees three lakhs per month should be supplied to the lender. The assessee was to furnish details of the count, the number of bales, etc., and it was incumbent upon the lender to accept all the goods offered by the borrower. The further clauses of the agreement, however, provided that if only a part of the goods so offered was accepted by the lender, or if the lender desired to have the goods sold by the mill itself, nevertheless a nominal profit of 2 per cent. on the sale of the goods was to go towards the remuneration of the lender. Detailed reference to these clauses is not in fact necessary, for it is agreed that at no point of time was any supply actually made to the lender, all the goods produced being sold locally by the borrower only and the accounts of the lender being credited with this profit of 2 per cent.
It is stated that this argument continued in force till the end of the calendar year. A sum of Rs. 5,817 became payable to the lender as interest on the loan and a further sum of Rs. 23,200 as the 2 per cent. commission on the sale prices in respect of the quantity produced by the mills and sold by it till the end of the calendar year. Both these amounts were claimed as deductible allowances. The Income-tax Officer allowed the interest deduction and disallowed the further sum of Rs. 23,200 taking the view that this claim made under the head of yarn brokerage was intended only to camouflage the real situation and that it really represented the financing commission given to the lender. It was also found that this sum of rupees two lakhs obtained as a loan wen towards discharging certain debenture loans which were held by one Krishnan, who was a partner of the managing agency firm which was managing the business of the assessee company. The view thus was that the expenditure represented by this sum of Rs. 23,200 was not of a revenue nature.
In appeal, the Appellate Assistant Commissioner was also of opinion that there was no real selling agency and that the payment made to Keshavlal Talakchand could only be described as a payment made for the purpose of obtaining capital. It was conceded before the appellate authority that the reasonableness of the expenditure incurred could be looked into be the department. The appellate authority felt that when interest on the borrowed capital was given according to the normal market practice, the further allowance in respect of the same borrowal, under whatever head it might be asked for, could not be granted. The appeal to the Tribunal also failed and an application for making a reference to this court having been dismissed by the Tribunal, the question was directed to be referred to this court on an application under section 66(2) of the Act.
Mr. K. Srinivasan, learned counsel for the assessee, has rested his arguments on the question of this allowance only on the basis of section 10(2)(xv) of the Act. It is not denied, however, that in so far as this provision applies, an expenditure which can properly come within its scope must be one which is not in the nature of a capital expenditure or personal expenses of the assessee, but should be one laid out and expended wholly and exclusively for the purpose of such business, profession or vocation. What has to be established by the assessee is, firstly, that the expenditure is of a revenue nature, and, secondly, that the incurring of this expenditure was necessary for the purpose of the business. The claim was not based on the footing that there was a genuine sales agency created in favour of Talakchand and that this expenditure was necessary for the purpose of pushing the sales of the manufactured product of the assessee company. Though it was faintly suggested in the course of the arguments before us that the assessee had difficult in pushing through the sales locally and that it was necessary to enter into an agreement of this kind, it was finally conceded that all the manufactured product of the assessee company was sold only locally, and that the services of Talakchand were not utilised on even a singly occasion for functioning as a selling agent. In the appellate order of the Tribunal it is stated :
'With the above deposit of rupees two lakhs it is admitted that one of the partners of the managing agency firm who was retiring was paid off.'
The Income-tax Officer also noticed that the sum of rupees two lakhs had been utilised ultimately for clearing debenture loans. It is not denied by the learned counsel for the assessee that the Krishnan, one of the partners of the agency firm, held debenture loans of the value of rupees two lakhs. As he had to be retired from the partnership of the managing agency firm, it became necessary that this debenture loan should be discharged. It was principally for this purpose that the loan appears to have been borrowed. It cannot be stated, however, as rightly argued by the learned counsel, that this amount was in fact utilised for that purpose. It is claimed that this sum went into the general revenues of the company and, in the course of the operation of the company, the funds of the company were utilised for the purpose of discharging those debenture loans. On the basis of this reasoning it is urged that the expenditure was not of a capital nature. We do not however think it necessary to express any decided opinion on this question, or upon the allied question whether the payment of the sum of Rs. 23,200 represented a commission paid to a financier as would, in that view, be an expense of a capital nature. Considering the angle from which the matter was approached both by the department and the assessee, the question really was whether even regarded as a revenue expenditure, it has been established that this expenditure had been laid out wholly and exclusively for the purpose of the business. Obviously, it is necessary to examine what the profit position of the company was at the time when it entered into this agreement.
The material relevant for a determination of this question is almost non-existent. The suggestion that the company was in difficulties in disposing of its product is wholly unconvincing because we find that the sales during the nine months of the calendar year 1961 came to Rs. 17,89,957; for the calendar year the sales were Rs. 40,09,445. Up to September 4, 1953, the date before the agreement was entered into, the sale comes to Rs. 23,53,853. During the remaining part of the calendar year 1953, that is, between September 5, 1953, the date of the agreement, and December 31, 1953, the sales came to Rs. 13,45,373. The sales during the calendar year 1953 as compared with the calendar year 1952 do not show any appreciable increase and the claim that this agreement was necessary to be entered into in order to push sales totally fails to carry conviction.
No material was placed before the department or the Tribunal to show that the company was or stood in need of working funds at the time when the agreement was entered into. Except for a copy of the loan account, interest and commission account, the case of the assessee is absolutely bare of any details which could enable the taxing authorities to consider to what extent the claim would come within the scope of section 10(2)(xv) of the Act.
Learned counsel had referred to Commissioner of Income-tax v. Tata Sons Ltd. : 7ITR195(Bom) . That was a case where the managing agents found a financier for the Tata Iron and Steel Co. Ltd., of which company they were the managing agents and an agreement was entered into by which the financier was assigned a share of six annas in the rupees out of the commission and other remuneration which the managing agents were entitled to receive from the managed company. The question that really arose in that case was whether the agreement to pay a share of the commission was an expenditure incurred by the assessee solely for the purpose of earning profits or gains in the conduct of their managing agency business. That question was found in favour of the assessee. In coming to that conclusion, the learned judges found as a material circumstance that the managed company was urgently in need of funds and that the ordinary practice was for the managing agents to finance the company. They observed :
'The question whether the payment of a part of the commission to a third person can be regarded as expenditure incurred solely for the purpose of earning that the commission is a question which must be answered on the facts of each case and on a commercial basis. Now, it is to my mind clear in this case that the assessees were bound either to lose the commission which they were getting from the Tata Iron and Steel Co. Ltd. or to arrange for financing that company, and we must assume that the arrangement which they made as to finance was the wisest which could be made in the circumstances. The agreement to share their commission with the lender was part of the terms on which they managed to obtain finance, and, in my opinion, therefore, in a commercial sense, the payment of this share of the commission was an expenditure solely for the purpose of earning profit or gains, viz., the remainder of the commission.'
The passage above clearly stresses the fact that but for the incurring of this expenditure, the assessee in that case stood to lose the chances of earning any commission whatsoever. That was the material circumstances on the basis of which the learned judges came to the conclusion that the expenditure was solely and exclusively for the purpose of earning profits. In contrast, no facts relevant to justify a conclusion of that nature were ever placed by the assessee in this case before the department or the Tribunal.
It was vaguely suggested by the learned counsel for the assessee that since the payment of Rs. 23,200 was on the basis of contract, the assessee became bound to pay the amount and the payment being for the purpose of the business, it ought to be accepted at its face value as coming within the scope of section 10(2)(xv). We are unable to accept this argument as at all sound. The onus of establishing that an item of expenditure was properly incurred and became allowable under section 10(2)(xv) rests directly upon the assessee making the claim, and solely for the reason that he has entered into an agreement it does not follow that the requirements of that sub-clause are satisfied.
We are, therefore, of the view that on the facts that were available to the Tribunal, the Tribunal could justifiably reach the conclusion that the expenditure was not incurred solely and exclusively for the purpose of the business. The question is accordingly answered in the negative and against the assessee. The assessee will pay the costs of the department. Counsels fee Rs. 250.