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Commissioner of Income-tax, Calcutta Vs. J. K. Eastern Industries (Private) Limited. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 67 of 1958
Reported in[1965]55ITR376(Cal)
AppellantCommissioner of Income-tax, Calcutta
RespondentJ. K. Eastern Industries (Private) Limited.
Cases ReferredIndian Molasses Co. (Private) Ltd. v. Commissioner of Income
Excerpt:
- sankar prasad mitra j. - this is a reference under section 66(1) of the indian income-tax act, 1922. the commissioner of income-tax by three several applications presented of the 4th september, 1958, required the appellate tribunal to refer to this court certain questions of law which were said to arise out of the order of the tribunal in the i. t. a. nos. 2415, 2416 and 2417 of the 1957-58 dated the 20th june, 1958. a statement of the case has been drawn up by the appellate tribunal, west bengal, for all the three applications mentioned above.the assessment years are 1950-51, 1951-52 and 1952-53 and the relevant accounting years are those ending on the 30th september, 1951, respectively.the assessee is a company incorporated under the indian companies act, 1943. the certificate of.....
Judgment:

SANKAR PRASAD MITRA J. - This is a reference under section 66(1) of the Indian Income-tax Act, 1922. The Commissioner of Income-tax by three several applications presented of the 4th September, 1958, required the Appellate Tribunal to refer to this court certain questions of law which were said to arise out of the order of the Tribunal in the I. T. A. Nos. 2415, 2416 and 2417 of the 1957-58 dated the 20th June, 1958. A statement of the case has been drawn up by the Appellate Tribunal, West Bengal, for all the three applications mentioned above.

The assessment years are 1950-51, 1951-52 and 1952-53 and the relevant accounting years are those ending on the 30th September, 1951, respectively.

The assessee is a company incorporated under the Indian Companies Act, 1943. The certificate of incorporation was obtained on the 28th May, 1945. The company was appointed the managing agent to Reform Flour Mills Ltd. on and from the 1st June, 1945. In the three assessment years referred to above, the assessee carried on certain speculative activities in B-Twills, hessian, etc. In the first year, there was a loss in speculation of Rs. 1,38,675. In the second accounting year, there was a loss in speculation of Rs. 32,625. Similarly, in the third accounting year, there was a speculative loss of Rs. 53,250. The department disallowed the losses in all the three years on the ground that the speculative activities were outside the scope of the objects of the assessee-company, and such activities were ultra vires the companys memorandum of association and on the ground that the activities were not in the nature of an adventure in trade.

The Appellate Tribunal held that the activities of the company were well within the objects as enumerated in the memorandum of association and the activity of purchases and sale of hessian and B-Twill could not be for the purpose of investment but was only for carrying out the business of the company. In this view, it held that the losses were incurred in the carrying out of the assessees business and should be set off against the computation of its total income.

The other point in this reference is that the assessee-company, as I have said, was the managing agent of the Reform Flour Mills Ltd. Both the assessee and the Reform Flour Mills Ltd. were private companies. Under its agreement with the managed company the assessee was entitled to a fixed remuneration of Rs. 1,000 per month and a commission of 2% on the sales of the managed company. According to this arrangement, for the assessment year relevant to the accounting year ending upon the 30th September, 1950, the amount of commission and allowance accrued to the assessee was Rs. 3,93,124 and Rs. 12,000 respectively. For the accounting year ending on the 30th September, 1951, the commission was Rs. 3,11,902. In both the two assessment years the managed company was not disclosing good profits and the assessee-company forwent Rs. 2,81,599 for the accounting year ending on the 30th September, 1950, relevant for the assessment year 1951-52 and Rs. 2,22,641 for the accounting year ending on the 30th September, 1951, relevant for the assessment year 1952-53.

The Income-tax Officer held that this forgoing on the part of the assessee-company amounted to parting with a portion of the profit and, therefore, not deductible from the total income. The Appellate Assistant Commissioner holdup this decision. For the assessment year 1951-52, the assessee-company did not pass any resolution either in any of the meetings of its board of directors or in its general meeting. For the assessment year 1952-53, a resolution was passed at a meeting of the directors held on the 19th November, 1952, resolving that in view of the unsatisfactory working of the Reform Flour Mills Ltd., it was decided to give up the commission for the sum of Rs. 2,22,641 being the managing agency commission for the period from October, 1950, to September 30, 1951. On the 15th March, 1951, the assessee-company wrote to the managed company a letter stating that the commission and allowance for the period from October 1, 1949, to September 30, 1950, amounted to Rs. 3,93,124 and Rs. 12,000 respectively but in view of the unsatisfactory trading conditions of the mills, they were prepared to accept a sum of Rs. 1,23,525 in full settlement of their commission and allowance for the year and agreed to refund Rs. 2,81,599. The assessees accounting year ended each year on the 30th September, whereas the accounting year of the managed company ended each year on 30th December. In the report to the shareholders, the managed company intimated to the shareholders about the surrender of the foresaid sum of Rs. 2,81,599. Similarly it reported to the shareholders to the same effect in the next accounting year. In the report it was stated that the managed company approached the managing agent (the assessee) to give up its claims of the managing agency remuneration and the managing agent agreed to the proposal. The assessee-company also intimated to the shareholders in the directors report ending on the 30th September, 1950, and the 30th September, 1951 about the surrender of these commissions. The Appellate Tribunal found that the managed companys balance-sheet showed that the said company was not financially strong and if the managing agency commission was paid in full, the managed company would run into debts.

The Appellate Tribunal has held that the forgoing of a part of the managing agency commission could not be taken as a gift in favour of the managed company and that by the surrender of this part of the commission the managed companys financial position would be strong and the managing agent would benefit by the stronger financial position of the managed company. The Appellate Tribunal has also found that the directors of the managed company reported to the shareholders about the surrender of these commissions by the managing agency company and that a request was made by the managed company to forgo a part of its claim. The Appellate Tribunal has relied on a judgment of the Bombay High Court which was then unreported in Chandulal Keshavlal & Co., Petlad v. Commissioner of Income-tax, which subsequently went up to the Supreme Court. The decision of the Supreme Court is reported in [1960] 38 I. T. R. 601. The Appellate Tribunal held that the payment to the managed company by the assessee was in view of commercial expediency and the amounts would, therefore, be admitted as expenses under section 10(2) (xv) of the Indian Income-tax Act, 1922.

From the above facts and circumstances, the following questions of law have been referred to us :

'(1) Whether, on the facts and in the circumstances of the case, as also on a proper construction of the memorandum of association of the assessee-company, the loss suffered by the assessee in transactions of hessian and B-Twill was a business loss ?

(2) Whether, on the facts and in the circumstances of the case, the sums of Rs. 2,81,599 and Rs. 2,22,641 for the assessment years 1951-52 and 1952-53 respectively forgone by the assessee-company on account of managing agency commission were admissible expenses under section 10(2) (xv) of the Indian Income-tax Act ?'

I shall first deal with the question of losses suffered by the assessee in transactions of hessian and B-Twills. Upon hearing learned counsel for the parties, it seems that there appears to be no dispute that these were speculative transactions or transactions of a wagering nature. The finding of the Tribunal that these activities were well within the objects as enumerated in the assessees memorandum of association cannot, therefore, be upheld. In the premises, we hold that these transactions were ultra vires the memorandum of association of the assessee. But it is well known that whether the activity is within the memorandum of a company or not is irrelevant for purposes of assessability of its income. In Commissioner of Inland Revenue v. Hyndland Investment Company Ltd., a company was formed in 1899 to purchase certain lands on which, under contracts entered into by the vendors, five blocks of flats comprising forty flats were in the process of erection. The company completed the building of the flats and let them to tenants. It acquired no other land. An offer to buy one block of flats was made to the company in 1902, but the negotiations fell through. Between 1920 and 1926 sixteen flats were sold separately. The memorandum of association of the company stated as one of its objects the acquisition of land, etc., to hold as an investment, and as another object the building of tenements etc., with power to realise any of its property. The company was assessed under Schedule D, Case, in respect of the profits on the sales. The General Commissioners on appeal were of opinion that the company had not traded but merely realising capital. The Crown appealed. It was held by the Court of Session, Scotland (First Division), that there were no grounds for disturbing the Commissioners decision as being erroneous in point of law. It is interesting to quote the observations of the Lord President Clyde, at page 699, which are as follows :

'The first point that strikes one is that the company in its memorandum of association describes its objects as being the acquisition of land and other heritable property, and the holding of the same as an investment, and the division of the income thereof. That is not, however, conclusive, because the question is not what business does the taxpayer profess to carry on, but what business does he actually carry on...'

Our Supreme Court also in Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax has pointed out at page 52 that, whether the transaction is or is not within the powers of a company, has no bearing on the nature of the transaction, or on the question whether the profits arising therefrom are capital accretion or revenue income.

We have, therefore, to go into the question as to whether the Tribunal was right in deciding that the activities of the assessee were in the nature of an adventure in trade.

Mr. Meyer, learned counsel for the applicant, has urged that these activities could not be said to be part and parcel of the assessees business. They are strictly of a casual or non-recurring nature. The assessee never did any business in B-Twills and hessian except the four transactions that it had entered into between 1945 and 1957. If instead of incurring losses, the assessee had made profits, it would have certainly been urged on its behalf that these profits were mere windfalls resulting from isolated ventures in the nature of gambling.

The Appellate Assistant Commissioner in paragraph 4 of his order at pages 34-35 of the paper-book has given the details of the speculative activities of the assessee. The said paragraph runs thus :

'The details of the speculative transactions, indulged in by the company to date, are as follows :

Account year ending 30th September, 1949 : Assessment year 1950-51.

Rs.

1,50,000 yards of hessian cloths purchased at Rs. 53-12-0 as per bought contract dated 22nd October, 1948, are sold as per sold contract dated 28th January, 1949 - Difference less .....

97,500

2,70,000 pieces of B-Twill bags at Rs. 118-4-0 (Bought contract dated 8th April, 1949, sold contract dated 4th May, 1949) .....

41,175

Total loss claimed .....

138,675

Assessment year 1951-52, year ending 30th September, 1950

Difference paid in respect of 1,80,000 bags of B-Twill ......

32,625

(Bought contract 22nd July, 1949, sold contract 23rd June, 1949)

This loss being claimed by the company in the assessment year 1951-52 had been disallowed by the Income-tax Officer.

Assessment year 1952-53, year ending 30th September, 1951. Difference paid in respect of 75,000 pieces of B-Twill ......

53,250

(Bought contract 28th September, 1951, sold contract 22nd August, 1951)

The loss of Rs. 53,250 has been claimed in the assessment year 1952-53 and has been disallowed by the Income-tax Officer.'

The character and quantity of goods purchased and sold by the assessee clearly indicate that these transactions were entered into purely with the idea of making profits. There was no intention on the part of the assessee to make these purchases to hold and enjoy the goods concerned. The nature of the transactions precludes any such theory and the only conclusion is that these purchases were made with the intention to re-sell. The incidents associated with the purchase and re-sale of commodities like B-Twills and hessians were all present in these transactions.

In the well-known case of G. Venkataswami Naidu & Co. v. Commissioner of Income-tax, at pages 607 and 608, the Supreme Court observes as follows :

'This question has been the subject-matter of several judicial decisions; and in dealing with it all the judges appear to be agreed that no principle can be evolved which would govern the decision of all cases in which the character of the impugned transaction falls to be considered. When section, sub-section (4), refers to an adventure in the nature of trade it clearly suggests that the transaction cannot properly be regarded as trade or business. It is allied to transactions that constitute trade or business but may not be trade or business itself. It is characterised by some of the essential features that make up trade or business but not by all of them; and so, even an isolated transaction can satisfy the description of an adventure in the nature of trade. Sometimes it is said that a single plunge in the waters of trade may partake of the character of an adventure in the nature of trade. This statement may be true; but in its application due regard must be shown to the requirement that the single plunge must be in the waters of trade. In other words, atleast some of the essential features of trade must be present in the isolated or single transaction. On the other hand, it is sometimes said that the appearance of one swallow does not make a summer. This may be true if, in the metaphor, summer represents trade; but it may not be true if summer represents an adventure in the nature of trade because, when the section refers to an adventure in the nature of trade it is obviously referring to transactions which individually cannot themselves be described as trade or business but are essentially of such a similar character that they are treated as in the nature of trade.'

At page 609 the Supreme Court has mentioned some of the essential features of trade or business and concludes at page 610 as follows :

'In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction; and so, though we may attempt to derive some assistance from decisions bearing on this point, we cannot seek to deduce any rule from, them and mechanically apply it to the facts before us.'

In the present reference, we find that fairly large quantities of B-Twills and hessians were being purchased by the assessee. Obviously, these were intended for re-sale and earning of profits therefrom. To say that these were not adventures in the nature of trade would not, in our opinion, be a correct approach.

In support of this view, I may refer to a few other decisions. In Rutledge v. Commissioners of Inland Revenue the appellant was a moneylender who was also in 1920 interested in a cinema company. He had since that time been interested in various businesses. Being in Berlin in 1920 on business connected with the cinema company, he offered an opportunity of purchasing very cheaply a large quantity of paper. He effected the purchase and, within a short time after his return to the United Kingdom, sold the whole consignment to one person at a considerable profit. The court of Session, Scotland (First Division), held that the profits in question were liable to assessment to income-tax, Schedule D, and to excess profits duty as being profits of an adventure in the nature of trade.

In the present case, the quantities of B-Twills and hessians were, as I have said, fairly large. Not only they were sold soon after the purchases, in some of the cases the assessee had sold the goods first and then purchased from the market to earn profits.

In Regent Estates Ltd. v. Commissioner of Income-tax the assessee, a property-owning company, on the 15th of June, 1949, entered into a contract with Nederlandsche Indische Handle Bank for the purchase of 90,000 U. S. dollars at the rate of Rs. 333-8-0 for each 100 dollars, the date for delivery being July 15 and August 15. The assessee did not take delivery on the due dates, but on September 23, 1949, sold the said dollars to the same bank at the then exchange rate of Rs. 474-12-0 for each 100 dollars. The Income-tax Officer assessed the profits thus made, namely, Rs. 1,27,125, as income from business. The assessee contented that it was exempt as a casual and non-recurring receipt not arising from business. It was held by this court that the most important point to be considered in deciding the question was the object or purpose for which the assessee acquired the foreign exchange and as the facts clearly showed that the object was to make a profit by sale, the adventure was one in the nature of trade, and the profit was assessable as income from business.

Reverting to the case before us, when we look at the details of the speculative transactions set out by the Appellate Assistant Commissioner at pages 34 and 35 of the paper-book, it seems to us that the facts clearly show that the object or purpose for which the assessee acquired hessians and B-Twills was to make profits by resale and as such these were adventures in the nature of trade.

Then again in Commissioner of Inland Revenue v. Fraser the respondent, a woodcutter, bought through an agent for resale whiskey in bond for pounds 407; the whiskey was sold in 1940 for pounds 1,131. This was the respondents sole dealing in whiskey : he had no special knowledge of the trade, and he did not take delivery of the whiskey nor did he have it blended or advertised. The respondent appealed against an assessment to income-tax under Schedule D in respect of his profit on the transaction. The General Commissioners found that the respondent had merely made an investment, and that the profit on its realisation was not assessable to income-tax. The Scottish Court Session (First Division) held that the transaction was an adventure in the matter of trade.

The assessee, in the case before us, was merely the managing agent of the Reform Flour Mills Ltd. It was not a regular dealer in B-Twills and hessians but the nature and quantities of its speculative transactions lead us to the conclusion that these were adventures in the nature of trade.

We, therefore, are inclined to uphold the view of the Appellate Tribunal that the speculative activities of the assessee in all the three assessment years in question were in the nature of adventures in trade.

I will next deal with the question of the managing agency commission. In the earlier part of the judgment, the finding of the Tribunal on this aspect of the case have been referred to, but I intend to set out fully what has been stated by the Appellate Tribunal in paragraph 6 (pages 8 and 9 of the paper-book) of its order made on the 20th June, 1958. The said paragraph is as follows :

'For the assessment years 1951-52 and 1952-53, there was a common ground regarding the managing agency remuneration. The assessee company is the managing agents of Reform Flour Mills Ltd. It is to be noted that both these two companies, the managing agents and the managed company, were private companies. The term of the managing agency commission was the payment of a fixed remuneration of Rs. 1,000 per mensem and commission of 2% on the sales of the managed company. According to this arrangement, for the first assessment year relevant to the accounting year ending upon 30th September, 1950, the amount of commission accrued the assessee was Rs. 4,05,124 and for the accounting year ending upon 30th September, 1951, it was Rs. 3,11,902. In both the two assessment years, the managed company was not disclosing good profits and the assessee company forwent Rs. 2,81,599 for the accounting year ending upon 30th September, 1950, relevant for the assessment year 1951-52 and Rs. 2,22,641 for the accounting year ending upon 30th September, 1951, relevant for the assessment year 1952-53. The Income-tax Officer held that this forgoing on the part of the assessee-company tantamounted to parting with a portion of the profit and, therefore, not deductible from the total income. The Appellate Assistant Commissioner upheld this decision. For the assessment year 1951-52, the assessee-company did not pass any resolution either in its board meeting or in the general meeting. For the assessment year 1952-53, a resolution was passed at a meeting of the directors held on 10th November, 1952, resolving that, in view of the unsatisfactory working of the Reform Flour Mills Ltd., it was decided to give up the Commission for the sum of Rs. 2,22,641 being the managing agency commission for the period from October, 1950, to 30th September, 1951. On the 15th March, 1951, the assessee-company wrote to the managed company a letter stating that the commission and allowance for the period from 1st October, 1949, to 30th September, 1950, amounted to Rs. 4,05,124, but in view of the unsatisfactory trading conditions of the mills, they were prepared to accept a sum of Rs. 1,23,525 in full settlement of their commission and allowance for the year and agreed to refund Rs. 2,81,599. The assessees accounting year ended each year upon 30th September, whereas the accounting year of the managed company ended each year upon 31st December. In the report to the shareholders the managed company intimated to the shareholders about the surrender of the said sum of Rs. 2,81,599. Similarly, it reported to the shareholders to the same effect in the next accounting year. In the report it was stated that the managed company approached the managing agents (the assessee) to give up their claim of managing agency remuneration and the managing agents agreed to the proposal. The assessee-company also intimated to the shareholders in the directors report ending upon 30th September, 1950, and 30th September, 1951, about the surrender of these commissions.'

The learned standing counsel, appearing for the respondent, has contended before us that the Appellate Tribunal has found (1) that there was forgoing of commission accrued to the assessee and (2) this forgoing had taken place in the course of the accounting year. A close examination of the findings of fact made by the Appellate Tribunal in paragraph 6 of its order quoted above does not support these contentions. So far as the accounting year ending of the 30th September, 1950, is concerned, the Appellate Tribunals finding is that on the 15th March, 1951, the assessee-company wrote to the managed company stating that it was prepared to accept only the sum of Rs. 1,23,525 and agreed 'to refund Rs. 2,81,599.' In other words, the managing agent received during the accounting year ending on the 30th September, 1950, the entire amount of commission and allowance aggregating to Rs. 4,05,124 and on the expiry of the accounting year it agreed to refund to the managed company the sum of Rs. 2,81,599. Similarly, for the accounting year ending on the 30th September, 1951, the resolution to give up the commission to the extent of Rs. 2,22,641 was passed by the assessee-company on the 10th November, 1952, upon the expiry of the accounting year.

The position, therefore, seems to be that the assessee received its commissions during the accounting years concerned and after the accounting years had expired, it decided upon giving up portions thereof.

The order of the Appellate Assistant Commissioner has been made a part of the statement of the case and has been annexed thereto. He has said that the fact that the managing agency remuneration agreed to be surrendered by the assessee has not been charged to revenue in the accounts of the Reform Flour Mills Ltd. is immaterial to decide the issue as there is no denial that the commission was actually received. At that point of time when it is actually received liability to tax is attracted. The subsequent surrender or waiver cannot change the character of the original receipt.

To my mind, the Appellate Assistant Commissioner had come to the correct conclusion. I may refer to the well-known observation of Lord Trayner in Californian Copper Syndicate Ltd. v. Harris, which are as follows :

'But it was said that the profit - if it was profit - was not realised profit, and, therefore, not taxable. I think the profit was realised. A profit is realised when the seller gets the price he has bargained for. No doubt here the price took the form of fully paid shares in another company, but, if there can be no realised profit, expect when that is paid in cash, the shares were realisable and could have been turned into cash, if the appellants had been pleased to do so. I cannot think that income-tax is due or not according to the manner in which the person making the profit pleases to deal with it. Suppose, for example, a seller made a profit on a trade transaction, but leaves the price (including the profit) in the hands of the buyer at so much per cent interest. That he so deals with it, rather than take the cash into his own pocket, would not affect the claim of the revenue for the tax payable on the profit. No more, in my opinion, does it affect the liability for the tax that the appellants left their profit in the hands of the company they sold to and took the companys shares as their voucher.'

Similar is the observation of Rowlatt J. in Board of Conservators of the Severn Fishery District v. OMay that it is very well-settled law that it does not matter at all what the income is expended upon if the subject-matter is taxable.

Then in Commissioner of Inland Revenue v. Anglo Brewing Co. Ltd., the respondent company, in October, 1920, which had in the past voluntarily granted pensions to certain employees on retirement, decided to close down its business, and immediately informed its employees of the fact, promising to treat them as generously as it had done in the past. On the 17th March, 1921, the directors at a formal meeting arranged to provide annuities for employees or to grant compensation for loss of office, and with two exceptions settled the amount to be awarded in each case. The pensions awarded were commuted for lump sums in 1922. The company ceased trading on the 30th November, 1921, and subsequently went into liquidation. No amounts were paid either as compensation for loss of office, or for pensions or for commutation of pensions, before the 31st March, 1921. The company claimed to deduct the whole of the compensation and the estimated cost of the annuities from its profits for the accounting period ended the 31st March, 1921, for the purpose of excess profits duty and corporation profits tax. The General Commissioners on appeal decided in its favour as regards certain sums which they considered to be payments for providing pensions, as distinct from compensation for loss of office. The Kings Bench Division held that the payments in question were not made for the purpose of carrying on the companys trade and that, in any event, as they were not made prior to the 31st March, 1921, they were not admissible deductions in computing the companys trading profits for the accounting period ending on that date.

Then again, in Commissioners of Inland Revenue v. Bell, during the war, the respondent had considerable difficulty in carrying on his business owing to the absence of employees on war service and in 1915 or 1916 he made an oral promise to some of the remaining employees that when he turned the business into a limited company (as he intended to do at the end of the war) he would give them a proportion (undefined) of shares in the company as a bonus in recognition of their increased work and responsibility during the war. The company was registered in January, 1921, took over the business as from 1st July, 1920. The purchase price was to be satisfied by the allotment of fully paid shares to the respondent or his nominees, and in January, 1921, the respondent arranged that 11,200 pounds I shares should be allotted to the employees in fulfillment of his promise. The pounds 11,200 was not charged to revenue in the accounts of the business to 30th June, 1920 but was shown as paid out of the balance of the respondents capital account at that date. Share certificates were issued to the allottees in October, 1921. The respondent claimed that the sum of pounds 11,200 was an expense of the business and should be deducted in computing his liability to excess profits duty for the accounting period ended 30th June, 1920. The Court of Session, Scotland (First Division), held that the said sum was not deductible in computing for excess profits duty purpose the profits of the accounting period ended 30th June, 1920.

Coming now to Indian case, in Commissioner of Income-tax v. Basant Rai Takhat Singh, the assessee took a lease from a cantonment authority for a period of 30 years. Under the terms of the leasehe had to erect certain permanent buildings which were to become the property of the lessors on the determination of the lease. He erected the buildings and received rents from third persons to whom he had leased the buildings. In computing the tax payable by the assessee in respect of the rents so received, the assessee claimed that allowance should be made for the expenditure incurred by him in erecting the buildings. On a reference by the Commissioner of Income-tax, the High Court held that the assessee was entitled to a deduction of the costs of erection from the rents in computing the taxable amount and that the deduction for the year of assessment should be one-thirtieth of the amount expended in erecting the buildings. The Judicial Committee, reversing the decision of the High Court, held that the assessee was not entitled to the deduction claimed inasmuch as the expenditure for erection of buildings was not incurred in the year in respect of which the income sought to be assessed arose, but occurred many years before.

Lastly, I shall refer to the observation of the Supreme Court of India in Indian Molasses Co. (Private) Ltd. v. Commissioner of Income-tax, which run thus :

'The income-tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the traders pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax laws do not take every such allowance as legitimate for the purposes of tax. A distinction is made between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent. The former deductible but not the latter.'

In the reference before us, I have already observed that the commissions were received during the accounting years. Upon the expiry of the accounting years, that is to say, in the following accounting years, decisions were made by the assessee to give up certain portions of those commissions. In these circumstances, on the authorities cited above, it is clear that the assessee cannot claim as expenses during the accounting years concerned the sums it had given up under section 10(2) (xv) of the Indian Income-tax Act. The Appellate Tribunal has followed an unreported decision of the Bombay High Court. That decision came to be considered ultimately by the Supreme Court : vide Commissioner of Income-tax v. Chandulal Keshavlal & Co. In that case the total commission of the managing agent for the accounting year 1950 was the sum of Rs. 3,09,114, but at the oral request of the board of directors of the managed company, the assessee agreed to accept a sum of rupees one lakh only as its commission, which was credited to the account of the managing agent in the books of the company at the end of the year 1950. In this case the specific finding of the Tribunal is that the managing agent did not agree to give up portions of their commissions during the accounting year. For the accounting year ending on the 30th September, 1950, the decision of the managing agent, according to the Tribunal, was communicated to the managed company of the 15th March, 1951. For the accounting year ending on the 30th September, 1951, the resolution of the directors of the managing agent was passed on the 10th November, 1952. The facts are, therefore, clearly distinguishable from the facts in Chandulal Keshavlal & Co.s case.

Mr. Meyer has also argued that the assessee gave up the aforesaid sums gratuitously and, as such, is not entitled to any deduction. It is not necessary to deal with this point as we have come to the same conclusion on the other ground indicated by us.

In the premises, the answers to the questions referred to us shall be as follows :

(1) The loss suffered by the assessee in transactions of hessian and B-Twills was a business loss on the ground that these were adventures in the nature of trade.

(2) No.

Each party will bear and pay its own costs of the reference.

SEN J. - I agree.


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