R.L Gulati, J.:— Under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), the Income-tax Appellate Tribunal, Allahabad, has submitted a statement of the case and has invited the opinion of this court on the following question of law:

“Whether, on the facts and in the circumstances of the case, the sum of Rs. 24,000 paid by the assessee-company to M/s. Symonds & Co. Ltd. is a revenue expenditure allowable under section 37 of the Income-tax Act, 1961, in its hands?”

2. The assessment year involved is 1964-65 with the previous year ending on 31st of December, 1963. The assessee is a private limited company. On 23rd of December, 1961, it entered into an agreement of sole selling agency with M/s. Symonds Company (P.) Ltd. (hereinafter referred to as the “manufacturing company”) for the sale of its products, such as sports goods, etc. Under the agreement, the assessee was entitled to a commission of 20% on sales. It appears that the manufacturing company got into a financial difficulty and to tide over that difficulty it requested the assessee-company to reduce its commission and to make some contribution towards its expenses. The matter was considered by the board of directors of the assessee-company and on 11th June, 1962, it passed a resolution reducing the commission to 10%. Later, on 12th of December, 1962, the assessee-company passed another resolution for contributing Rs. 24,000 per annum towards the expenses of the manufacturing company for the years 1962 and 1963 subject to the condition that the contribution may be reduced or stopped in 1963 if the circumstances so justified. In pursuance of the resolution the assessee-company paid Rs. 24,000 to the manufacturing company in 1962 and another sum of Rs. 24,000 in the year 1963. The contribution so made was claimed by the assessee as admissible expenditure in the computation of its business income. The claim was disallowed by the Income-tax Officer as also by the Appellate Assistant Commissioner of Income-tax on appeal. The assessee then took the matter in second appeal before the Income-tax Appellate Tribunal. There was a difference of opinion between the Judicial Member and the Accountant Member, the former holding that the expenditure was of a capital nature and as such not deductible and the latter holding that the expenditure in question was of a revenue nature having been incurred out of commercial expediency and as such allowable. The matter was then referred to the Vice-President of the Tribunal, who agreed with the Accountant Member and held that the expenditure was a revenue expenditure having been incurred wholly and exclusively for the purposes of business on account of commercial expediency. The department is aggrieved. Hence, this reference.

3. Section 28 of Part D of Chapter IV of the Act deals with profits and gains of business or profession. Section 29 provides that the income referred to in section 28 shall be computed in accordance with the provisions of sections 30 to 43A. Section 30 onwards sat out various deductions that have to be allowed in the computation of business income. These deductions are, however, not exhaustive. Section 37 is a residuary provision providing for the allowance of any expenditure laid out or expended wholly or exclusively for the purpose of business or profession provided it is not of a personal or capital nature. The assessee's claim falls to be considered under section 37. In other words, what has to be seen is as to whether the expenditure in question had been incurred by the assessee wholly and exclusively for purposes of business.

4. In order that an expenditure may be allowed under this provision, it is not necessary that the expenditure should be incurred directly for carrying on the business or earning profits. The expenditure would be allowable even when it is incurred indirectly to facilitate the carrying on of the business or to preserve the existing source of income. In a large number of cases expenditures are incurred out of commercial expediency with a view not directly to increase or earn profits but with a view to safeguarding the business as also of increasing profits in future.

5. Before we deal with this matter any further, it is necessary to deal with a preliminary objection raised by the learned counsel for the assessee. He says that the Tribunal had allowed the expenditure on the finding that the same had been incurred wholly and exclusively for the purposes of assessee's business out of commercial expediency. This, according to him, is a finding of fact and cannot be questioned in a reference. This contention is not wholly true. As has been held by the Supreme Court in Commissioner of Income-tax v. Greaves Cotton and Co. Ltd. [1968] 68 ITR 200 (SC) the question whether a certain expenditure is laid out or expended wholly and exclusively for the purposes of the assessee's business is a question which involves, in the first place, the ascertainment of facts by the Tribunal and, in the second place, the application of the correct principle of law to the facts so found. The question, therefore, is a mixed question of fact and law. It is a question of law because the Appellate Tribunal has to determine what is the meaning of the statutory phrase “expenditure laid out or expended wholly and exclusively for the purposes of the business.” The proper construction of statutory language is always a matter of law and, therefore, the claim of the assessee in any particular case that he is entitled to deduction of certain items of deductions under section 10(2)(xv) of the Indian Income-tax Act, 1922 (corresponding to section 37 of the Act) involves the application of the law to the facts found in the setting of a particular case. We have, therefore, now to examine the facts found by the Tribunal and to see if a proper legal inference has been drawn by the Tribunal from the facts found by it. Briefly stated the facts found by the Tribunal are:

(i) That the assessee-company and the manufacturing company are inter-connected inasmuch as they have common set of directors and the assessee-company holds a majority of shares in the manufacturing company.

(ii) That under the agreement between the assessee-company and the manufacturing company, the former was appointed as sole selling agent for the products of the latter company on a commission of 20% on sales.

(iii) That the manufacturing company got into financial crises so that its very existence was at stake. With a view to helping the manufacturing company out of the difficulty, it agreed to forgo half of its commission and also to contribute a sum of Rs. 24,000 a year towards its expenses.

(iv) That although in the relevant year the manufacturing company contributed only 12% of its gross profits, yet it was a regular and increasing source of income to the assessee-company and in the subsequent years the percentage of gross profit of the assessee-company from the commission earned by it from the manufacturing company increased tremendously.

(v) That the assessee-company had incurred the expenditure in question as a prudent businessman in order to save and preserve a steady source of income, and, lastly,

(vi) That on these facts the expenditure could be said to have been laid out or expended wholly and exclusively for the purposes of business.

6. We are of opinion that the circumstances relied upon by the Tribunal, are all relevant and the Tribunal has not committed any error in coming to the final conclusion.

7. Some emphasis was laid on the fact that the two companies are inter-connected having a common set of directors. This circumstance, in our opinion, does not in any way affect the validity of the conclusion reached by the Tribunal. There is no suggestion, much less a finding, that the two resolutions passed by the assessee-company were colourable and were passed in order to reduce the assessee-company's income, nor is there any suggestion or finding that the expenditure in question was not incurred at all. We have, therefore, to accept the fact that the transaction relating to the contribution towards the expenses of the manufacturing company was a bona fide one and so was the payment. It has to be remembered that the assessee-company was a separate legal entity, even if its directors were common with the manufacturing company. The fact that the same director sent the request for the reduction of commission, etc., and the same director signed the letter of acceptance on behalf of the assessee-company also makes no difference. It is possible for a person to act in a dual capacity. There is no prohibition in law to such a course, unless an ulterior motive has been attributed to any of the directors. Indeed, the department has not questioned the other transaction relating to the reduction of commission. We are of opinion that the two resolutions, one for the reduction of commission and the other for contribution towards the expenses, were parts of the same transaction. In fact, the contribution towards expenses is nothing but a remission of commission put in another shape in order to get over some technical difficulty. This has been made clear by the Tribunal. Therefore, if the resolution with regard to the reduction of commission is accepted, the other resolution with regard to the contribution towards expenses has also to be accepted.

8. It is true that the expenditure was incurred voluntarily and not under any compulsion except the compulsion of commercial expediency. But that circumstance is again immaterial. Reference may be made in this connection to the observations of Lord Viscount Cave L.C in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, 191 (HL):

“A sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade.”

9. This test has been quoted with approval and applied by the Supreme Court in Eastern Investments Ltd v. Commissioner Of Income Tax, West Bengal [1951] 20 ITR 1 (SC) followed in Commissioner of Income-tax v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC).

10. The fact that the expenditure in question inured to the benefit of a third party, namely, the manufacturing company, also is of no consequence. Lord Sumner stated in Usher's Wiltshire Brewery Ltd. v. Bruce [1914] 6 TC 399, 437 (HL) that where the whole and exclusive purpose of the expenditure is the purposes of the expender's trade and the object which the expenditure serves is the same, the mere fact that to some extent the expenditure inures to a third party's benefit or that the expender incidentally obtains some advantage in some character other than that of a trader, cannot in law defeat the effect of the finding as to the whole and exclusive purpose. The same principle has been laid down by the Supreme Court in Commissioner of Income-tax v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC) and Commissioner of Income-tax v. Royal Calcutta Turf Club [1961] 41 ITR 414 (SC).

11. It is clear from the facts that the sole purpose for which the assessee-company incurred the expenditure in question was to save a part of its own business by helping the manufacturing company out of the difficulty. In our opinion, when the assessee-company agreed to bear a part of the expenditure of the manufacturing company, it did so out of commercial expediency. Its action was that of a prudent businessman. We have no hesitation in holding that the expenditure in question had been incurred wholly and exclusively for purposes of the assessee's business. The expenditure also was not of a capital nature inasmuch as it did not bring into existence any asset or benefit of lasting nature to the assessee. It had been incurred to preserve and develop an existing source of income. The view that we have taken finds full support from a decision of the Supreme Court in Commissioner of Income-tax v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC). That was also a case where the assessee, a company which was the managing agent of another company, gave up a part of its commission in order to help the managing company. The Appellate Tribunal found, (i) that the financial position of the managed company was rather unsatisfactory, (ii) that the assessee had been remitting a part or whole of its commission in the past whenever the profits of the managed company were unsatisfactory, (iii) that the waiver was neither a bounty nor mala fide, and (iv) that the business of the assessee was so linked up with the managed company that if the latter was put on a sounder position, the assessee would get a larger commission in the future; and held that the part of the commission remitted by the assessee was given up for reasons of commercial expediency and was business expenditure allowable under Section 10(2)(xv) of the Income-tax Act. The Supreme Court held that the Tribunal was a fact-finding authority and if it came to the conclusion that a part of the expenditure was wholly and exclusively laid out or expended for purposes of the business and that finding was supported by evidence, it could not be disturbed. In deciding whether a payment of money is a deductible expenditure, one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purposes of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party.

12. We, accordingly, answer the question in the affirmative, in favour of the assessee and against the department. The assessee is entitled to the costs which we assess at Rs. 200.