SANJEEVI AND CO Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference relates to the asst. year 1960 -61, corresponding to the accounting year ended on 31st March, 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 Company (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 AAC considered that the brokerage claimed as having been paid worked out at 40 per cent 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 IT Act, 1922:

(2.) 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 by 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 deduction 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.

(3.) 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, there is no alternative for the Revenue but to give the deduction of the entire amount.