1. The question for consideration in this income-tax reference is whether expenditure incurred by the assessee in paying commission to its selling agent is deductible under Section 10(2)(xv) of the Indian Income-tax Act, 1922, hereinafter referred to as "the Act". Jaswant Sugar Mills Ltd., Meerut, is the assessee. This is a company manufacturing sugar and other products. The assessment years are 1951-52, 1952-53 and 1953-54. Therelevant accounting periods ended on May31, 1950, May 31, 1951, and May 31, 1952, respectively.

2. The assessee-company decided to appoint National Finance Ltd., as selling agent. The assessee wrote a letter to this effect on December 20, 1947. An agreement of selling agency was executed on October 1, 1948. The agreement provided for payment of commission to the selling agent at the rate of 21/2 per cent. The Government introduced control on the sale of sugar in August, 1949. The assessee-company had to supply sugar to dealers in accordance with the directions of the Government. The assessee-company paid full commission to the selling agent in spite of the fact that the Government had introduced control on the sale of sugar. When the Income-tax Officer took up assessment for the three assessment years, he took the view that it was not necessary to pay commission for the sale of controlled sugar. He, therefore, disallowed the expenditure to the extent of commission paid on the sale of controlled sugar. He also fixed the rate of commission on the sale of free sugar at the rate of 11/2 per cent. instead of the rate of 21/2 per cent. under the agreement. When the assessee took up the matter in appeal before the Appellate Assistant Commissioner, he raised the rate of commission on the sale of free sugar from 11/2 per cent. to 2 per cent. But he agreed with the Income-tax Officer that no commission was payable with respect to the sale of controlled sugar.

3. When the assessee took up the matter in further appeal before the Appellate Tribunal, the Tribunal took the view that in view of the control imposed by the Government on the sale of sugar, the assessee-company should have terminated the selling agency agreement by giving three months' notice to the selling agent. However, the Tribunal modified the assessment in favour of the assessee in two ways. Firstly, the Tribunal held that the selling agent was entitled to receive commission on the sale of free sugar at the full rate of 21/2 per cent. Secondly, the Tribunal agreed to allow commission at the full rate of 21/2 per cent. during the period of notice (three months). The net result was that the Tribunal disallowed the commission to the extent of Rs. 92,883, Rs. 1,18,946 and Rs. 59,089 for the three assessment years respectively.

4. At the instance of the assessee, the Tribunal has referred the following question of law to'this court:

"Whether, on the facts and in the circumstances of the case, the commission of Rs. 92,883, Rs. 1,18,946 and Rs. 59,089 paid to the selling agents--National Finance Ltd.--in the three assessment years 1951-52. 1952-53, and 1953-54, respectively, was an expense incurred wholly and exclusively for the purposes of the assessee-company?"

if not

"What portion, if any, was incurred as an expenditure wholly and exclusively for the purposes of the business of the assessee-company ?"

5. Annexure "A-1" to the statement of the case is a copy of the letter, dated December 20, 1947, addressed by the assessee-company to Messrs. National Finance Ltd. In that letter the assessee indicated that it was agreeable to appoint National Finance Ltd- as its sole selling agent for sugar.

6. Annexure "A" to the statement of the case is a copy of the agreement, dated October 1, 1948, between the assessee-company and the selling agent (Messrs. National Finance Ltd.). By paragraph 1 of the agreement, the second party was given the privilege of selling and securing orders for sugar. Clause 12 of the agreement provided for payment of commission. Clause 12 ran thus:

"The manufacturer agrees to give, and the agent agrees to accept, for his services rendered in selling and securing orders for the products a commission at the rate of two and a half per cent. calculated at the net value of the product supplied after deducting all expenses...."

7. It is true that commission was payable for services rendered by the selling agent. But commission had to be calculated at the net value of the product supplied. The amount of commission did not depend upon the amount of work done by the agent. Nor did Clause 12 require that a particular product must have passed through the hands of the agent in order to enable it to earn the commission.

8. The basis of the commission was the net value of the product supplied by the manufacturer. Clause 16 of the agreement dealt with the duration of the agreement. Clause 16 stated:

"This agreement shall remain and continue in force and govern all transactions between the parties hereto for a period of one year or until cancelled or terminated in the manner hereafter expressed.

This agreement may be 'terminated by either party by giving to the other party three months' notice to that effect...."

9. Annexure "E" to the statement of the case is a copy of the Tribunal's judgment, dated August 31, 1963, relating to the assessment year 1951-52. In paragraph 3 of its judgment the Tribunal observed:

" . . . . When control was introduced by the Government, since the assessee found that no useful purpose could be served by the selling agents, there was a duty cast upon them to terminate the selling agency agreement and not incur any unnecessary expenditure on behalf of the assessee."

10. This reasoning of the Tribunal is unsound in two ways. Firstly, one cannot be sure that the assessee was unwise in keeping the selling agency agreement alive, in spite of the control imposed by the Government on the sale of sugar. It appears that, although control on sugar was imposed by Government, some sugar was left for sale in the open market. This sale has been described as free sale. Again, sugar was not the only commodity handled by the selling agent. In paragraph 3 of the statement of the case, it is stated that National Finance Ltd. was appointed selling agent for the assessee for sugar, strawboard, etc. That observation indicates that the selling agent handled a number of articles like strawboard in addition to sugar. The agent maintained an office as required by Clause 8 of the agreement. By Clause 5 of the agreement, the agent was prohibited from doing business on behalf of other manufacturers of sugar. Control on sugar was removed from time to time. The assessee could not be sure how long control imposed in August, 1949, would remain in force. Under the circumstances, it is doubtful whether prudence required that the agency agreement ought to have been terminated in August, 1949.

11. Secondly, it was not the function of the Tribunal to advise the assessee-company in the management of its affairs. In Commissioner of Income-tax v. Walchand and Co. (Private) Ltd., [1967] 65 I.T.R. 381; [1967] 3 S.C.R. 214 (S.C.). it was explained by the Supreme Court that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for purposes of the business, the reasonableness of the expenditure has to be adjudged from the point of view of the business, and not of the revenue.

12. In J.K. Commercial Corporation Ltd. v. Commissioner of Income-tax, [19691 72 I.T.R. 296 (All) we held that the test of allowability is not what a prudent man would do in similar circumstances. Though an assessee is an imprudent businessman, yet if he incurs an expenditure voluntarily for the purpose of his own business, it would be allowable as a proper deduction.

13. In J.K Woollen Manufacturers v. Commissioner Of Income Tax U.P ., [1969] 72 I.T.R. 612 (S.C.) it was held by the Supreme Court that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the assessee's business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the income-tax department.

14. The learned Advocate-General, appearing for the department, contended that the finding of the Tribunal that the expenditure in question was not wholly and exclusively for purposes of the business of the company is binding on this court. For this contention reliance was placed upon the decision of the Supreme Court in Commissioner of Income-tax v. Chandulal Keshavlal & Co., [1960] 38 I.T.R. 601; [1960] 3 S.C.R. 38 (S.C.). In that case Kapur J. observed on page 610:

"... it is a question of fact in each case whether the amount which is claimed as a deductible allowance under Section 10(2)(xv) of the Income-tax Act was laid out wholly and exclusively for the purpose of such business and if the fact-finding Tribunal comes to the conclusion on evidence which would justify that conclusion, it being for them to find the evidence, and to give the finding, then it will become an admissible deduction. The decision of such questions is for the Income-tax Tribunal and the decision must be sustained if there is evidence upon which the Tribunal could have arrived at such a conclusion."

15. In Commissioner of Income-tax v. Royal Calcutta Turf Club, [1961] 41 I.T.R. 414; [1961] 3 S.C.R. 60 (S.C.) the same learned judge referred to his previous observations in the case of Chandulal Keshavlal, and pointed out on page 418 of the judgment that those observations must be read in the context of that case.

16. In J. R. Patel and Sons Private Ltd. v. Commissioner of Income-tax, [1964] 51 I.T.R. 717 (Guj.), it was observed by the Gujarat High Court on page 727:

" . . one has not got to take an abstract or academic view of what was proper expenditure laid out or expended wholly and exclusively for purposes of one's business but one had got to take into consideration questions of commercial expediency and the principles of ordinary commercial trading and that the main consideration that had got to weigh with the court was whether the expenditure was a part of the process of profit making."

17. In Aspro Ltd. v. Commissioner of Taxes, [1936] 4 I.T.R. 264 (P.C.), two persons were the sole shareholders as well as the sole directors of a private limited company. At the end of each trading year the company fixed at a general meeting about two-thirds of the profits as directors' fees. For the year 1931, a sum of £10,000 was thus debited in the accounts as directors' fees. It was held by the Judicial Committee that in view of the fact that there was complete, identity of the persons interested as shareholders in fixing the amount and of the persons to whom the fees were to be paid, and the fact that the fees were fixed each year when a fair estimate of the profits was available, the court was entitled to hold that the company had failed to. prove that £10,000 had been exclusively expended in the production of the assessable income.

18. In Bengal Enamel Works Ltd. v. Commissioner of Income-tax, [1966] 59 I.T.R. 472 (Cal.), a certain sum was paid as remuneration to a technical adviser by a company. Circumstances under which the technical adviser was selected were not very clear. The appointment did not take place after necessary advertisement of the vacancy in the newspapers. The technical adviser had no special technical and academic qualification or knowledge of the company's business. The technical adviser was an important shareholder and director of the assessee-company. It was held by the Calcutta High Court that disallowance of part of the remuneration to the technical adviser was justified.

19. In Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax, [1967] 63 I.T.R. 57 (S.C.), their Lordships of the Supreme Court explained on page 60:

"It is an erroneous proposition to contend that as soon as an assessee has established two facts, viz., the existence of an agreement between the employer and the employee and the fact of actual payment, no discretion is left to the Income-tax Officer except to hold that the payment was made wholly and exclusively for the purposes of the business. Although the payment might have been made and although there might be an agreement in existence, it would still be open to the Income-tax Officer to take into consideration all the relevant factors which will go to show whether the amount was paid as required by Section 10(2)(xv)."

20. In Commissioner of Income-tax v. Royal Calcutta Turf Club, the facts were these: The Royal Calcutta Turf Club was an association of persons whose business it was to hold race meetings on a commerical basis. The turf club itself did not own any horse or employ jockeys. As it was of opinion that there was a risk of jockeys becoming unavailable and that such unavailability would seriously affect its business, the turf club established in 1948 a school for the training of Indian boys as jockeys. During the relevant year the turf club spent a sum of Rs. 62,018 on the running of the school. It was held by the Supreme Court that as the amount was spent for the preservation of its business, it was laid out wholly and exclusively for the purpose of the business of the turf club and was an allowable deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922.

21. In Central Distillery and Chemical Works Ltd. v. Commissioner of Income-tax, [1955] 27 I.T.R. 100 (All.), the assessee-company appointed a firm of partners as its managing agents for a fixed term on a remuneration of a fixed sum and a commission. Under the Defence of India Rules, the Government issued a notification appointing a controller to control and supervise the working of the concern. The notification did not terminate the managing agency agreement; nor did the notification expressly provide that managing agents would not be entitled to remuneration. In the assessment year 1945-46, a certain sum was payable to the managing agents as remuneration. Shareholders passed a resolution sanctioning the payment. The controller, however, did not sanction the payment. The assessee paid the amount later to the managing agents. It was held by this court that the expenditure claimed was an allowable deduction inasmuch as it was wholly and exclusively laid out and expended for purposes of the business. There is much resemblance between the facts of the present case and the facts of the case of the Central Distillery.

22. It is true that the facts found by the Tribunal are binding on this court. But, ultimately, it is for the court to decide whether, on the facts found by the Tribunal, the expenditure in question was wholly and exclusively for the business of the assessee-company. It is true that the burden of proving a case under Section 10(2)(xv) of the Act lies on the assessee. But once legal liability and actual payment are established, the initial burden may be said to have been discharged by the assessee. In the present ease, the department did not challenge the validity of the agency agreement, dated October 1, 1948. The authorities were prepared to recognise certain payments made under the agreement as an allowable expenditure under Section 10(2)(xv) of the Act. In paragraph 4 of its judgment dated August 31, 1963, the Tribunal observed:

"There is no question of going behind a trading agreement unless something flimsy is seen in it. Here is a plain sole selling agency agreement and it appears the selling agents had an office establishment in respect of the work to be carried out by them."

23. In paragraph 3 of the judgment the Tribunal referred to the fact that there was close connection between the constitution of the assessee-firm and the constitution of the National Finance Ltd., which was its selling agent. The Tribunal, however, does not appear to have attached much significance to this fact. After referring to the close connection between the two companies, the Tribunal observed:

"Whatever it is, there is a clause in the agency agreement which the assessee-mills should have used in the present circumstances when it found that the selling agents would be of no use to the assessee."

24. The Tribunal emphasised the fact that under Clause 16 of the agreement it was possible to terminate the selling agency agreement. The Tribunal did not hold that the assessee was actuated by some oblique motive in keeping the selling agency alive even after enforcement of control on sugar. The sole reason given by the Tribunal for disallowing commission on the sale of controlled sugar was that the assessee ought to have terminated the selling agency agreement.

25. As explained above, the omission of the assessee-company to terminate the selling agency agreement could not be a valid ground for holding that the expenditure was not wholly and exclusively for purposes of the business of the company. Validity of the agreement dated October 1, 1948, was accepted by the Tribunal. The agreement remained in force at all material times. Under Clause 12 of the agreement the agent was entitled to receive commission even though much of the sugar was despatched to dealers nominated by the Government. So long as the agreement remained in force the assessee-company remained liable to pay commission to its agent. Under the circumstances, the commission paid on the sale of controlled sugar must be held to be for purposes of the business of the assessee-company. The expenditure was wholly and exclusively for purposes of the business of the company.

26. We, therefore, answer both the parts of the question referred to the court in favour of the assessee. The three amounts of Rs. 92,883, Rs. 1,18,946 and Rs. 59,089 paid by the assessee-company for the three assessment years 1951-52, 1952-53 and 1953-54, respectively, were in their entirety incurred wholly and exclusively for purposes of the business of the assessee-company. The Commissioner of Income-tax shall pay to the assessee Rs. 200 as costs of this reference.