CHEMAUX PRIVATE LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN this reference made by the Tribunal under section 66(1) of the Indian Income -tax Act, 1922, the following question has been referred to us for our opinion at the instance of the assessee :

(2.) THE assessee is a private limited company doing business in chemicals and textile auxiliaries. It appears that one Shri A.M. Khopkar, who was previously in the employ of M/s. Amritlal and Co. Pvt. Ltd., joined the service of the assessee -company and in the year of account he was working as the manager of the assessee -company drawing a salary of Rs. 400 per month. In the middle of the year, i.e., June 12, 1958, he addressed a letter to the chairman of the assessee -company requesting him to sanction commission on sales at the rate of 2 1/2%, which, according to him, was what he was required to disburse in one form or another in the interest of the company's business. The board of directors at their meeting held on 15th September, 1958, passed a resolution sanctioning payment of commission at the rate of 2 1/2% on sales to Shri Khopkar with a view to reimburse him in regard to expenditure on account of entertainment, presents and commission to diverse customers of the company in the interest of the company's business. On September 24, 1958, an agreement was entered into between the company and Shri Khopkar according to which the company agreed to pay commission at the aforesaid rate on sales beginning with the year 1958 till the termination of the agreement. It appears that in the year of account the company paid Rs. 26,288 to Shri Khopkar; it also deducted tax at source from this amount and paid it to the Government. In the assessment proceedings the assessee -company claimed the said expenditure as allowable deduction in ascertaining its profits as also on the ground that the said expenditure had been wholly and exclusively laid out for the purpose of business of the company. The Income -tax Officer disallowed the whole of the commission in the company's assessment; he took the view that the assessee -company had parted with the amount of Rs. 26,288 with the oblique purpose of reducing the profit of the assessee -company. He found that as compared to the monthly remuneration that was paid to the company to Shri Khopar the commission of Rs. 26,288 to him was palpably out of proportion to the services rendered by him. Shri Khopkar was, therefore, summoned and examined. He claimed that the commission was not utilised for any investment but was duly spent for procuring business but he did not have any proof of expenditure. According to him, the payments were mostly made to third parties as secret commission to canvas sales on the company's behalf and by its very nature no receipt could be obtained from the recipients and that although he was in a position to give away their names, it was not advisable or discreet to do so. The Income -tax Officer on an appreciation of material that was placed before him recorded a finding that the assessee had parted with the so -called commission of Rs. 26,288 with the oblique purpose of reducing the profit and thereby it had avoided the tax liability to that extent. He, accordingly, disallowed the claim for deduction. The Appellate Assistant Commissioner, to whom the assessee carried an appeal, confirmed the Income -tax Officers' view on the ground that the expenditure had not been proved and that the payment of this nature could not be treated as having been incurred wholly or exclusively for the purposes of business. The assessee carried the matter in second appeal to the Tribunal and the Tribunal dismissed the appeal and confirmed disallowance principally on the ground that there was not even indirect evidence of any expenditure having been incurred by Shri Khopkar on behalf of the company. At the instance of the assessee, therefore, the question set out at the commencement of the judgment has been referred to us for our opinion.

(3.) IT is not possible for us to accept any of these submissions of Mr. Dwarkadas for more than one reason. In the first place, the manner in which Shri Khopkar has written his letter dated June 12, 1958, to the chairman of the board of directors of the assessee -company and the manner in which the resolution of the board of directors has come to be passed unquestionably leads to an inference that the letter was addressed and the relevant resolution that was passed, both were inspired things. In any case the letter does not seem to be an ordinary letter of demand made by an employee upon the employers to reimburse him in respect of expenditure incurred by him for the company. In his letter dated June 12, 1958, addressed to the chairman of the board of directors of the assessee -company, Shri Khopkar has stated thus :