COMMISSIONER INCOME TAX THE GUJARAT Vs. JIVIBEN SMT

JUDGEMENT

(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 sec. 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 partnership 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 partners of whom the assessee was one and two minors were admitted to the benefits of the partnership. The assessee had 30 per cent at share in the profits and losses of the partnership and the accounts of the partnership were maintained according to Samvat year. Clauses 8 11 and 12 of the partnership deed according to the English translation read as follows :

(2.) 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 assessees 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 decide not on an abstract or academic view of what is proper expenditure laid out or expended wholly and exclusively for the purpose of ones business but on considerations of commercial expediency and principles of ordinary commercial trading. The expenditure and not be fruit full 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 ground of commercial expendiency 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 laid out or expended wholly and exclusively for the purpose of the assessees business.

(3.) The partnership as constituted under the partnership deed dated 2 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 profits and losses and as provided in Clause 4 he was liable to invest a sum of Rs. 3 0 0 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 no 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 is 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 state in the partnership amounted to over Rs. 3 0 30 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 making of decisions regarding the affairs of the 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 authorized 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 authorized 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 authorized 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 0 for the services to be rendered by him. Now it was not the case of the Revenue that this agreement was a seam 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 remumeration 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 assessees business