Chagla, C.J:—
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.F Kharawala and his business is to push the sales of the Ciba Ltd.
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 12½ per cent on net sales. This 12½ per cent included all contingency expenses which the representative had to bear himself. In 1935 this commission of 12½ per cent 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 1948-1949 and 1949-1950 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 s. 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.
Under s. 10(2)(xv) what the assessee has got to establish is that the amount which it claimed as an allowance is an expenditure laid out or expended wholly and exclusively for the purpose of the business. Therefore before an expenditure can be allowed the assessee must satisfy the taxing department that expense was necessary for the purpose of the business. Having satisfied the taxing department as to the purpose, it must then satisfy the department that the amount claimed was laid out or expended wholly and exclusively for that purpose. We have had occasion to point out the distinction between s. 10(2)(xv) and s. 10(2)(x). Section 10(2)(x) deals with the bonus or commission to be paid to an employee. In the case falling under s. 10(2)(x) it is not sufficient for the assessee to establish that he has paid a bonus or a commission to his employee. He has further to satisfy the taxing department that the bonus or commission is of a reasonable amount and the Legislature has laid down certain tests which have got to be applied in order to determine whether the bonus or commission is a reasonable one or not.
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 Farashram Kharawala v. Commissioner of Income Tax(2). 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 s. 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 s. 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 s. 4(3)(vi) it is not necessary for him to prove the actual payment, in the case of an assessee claiming exemption under s. 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 assessee 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 expendiency. The only question is whether a certain amount is necessary for the purpose of a particular business carried on in a particular manner.
Sir Nusserwanji says that this construction would entitle an assessee to pay any amount to his agent's and claim the payment as a permissible deduction under s. 10(2)(xv) merely by proving payment of the amount to the agent. Now, we are laying down no such proposition of law. We wish to make it perfectly clear that before an assessee can become entitled to an allowance under s. 10(2)(xv) he must satisfy the department of the purpose for which the amount is spent. Although the department is not entitled to go into the reasonability of the expense, the department is entitled to be satisfied as to the commercial necessity for expending the amount. It would have been perfectly open to the department in this very case to have asked the assessee to satisfy it that this 5 per cent commission was necessary for the particular business which the assessee company was carrying on. But for obvious reason the department did not make any such request upon the assessee, and the reason is this, it would have been difficult for the department to contend that although in the hands of the recipient this 5 per cent commission has been held to be for the purpose of the performance of his duties and the amount has been granted wholly and exclusively for that purpose, yet when it comes to consider the question of the assessee company which pays that amount to its representative, it may not be for the purpose contemplated by s. 10(2)(xv). In this particular case, in a sense, s. 4(3)(vi) and s. 10(2)(xv) are complementary. The assessee company pays a certain amount to its representative and that amount is paid because it is necessary that the representative should spend that amount in the performance of his duties. It is established that amount is necessary for the performance of his duties. How could it possibly be said that when the assessee company pays that amount, it is not wholly and exclusively expended for the purpose of business from the point of view of commercial necessity or commercial expediency?
In our opinion, therefore, the assessee was entitled to deduction of this amount as a permissible allowance under s. 10(2)(xv).
The question, therefore, submitted to us must be answered in the affirmative. The Commissioner to pay the costs.
Attorneys for Assessee: Crawford Bayley & Co.
Attorneys for Commissioner: N.K Petigara.
Answer accordingly.
P.M.P