Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, CALCUTTA, NOWST BENGAL III
Vs.
RESPONDENT:
IMPERIAL CHEMICAL INDUSTRIES (INDIA) PRIVATE LTD.
DATE OF JUDGMENT:
20/02/1969
BENCH:
RAMASWAMI, V.
BENCH:
RAMASWAMI, V.
SHAH, J.C.
GROVER, A.N.
CITATION:
1969 AIR 1160 1969 SCR (3) 804
1969 SCC (1) 629
CITATOR INFO :
RF 1986 SC 98 (18)
R 1986 SC1483 (4)
R 1986 SC1483 (4)
ACT:
Indian Income-tax Act, 1922, ss. 3, 10(2) (xv) and 66(1)-
Assessee appointed sole selling agent of principal-
Compensation paid to former selling agents through accounts
of assessee--compensation paid through assessee’s accounts
whether deductible expenditure-Payment whether expenditure
laid out for purposes of business-Payment whether under
overriding title-Tribunal’s finding of fact that
compensation was not paid by assessee under any agreement
with principal cannot be interfered with by High Court when
question not referred to it.
HEADNOTE:
The Imperial Chemical Industries (Export) Glasgow was a
subsidiary of Imperial Chemical Industries London. With
effect from 1st April 1948 the former terminated the
services of four selling agents in India and in their place
appointed the respondent company (another subsidiary of the
Imperial Chemical Industries, London) as their sole selling
agents. The four former selling agents were to be paid
compensation for the termination of their services and this
was done through the accounts of the respondent. In its
income returns for the years 1949-50, 1950-51, 1951-52 and
1952-53 the respondent showed as its income the net amount
of commission arrived at after deducting from the gross
commission the compensation paid to the former selling
agents. The Income-tax Officer in his order for the year
1951-52 held that the said deductions were not permissible.
His order was confirmed by the Appellate Assistant
Commissioned and the Income-tax Appellate Tribunal. The
Tribunal held that there was no agreement between the
Imperial Chemical Industries (Export) Glasgow and the
respondent company casting on the latter the liability to
pay the compensation to the former selling agents out of the
commission earned by it; the Tribunal further said that even
if there was an agreement it was not acted upon. In
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reference under s. 66(1) of the Indian Income-tax Act, 1922
the High Court took the opposite view and held that the
claim made by the respondent company was allowable. The
revenue appealed to this Court. The questions that fell for
consideration were : (i) whether the High Court was
justified in interfering with the Tribunal’s finding of fact
on a question not referred to it; (ii) whether the
compensation amounts paid by the respondent to the former
selling agents were expenditure laid out wholly and
exclusively for ’the purpose of business; (ii) whether the
income in question was diverted before it reached the
respondent by virtue of an overriding title.
HELD : (i) It is well-established that the High Court is not
a Court of Appeal in a reference under s. 66(1) of the Act
and it is not open to the High Court in such a reference to
embark upon a reappraisal the evidence and to arrive at
findings of fact contrary to those of the Appellate:
Tribunal. It is the duty of the High Court while hearing
the reference to confine itself to the facts as found by the
Appellate Tribunal and to answer the question of law in the
context of those facts. It true that the finding of fact
will be defective in law if there is no evidence
805
to support it or if the finding is perverse. But in the
hearing of a reference under s. 66(1) of the Act it is not
open to the assessee to challenge such a finding of fact
unless he has applied for the reference of the specific
question under s. 66(1). [809 B-D]
In the present ease the assessee had in its applications
under s. 66(1) expressly raised the question about the
validity of the finding of the Appellate Tribunal as regards
the agreement but the question was not referred by the
Appellate Tribunal to the High Court and the contention of
the assessee with regard to the question must be deemed to
have been rejected. The assessee did not thereafter move
the High Court under s. 66(2) of the Act requiring it to
call for a statement of the case on that specific question.
The High Court was therefore in error in embarking upon a
reappraisal of the evidence before the Appellate Tribunal
and setting aside the finding of the Appellate Tribunal that
there was no agreement as claimed by the assessee for the
payment of compensation to the former selling agents out of
its own commission and. that if there was such an agreement
it was not acted upon. [809 F-H]
India Cements Ltd. v. Commissioner of Income-tax, 60 I.T.R.
52, Commissioner of Income-tax v. Sri Meenakshi Mills Ltd.,
63 I.T.R. 609 and Commissioner of Income-tax, Bombay City I
v. Greaves Cotton & Co. Ltd., 68 I.T.R. 200, applied.
(ii) In the absence of proof of the exact terms and
conditions of the agreement it was not possible to accept
the argument that the amount paid as compensation to the ex-
agents was an ’expenditure laid out wholly and exclusively
for the purpose of the business’ under s. 10(2)(xv) of the
Act. [810 D]
(iii) The assessee’s documents suggested that the
payment of compensation was the exclusive liability of the
I.C.I. (Exports) Ltd. and the assessee was not under a legal
obligation to pay the amount of compensation to the outgoing
agents. It was not established that the payment of
compensation was by an overriding title created either by
the Act of the parties or by the operation of law. An
obligation to apply the income in a particular way before it
is received by the assessee or before it has accrued or
arisen to the assessee results in the diversion of income.
An obligation to apply income accrued, arisen or received
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amounts merely to the apportionment of income and the income
so applied is not deductible. The true test for the
application of the rule of diversion of income by an
overriding title is whether the amount sought to be deducted
in truth never reached the assessee as his income. [810 H-
811 H]
Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax,
[1933] 1 I.T.R. 135, P. C. Mullick v. Commissioner of
Income-tax, [1938] 6 I.T.R. 206 and Commissioner of Income-
tax, Bombay City II v. Sitaldas Tirathdas, 41 I.T.R. 367,
applied.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 1549 to
1552 of 1968.
Appeals from the judgment and order dated September 28, 1964
of the Calcutta High Court in Income-tax Reference No. 18
1961.
Sukumar Mitra, S. K. Aiyar, R. H. Dhebar, R. N. Sachthey and
B. D. Sharma, for the appellant (in all the appeals).
806
M. C. Chagla, T. A. Ramachandran and D. N. Gupta, for the
respondent (in all the appeals).
The Judgment of the Court was delivered by
Ramaswami, J. These appeals are brought by certificate from
the judgment of the Calcutta High Court dated 28th
September, 1964 in Income Tax Reference No. 18 of 1961.
The respondent (hereinafter called the assessee) is a
private limited company incorporated in India and is a
subsidiary of the Imperial Chemical Industries, London,
which holds the entire share capital of the assessee. The
business of the assessee consists mainly of acting as
selling agents in India for a large variety of goods such as
chemicals, dyes, explosives etc., manufactured or purchased
by its London principals and sold in India. The Imperial
Chemical Industries (Export) Glasgow [hereinafter referred
to as the I.C.I. (Export) Ltd.] is another subsidiary of
I.C.I. London which holds the entire share capital of I.C.I.
(Export) Ltd. The I.C.I. (Export) Ltd. had appointed as
their selling agents in India four companies, viz., (1)
Gillanders Arbuthnot & Co. Ltd., Calcutta, (2) Best & Co.
Ltd., Madras, (3) Anglo Thai Co. Ltd. Bombay and (4) Shaw
Wallace & Co. Ltd. With effect from 1st April, 1948, the
I.C.I. (Export) Ltd. terminated the services of the
aforesaid selling agents and appointed the assessee as its
sole selling agent. The I.C.I. (Export) Ltd. had agreed to
pay to the former selling agents compensation at the rate of
two fifth, two fifth and one and two fifths of the
commission earned by the assessee for the three years from
1st April, 1948. The compensation was paid to the four
companies through the accounts of the assessee. For this
purpose the modus operandi adopted was as follows :-The
compensation payable to the former agents was spread over a
period of three years and on the assumption that the
turnover was constant, the compensation payable to the
selling agents was on an average, an amount equal to the
11/15th of the commission earned by the assessee at the
normal rates. In order to arrive at the amount of
commission to be credited to the assessee’s profit and loss
account each year the assessee in the first place credited
the commission account and debited the I.C.I. (Export) Ltd.
account with the full amount of compensation earned by it
at normal rates on sales effected during the year. Next,
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the assessee transferred from the commission account to a
special reserve account called the ’Explosives Ex-Agents
Compensation Reserve Account’, the proportion payable to the
ex-agents as compensation, namely, 11/15th (2/5+2/5+7/5=
11/5 X 1/3 = 11/15) (leaving 4/15th towards commission
account) so that funds might be accumulated for payment to
the four companies from time to time.
807
The year of account of the assessee is from 1st October to
30th September every year. As a result of the above method
of accounting, the following figures appeared in the
assessee’s books of accounts
-----------------------------------------------------------
Gross Transfer toNet
Commission Reserve forCommission
compensa-
tion
-----------------------------------------------------------
Rs. Rs. Rs.
1st April 1948 to 30th
September 1948 2,91,396 2,03,503 87,893
Year ending 30th
September 1949 7,67,294 5,41,526 2,25,768
Year ending 30th
september 1950 7,52,204 5,29,284 2,22,920
year ending 30 th
september 1951 10,20,922 4,00,052 6,20,870
------------------------------------
TOTAL 28,31,816 16,74,365 11,57,451
----------------------------------------------------------
For the assessment years 1949-50, 1950-51, 1951-52 and
1952-53 the assessee showed the net amounts of commission
earned on the selling agencies by the I.C.I. (Export) Ltd.
adding a foot note that the amounts were arrived at after
deducting the amount of compensation payable to the out-
going agents. By his order dated 28th January, 1957 for the
assessment year 1951-52 the Income Tax Officer held that the
deductions were not permissible. In an appeal preferred by
the. assessee the Appellate Assistant Commissioner confirmed
the assessment by his order dated 25th November, 1957. The
assessee took the matter in further appeal to the Appellate
Tribunal which dismissed the appeal. The Appellate Tribunal
held that there was no justification for the absence of a
written agreement between the I.C.I. (Export) Ltd. and the
assessee when the former selling agencies were terminated
and the assessee was appointed as the sole selling agent.
It was observed that the assessee was not collecting any
commission on behalf of the outgoing agents and it was not
their legal obligation to pay compensation to the out-going
agents. If the assessee was not entitled to more than 3/5th
of commission during the first two years, it should have
credited that amount whereas the assessee had actually
credited four-fifteenth on a notional basis which was not in
consonance with the arrangement. The conclusion reached by
the Appellate Tribunal was that "there was no agreement
between the assessee and the I.C.I. (Export) Ltd. and if
there was one it was not acted upon". It was held by the
Appellate Tribunal that the payment of compensation was not
because of an overriding title created either by the act of
the parties or by operation of law.
At the instance of the assessee the following question of
law was referred to the High Court under section 66(1) of
the Income-Tax Act, 1922 (hereinafter called the Act):--
808
"Whether the inclusion by the Income Tax
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officer. of Rs. 2,03,503, Rs. 5,411,526, Rs.
5,29,284 and 4,00,052 in the assessment for
the years 1949-50, 1950-51, 1951-52 and 1952-
53, for relevant accounting years ending the
30th Sept. 1948, 1949, 1950 and 1951
respectively in the computation of the total
income of the assessee is justified and
correct ?"
The High Court answered the question in the negative in
favour of the assessee holding that the inclusion of the
amount of compensation in the total income of the assessee
for the relevant assessment years was not justified.
On behalf of the appellant it was contended that the
High Court had no legal Justification for interfering with
the finding of the Appellate Tribunal that there was no
proof of the agreement between the assessee and the I.C.I.
(Export) Ltd. with regard to the quantum of commission to be
paid to the assessee for the period between 1st April, 1948
and 31st March, 1951. On this point reference was made by
Mr. Chagla to (a) the letter dated 11th March, 1947 from the
I.C.I. (Export) Ltd. to M/s. Gillanders Arbuthnot & Co.,
(b) the affidavits of Mr. W. A.Bell and Mr. J. W. Donaldson
and (c) the letter dated 3rd January, 1958 of M/s.
Lovelocke and Lewes, Chartered Accountants, Calcutta. It
was argued that these documents established that there was
an agreement between the I.C I. (Export) Ltd. and the
assessee, that for the period 1st April 1948 to 31st March,
1951 the assessee was entitled to receive as its commission
only the amounts representing the, difference between the
normal rates of commission and the compensation payable to
the former agents during that period. The Appellate
Tribunal had considered all these documents and reached the
conclusion that there was no agreement between the I.C.I.
(Export) Ltd. and the assessee and ’if there was one it was
not acted upon’. The Appellate Tribunal remarked that the
letter dated 11th March, 1947 from the I.C.I. (Export) Ltd.
set forth only the terms and conditions subject to which the
selling agencies of the out-going agents were terminated. It
was silent on the crucial question of commission to be paid
to the assessee during the three years from the date of its
appointment as sole selling agent. The affidavits of Mr.
Bell and Mr. Donaldson were produced for the first time
before the Appellate Assistant Commissioner. The affidavits
were made- many years ’after the crucial date of the
appointment of the assesee as the sole selling agent of the
I.C.I. (Export) Ltd. The affidavits did not mention the
amount of commission to be paid to the out-going agents and
the affidavits were also not consistent with the entries in
the books of accounts of the assessee. The letter of M/s
Lovelocke and Lewes was produced at a very late stage during
the hearing- of the appeal before the Tribunal and even,
otherwise the
809
letter merely explains the method of accounting adopted by
the assessee and did not carry the matter any further in the
circumstances, the Appellate Tribunal held that there was no
agreement between the assessee and the I.C.I. (Export) Ltd.
and if there was any such agreement it was not acted upon.
It is manifest that the finding of the Appellate Tribunal on
this question is a finding on question of fact and the High
Court was not entitled to interfere with this finding. It
is well established that the High Court is not a Court of
Appeal in a reference under s. 66(1) of the Act and it is
not open to the High Court in such a reference to embark
upon a reappraisal of the evidence and to arrive at findings
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of fact contrary to those of the Appellate Tribunal. It is
the, duty of the High Court while hearing the reference to
confine itself to the facts as found by the Appellate
Tribunal and to answer the question of law in the context of
those facts. It is true that the finding of fact will be
defective in law if there is no evidence, to support it or
if the finding is perverse. But in the hearing of a
reference under s. 66(1) of the Act it is not open to the
assessee to challenge such a finding of fact unless he has,
applied for the reference of the specific question under
s.66(1). In India Cements Ltd.. v. Commissioner of Income
Tax(’) it was held by this Court that in a reference the
High Court must accept the findings of fact reached by the
Appellate Tribunal and it is for the party who applied for a
reference to challenge those findings of fact, first, by an
application under s. 66(1). If the party concerned has
failed to file an application under s. 66(1) expressly
raising the question about the validity of the finding of
fact, he is not entitled to urge before the High Court that
the finding is vitiated for any reason. The same view has
been expressed by this Court in Commissioner of Income Tax
v. Sri Meenakshi Mills Ltd.(2) and Commissioner of Income
Tax, Bombay City I v. Greaves Cotton & Co. Ltd.(3).In the
present case the assessee has in his application under
s.66(1) expressly raised the question about the validity of
the finding of the Appellate Tribunal as regards the
agreement but the question was not referred by the Appellate
Tribunal to the High Court and the contention of the
assessee with regard to the question must be deemed to have
been rejected. The assessee did not thereafter move the
High Court under s. 66(2) of the Act requiring it to call
for a statement of the case on that specific question. We
are therefore of opinion that the High Court was in error in
embarking upon a reappraisal of the evidence before the
Appellate Tribunal and setting aside the finding of the
Appellate Tribunal that "there was no agreement as alleged
in the affidavits of Mr. W. A. Bell and Mr. J. W. Donaldson
and "if there was such an agreement it was not acted upon".
(1) 60 I.T.R. 52.
(2) 63 I.T.R. 609.
(3) 68 I.T.R. 200.
810
It was argued by Mr. Chagla that even if the agreement
was not established,, the amount, Paid by the assessee as
compensation to the ex-agents was an expenditure laid out
wholly and exclusively for the purpose of the business such
is allowable under s.10(2) (xv) of the Act. The contrary
view point was urged on behalf of the appellant,. It was
pointed out that the assessee was acting as the agent of the
I.C.I. (Export) Ltd. for the payment of compensation of the
ex-agents and the payment was made not in the character
of a trader but in the character of the agent of its
Principal. The contention of the appellant was that the
assessee got the right to sell goods after 1st April 1948
and for getting that right the assessee parted with a
portion of its commission for the first two years after 1st
April 1948 and paid very much more than the commission
earned in the third year. This position was borne out by
the accounts of the respondent which show that the assessee
received the commission at full rates and out of it created
a reserve account of which these compensations were made to
the ex-agents. We have already referred to the finding of
the Appellate Tribunal that no agreement between the
assessee and the I.C.I. (Export) Ltd. has been proved. In
the absence of proof of the exact terms and conditions of
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the ’agreement it is not possible to accept the argument of
the assessee that the amount paid as compensation to the ex-
agents was an "expenditure laid out wholly and exclusively
for the purpose of the business" under s. 10(2) (xv) of the
Act.
It was finaly contended on behalf of the respondent that
by virtue of an overriding title the income was diverted
before it reached the assessee, and so, the amount of
compensation paid to the ex-agents did not form part of the
income of the assessee. In other words, the contention was
that the compensation payable to the ex-agents was diverted
from the income of the assessee by ,an overriding title
arising under the agreement between the assessee and the
I.C.I. (Export) Ltd. The argument was stressed that the
commission payable as compensation to the ex-agents did not
form part of the income of the assessee. We are unable to
accept this argument as correct. We have already pointed
out that the finding of the Appellate Tribunal is that the
precise terms of the agreement between the assessee and the
I.C.I EXPORT Ltd. have not been established. In any event,
even on basis of the affidavits of Mr. Bell and Mr.
Donaldson the payment of compensation to the "-agents was
apparently made by the assessee for and on behalf of the
I.C.I. (Export) Ltd. The assessee’s documents suggest that
the payment of compensation was the exclusive liability of
the I.C.I. (Export) Ltd. and the assessee was not under a
legal obligation to pay the amount of compensation to the
out-.going agents. It is not established that the payment
of compensation ,was by an overriding title ,created either
by the act of the parties
811
or by the operation of law. An obligation to apply the
income in a particular way before it is received by the
assessee or before it has accrued or arisen to the assesses
results in the diversion of income. An obligation to apply
income accrued, arisen or received amounts merely to the
apportionment of income and the income so applied is not
deductible. The true test for the application of the rule
of diversion of income by an overriding title is whether the
amount sought to be deducted ’in truth never reached the
assessee as his income. The leading case on the subject is
Raja Bejoy Singh Dudhuria v. Commissioner of Income Tax(1)
where the step mother of the Raja had brought a suit for
maintenance and a compromise decree was passed in which the
step mother was to be paid Rs. 1,100 per month, which amount
was declared a charge upon the properties in the hands of
the Raja by the Court. The Raja sought to,deduct this
amount from his assessable income, which was disallowed by
the High Court at Calcutta. On appeal to the Judicial
Committee Lord Macmillan observed as follows
"But their Lordships do not agree with the
learned Chief Justice in his rejection of the
view that the sums paid by the appellant to
his step mother were not ’income’ of the
appellant at all. This in their Lordships’
opinion is the true view of the matter.
When the Act by section 3 subjects to charge
’all income’ of the individual, it is what
reaches the individual as income which it is
intended to charge. In the present case the
decree of the court by charging the
appellant’s whole resources with a specific
payment to his step-mother has to that extent
diverted his income from him and has directed
it to his step-mother; to that extent what he
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receives for her is not his income. It is not
a case of the application by the appellant of
part of his income in a particular way, it is
rather the allocation of a sum out of his
revenue before it becomes income in his
hands".
Another case of the Judicial Committee is reported in P. C.
Mullick v. Commisisoner of Income Tax(2), where, a testator
appointed the appellants as executors and directed them to
pay Rs. 1,00,000 out of the income on the occasion of his
addya sradh. The executors paid Rs. 5,537 for such
expenses, and sought to deduct the amount from the
assessable income. The Judicial Committee confirmed the
decision of the Calcutta High Court disallowing the
deduction and observed that the payments were made out of
the income of the estate coming to the hands of the
executors and in pursuance of an obligation imposed upon
them by the testator. The Judicial Committee observed that
it was not a case in which
(1) [1933] 1 I.T.R. 135.
(2) [1938] 6 I.T.R. 206.
812
a portion of the income had been diverted by an overriding
title from the person who would have received it otherwise
and distinguished Bejoy Singh Dudhuria’s case(1). In
Commissioner of Income Tax Bombay City II v. Sitaldas
Tirathdas(2), Hidayatullah, J., speaking for the Court
observed as follows
"There is a difference between an amount
which a person is obliged to apply out of his
income and an amount which by the nature of
the obligation cannot be said to be a part of
the income of the assessee. Where by the
obligation income is diverted before it
reaches the assessee, if is deductible; but
where the income is required to ’be applied to
discharge an obligation after such income
reaches the assessee, the same consequence, in
law, does not follow. It is the first kind of
payment which can truly be excused and not the
second. The second payment is merely an
obligation to pay another a portion of one’s
income, which has been received and is since
applied. The first is a case in which the
income never reaches the assessee, who even if
he were to collect it, does so, not as part of
his income, but for and on behalf of the
person to whom it is payable".
In view of the principle laid down in these authorities
we are of ,opinion that the payment of compensation by the
assessee to the ex-agents was not by an overriding title
created either by act of the parties or by operation of law.
We accordingly reject the argument of Mr. Chagla on this
aspect of the case.
For the reasons expressed we hold that the judgment of the
Calcutta High Court dated 28th September, 1964 should be set
aside and the question referred by the Appellate Tribunal
should be answered in the affirmative and against the
assessee. The appeals are accordingly allowed with costs.
One hearing fee.
G.C. Appeals allowed.
(1) [1933] I.T.R. 135. (2) 41 I.T.R. 367.
813
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