CIBA DYES LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is a limited company carrying on business of import of dyestuffs and chemicals from its parent company, Ciba, Ltd., Basle, Switzerland. Its representative in India is one T.P. Kharawala and his business is to push the sales of the Ciba, Ltd.

(2.) THERE was an agreement dated October 29, 1928, between the assessee company and Kharawala. Under that agreement the assessee company agreed to pay to Kharawala 12 -1/2 per cent, on net sales. This 12 -1/2 per cent, included all contingency expenses which the representative had to bear himself. In 1935 this commission of 12 -1/2 percent, was split up and 5 per cent, was specifically allowed to the representative for making contingency expenses. A letter was written by the company to its representative on October 20, 1947, in which it was stated that the 5 per cent, allowed to the representative was to meet contingency expenses, which, according to the assessee company, consisted of commission to dyeing masters, agents, etc., which had to be paid by the representative for the purpose of canvassing business. In the two assessment years 1948 -49 and 1949 -50 Rs. 1,65,028 and Rs. 1,26,882 respectively was paid by the assessee company to its representative as representing this 5 per cent, commission, and the assessee company claimed these amounts as a permissible allowance under Section 10(2)(xv). The taxing department has refused to allow this reduction and the Tribunal has upheld the view of the taxing department, and the matter has come before us in this reference.

(3.) NOW , in this particular case the finding of the Tribunal is that these two sums were actually paid by the assessee company to its representative. The agreement under which these amounts were paid has not been challenged as an agreement which is not a genuine agreement or not a bona fide agreement. It has not been suggested that the payment to the representative was not for the purpose of contingency expenses which the representative had to meet for paying commission to dyeing masters, agents, etc. The amount has not been allowed to be deducted by the assessee solely on the ground that it has not been proved that the representative in fact expended this 5 per cent, for the purpose suggested by the assessee company. In other words, the taxing authorities claim the right to have evidence of actual payment by the representative to satisfy the taxing authorities that he in fact had expended the whole of the amount paid to him for the purpose for which the amount was paid to him. The Tribunal in upholding the decision of the taxing authorities has relied on a judgment of this Court in - 'Tejaji Parasram v. Commissioner, I.T.', AIR 1949 Bombay 34 In that case we had the case of the representative Kharawala before us and he claimed an exemption in respect of this very 5 per cent, commission under Section 4(3)(c). The contention of the department was that he was not entitled to that exemption unless he proved that he had expended the whole of the amount for the purpose for which it had been paid to him. We rejected that contention and held that under Section 4(3)(c) it was not necessary that the amount paid to an employee must actually be spent. All that was necessary to be proved was that the amount had been paid for a particular purpose and the purpose was that it was necessary to incur the whole of that expense in the performance of the duties of the office which the employee held or the work that the employee did. The Tribunal has read this judgment to mean that whereas in the case of an employee claiming exemption on ground of a special allowance being paid to him under Section 4(3)(vi) it is not necessary for him to prove the actual payment, in the case of an assessee claiming exemption under Section 10(2)(xv) proof of actual payment is necessary. But with respect to the Tribunal, it has confused the notion of payment as emerges from that decision. It is perfectly true that there must be proof of actual payment, but payment by whom ? Payment by the assessee to his representative as in this case but not proof of actual payment, by the representative to the various persons he has got to pay in order to push the sales of the assesses company. The Tribunal has also, again with respect to it, fallen in this error that it has taken the view that it is only if the department is satisfied that the representative has actually expended the amount that the reasonability of such expense can be determined. No question of reasonability of expense arises in this case. The only question is of commercial necessity or expediency. The only question is whether a certain amount is necessary for the purpose of a particular business carried on in a particular manner.