COMMISSIONER OF INCOME TAX Vs. JIVIBEN

JUDGEMENT

(1.) THIS reference at the instance of the CIT raises the question whether a certain payment made by the assessee to his agent is an admissible item of expenditure under S. 10(2)(xv) of the IT Act, 1922. The question arises out of an assessment made on the assessee as an individual for the asst. yr. 1961 62, the relevant account year being the calendar year 1960. The assessee was a partner in a firm called M/s Halar Salt & 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 a 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 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 may be pointed out at this stage that the assessee was right up to some date in the accounting year, resident in Mombasa and a power of attorney was, therefore, executed by him in favour of one Somchand on 28th November, 1951, appointing Somchand to be his attorney to act for him and represent him in the business and to sign or execute or concur in signing or executing all necessary papers and documents necessary to preserve the rights and privileges of the partnership with the Government, local authority or municipality or any other Department of the Government. Soon after the execution of the partnership deed dated 2nd November, 1959, the assessee enterd into an agreement with Somchand on 24th December, 1959. It was recited in the agreement that the assessee was then residing in British East Africa and a power of attorney was therefore executed by the assessee in favour of Somchand for the purpose of attending to the work of the partnership on behalf of the assessee whenever necessary but no remuneration was settled to be payable to Somchand and, therefore, in order to avoid any dispute in the future as also for the purpose of authorising Somchand to act on behalf of the assessee and to attend to the day to day business of the partnership, the agreement was entered into between the assessee and Somchand. The services agreed to be rendered by Somchand were as set out in cl. 1 of the agreement :

(3.) 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 assessee's 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 decided not on an abstract or academic view of what is proper expenditure laid out or expended wholly and exclusively for the purpose of one's business but on consideration of commercial expediency and principles of ordinary commercial trading. The expenditure need not be fruitful 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 the ground of commercial expediency 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 said to be laid out or expended wholly and exclusively for the purpose of the assessee's business.