C.L.T., Punjab Haryana, J & K, H.P. & Union Territory of Chandigarh v. Panipat Woollen & General Mills. Co. LTD., Chandigarh
FAZAL Au, J.-These are appeals by the Revenue by special leave
against the order of the High Court of Punjab & Haryana dated
~ ,
/'
'
C.I.T. v. PANIPAT WOOLLEN MILLS (Fazal Ali,!.) 189
January 20, 1970 answering the questions referred to the High Court A
by the Tribunal in favour of the assesseeslrespondents and against the
Revenue. The appeal arises. in the following circumstances.
M/s. Panipat Woollen & General Mills Co. Ltd.-hereafter refer
red to as 'the assessee Company' had two Departments-( 1) for
spinning of yarn from raw and waste wool and (2) for spinning of B
yarn from imported wool tops. The second Department which carried
on the operations of spinning of yarn from imported wool tops was
started some time in the year 1952. Weaving operations were, how-
ever, carried on in both these Departments. One of the Departments
was known as M/s. Panipat Woollen Mills, Kharar while the other
one was known as Mis. Navin Woollen Mills. It is said that the
assessec Company was running at a constant loss as a result of which c
in 1952 the assessee Company decided to instal a plant for manu
facture of worsted yarn from imported wool tops by raising a loan of
Rs. 7 lakhs from the Industrial Finance Corporation. The plant went
into production in September 1952. The assessee Company appointed
M/s. Murlidhar Chiranjilal as the sole selling agents for the worsted
yarn on payment of 2 % commission. Subsequently on December 15,
1953 the assessec Company entered into an agreement with Mis. ,D
Saligram Premnath under which the latter were appointed as the sole.
selling agents on certain specified conditions, the important of which
being that the agents were to finance the assessee Company to the
extent of Rs. 2,50,000/- and the assessee Company agreed to pay 6%
interest on the advances to be made by the agents and further agreed
to pay 2 % commission on the net proceeds of sales of goods in India.
Before expiry of this agreement, another agreement was entered into E
by the assessce Company with the agents on October 20, 1955 under
which the agents were to get 6% interest on all the advances made
by them, l:i-% commission on net sales and 50% commission on net
sales of the worsted plant. What is more was that the agents agreed
to a deduction of 50% of the loss incurred by the assessee Company
from their remuneration. There were a number of other conditions
with which we shall deal later. The selling agents M/s. Saligram F
Premnath advanced a sum of Rs. 6,26,8471- and Rs. 8,71,8731- and
received Rs. 37,157/- and Rs. 73,7871- as 50% commission on the
net profits of the worsted plant in the course of two years, namely,
assessment years 1956-57 ending on March 31, 1956 and 1957-58
ending on March, 31, 1957. The assessee Company accordingly in
its return for the year 1956-57 claimed the amount of Rs. 37,157/-
and Rs. 73,7871- for the assessment year 1957-58 as a deduction c;;
under the provisions of s. 10(2) (xv) of the Income-tax Act, 1922. '·
The case of the assessee was that the two amounts mentioned above
being in the nature of commission paid to the selling agents would be
deemed expenses incurred by the Company in order to earn profits
and would, therefore, fall within the ambit of s. 10(2) (xv) of the
Income-tax Act, 1922-hereafter referred to as 'the Act'. The In
come-tax Officer, however, disallowed the deduction and held that the , ~
deduction claimed was actually a division of profits after the profits
Jiad come into existence and had been ascertained, and therefore could
not be claimed as a valid deduction under the provisions of the Act.
/
190 SuPREME COURT REPORTS [1976) 3 S.C.R.
The assessee Company went up in appeal to the Appellate Assistant
Commissioner who accepted the plea of the assessee Company and
held that the payment was a permissible deduction as it was incurred
for the purpose of the assessee's trade in order to facilitate the business
of the assessec. The Revenue then went up in appeal before the
Tribunal which after considering the facts and the law on the subject
upheld the contention of the Revenue and held that the sums in ques
tion were not legal deductions as contemplated under s. 10(2)(xv)
of the Act but amounted to application of profits after they were earned.
The Tribunal further held that the agreement dated October 20, 1955
amounted to a joint venture for the distribution of profits between the
assessee Company and the selling agents after the profits were ascer
tained. The assessee Company then approached the Tribunal for
making a reference to the High Court and the Tribunal accordingly
referred the !oilowing two questions to the High Court for its opinion :
"l. Whether on the facts and in the circumstances of the
case, the Tribunal rightly held that the sums of Rs. 37,157/- \
and Rs. 73,787 /- were chargeable to tax in the hands of the A
assessce Company in the assessment years 1956-57 and
1957-58 respectively?
D 2. Whether on the facts and in the circumstances of
the case, the Tribunal rightly disallowed the assessee Com
pany's claim for deduction of the payment of Rs. 37,157 /
and Rs. 73,787/-, under sec. 10(1) and Sec. 10(2)(xv)
of the Income-tax Act, 1922, in the assessment years 1956-
57 and 1957-58 respectively?"
E The High Court by its i.udgment dated January 20, 1970, answered
both the questions in favour of the assessee Company and held that
the payments in question amounted to a legitimate deduction under
s. 10(2)(xv) of the Act, and the Tribunal was wrong in disallowing
the same. Thereafter the appellant moved the High Court for grant
o( leave to appeal to the Supreme Court which having been rejected
the appellant filed a petition for special leave. The special leave
F having been granted, the appeal is now before us.
The High Court in reversing the order of the Tribunal mainly
relied on what it described as the surrounding circumstances under
which the alleged payments were made to the selling agents by the
assessee Company as spelt out from the agreement entered into by the
assessee Company with the selling agents. The main point which was
argued before the Tribunal as also before the High Court was that the
cumulative effect of the interpretation of the various clauses of the
agreement dated October 20, 1955 unmistakably revealed that in the
garb of an agency the parties entered into a joint venture for distribut
ing the net profits, after being ascertained ,between themselves and that
is why there was an express provision in the agreement by which the
agents agreed to share the losses to the extent of 50% which were to
be deducted from the remuneration payable to the agents. The Tri
bunal held that the agreement amounted to a joint venture resulting
in division of net profits and therefore the amount paid to the agents
could not be claimed by the assessee Company as a deduction under
C.l.T. v. PANIPAT WOOLLEN MILLS (Fazal Ali, J.) 191
s. 10(2)(xv) of the Act, as it was not incurred for the purpose of
the business or for earning profits. The High Court held that the
mere fact that the agents agreed to share the profits and the losses
would not take the case of the assessee beyond the ambit of s.
10(2)(xv) of the Act in order to show that the payments made to
the agents were not expenses incurre.d for the purpose of the business.
The High Court laid special emphasis on the fact that the Revenue
could not examine the question of the commercial expediency of the
businessman to incur expenses or earn profits in a particular manner.
The High Court accordingly found that the agreement per se was a
contract of agency and not a joint venture and accordingly the High
Court accepted the plea of the assessee Company.
In support of the appeal Mr. Ahuja, the learned standing counsel
for the Revenue submitted the following two points before us :
(1) In the first place it was submitted that there being
an express provision in the agreement dated October 20,
1955 by which the agents agreed to share losses which was
a provision peculiar to the present transaction and was not
at all covered by any authority cited before the Tribunal
or the High Court, that itself was proof positive of the fact
that the transaction amounted to a joint venture with a view
to division of profits; and
(2) It was argued that the High Court had exceeded
its jurisdiction in travelling beyond the agreed statement of
the case framed by the Tribunal and had relied on certain
materials which were not at all found by the Tribunal in its E
order nor were those materials mentioned in the statement
of the case.
Mr. A. N. Goyal counsel for the assessee Company has, however.
submitted that the view taken by the High Court is absolutely correct
and t.he facts of the present case are clearly covered by the decision
of this Court in Dharamvir Dlu'r v. Commissioner of Income-tax,
Bihar & Orissa( 1 ). A number of other cases have also been cited at
the Bar and we shall refer to the same after marshalling the facts
found in the present case.
Before comin~ to the. facts it may be necessary to mention that
there can be no dispute with respect to the two important propositions;
(I) that in order to fall within s. 1 O (2) (xv) of the
Ac~ the dedu.ct10n claimed must amount to an expenditure
which was laid out or expended wholly and exclusively for
t~e purpose of the business, profession or vocation. ·This
will naturally depend upon the facts of each case.
(2) that in order to determine the question of reason
a?lene.ss of the expenditure,. the test of commercial expe-
dienc) wo1;'1d have to be adjudged from the point of view H
of the busmessman and not of the Income-tax Depart-
(!) 42 l.T.R. 7.
192 SUPREME COURT REPORTS [I 976] 3 S.C.R.
A ment. With this preface we now proceed to deal with the
facts of the present case on the basis of which the questions
of law referred to the High Court and answered in favour of
the assessee Company arise.
ll
To begin with, it is conceded by the learned standing counsel for
the Revenue that the asscssee Company was running at a loss as a
result of which it had to raise a loan of several lakhs of rupees franc
the Industrial Finance Corporation. It was perhaps for this reason
that the assessec Company entered into an agreement with the new
selling agents M/s Saligram Premnath who were prepared to give to
the assessee Company better and more profitable terms. The main
question to be determined is as to whether or not the agreement dated
October 20, 1955 read as a whole amonnts to a joint venture for the .
purpose of division of profits. In order to decide this question it
may be necessary to refer to some important portions of the second
agreement which alone is relevant for the purpose of deciding this
point. We might mention, however, that so far as the first agreement
is concerned the terms thereof do not make out a case of joint venture
but appear to be iu cousonance with the agreement being one of an
agency simpliciter. It is the second agreement that in our opinion
appears to change the eutire complexion of the case. This agreement
is set out at p. 17 of the Paper Book and consists of ten main clauses.
The agreement was to enurc for a period of two years to commence
from January I, 1956 or the date on which manufacturing actually
starts under the agreement whichever is later. This is provided in
clause 2 of the agreement. It was further provided that the period
of the agency could be extended further by mutual consent. Clause
3 (ii) runs thus :
"Programme for the manufacture of goods will be made
from time to time by the Company in consultation and with
the consent of the Agents."
F It may be noticed that this clause requires not only consultation with
the agents for the progn1111n1c of 1nanufacture of goods but a tacit
consent of the agents. Tn other words, if the agents withheld their
consent, they could veto the programme of manufacture. Such a
limitation placed on the power of the assessee Company does not
appear to us to be in consonance with a pure and simple contract of
G agency. Clause 6 which deals with financial arrangements may be
extracted thus :
"(i) The Agents shall invest full amount for the work
ing of the Worsted Plant to the full possible capacity begin
ning from the purchase of tops to the completion of the
yarn sales including wages, power, stores, and repairs and
mamtenance etc. Such mvestments and expenses incurred
on tops, manufacturing, bank charges, transport, insurance
and octroi will be debited to the account of the Company.
C.I.T. V. PANIPAT WOOLLEN MILLS (Fazal Ali, !.) 193
· (ii) Before the beginning of the arrangements under this A
Agreement, the Machinery of the Worsted Plant will be over-
hauled and similarly before this arrangement ends the
Machinery will be overhauled.
x x x x x
(viii) In case of any loss or damage to the toi:s or goods
in· transit or in godowns, the same will be debited to the
account of the Worsted Plant.
(ix) The accounts of lhe Worsted Plant will be main
tained separately in an office situated near the Worsted
Plant and the Agents will have free access to the account
books.
x x x x
Sub-clause (i) clearly contemplates lhat the agents would have to
make lull and complete investment for the working of the worsted
plant to the fullest possible capacity including wages, power, stores,
repairs and maintenance etc. This provision appears to be more
in consonance with the terms of a person who is a partner in a ven
ture rather than one who is a mere agent. Further more, sub-clause
(ii) provides that before the agreement starts the machinery of the
worsted plant would be overhauled and would be again overhauled
before the agreement ends. This provision also has its own impor
tance and appears to be beyond the role of the selling agents simpli
citer. Sub-clauses (viii) and (ix) extracted above clearly show that
the damage to the tops or goods in transit would have to be debited
to the account of the worsted plant and such accounts would have
to be maintained separately. The obvious object is that the agents
should be in a position to ascertain the net profits and control the
working of the worsted plant. Clause 7 is the most important clause
of this agreement, which, in our opinion, clearly shows that the agree
ment in essence and in purport is a sort of a partnership or a joint
venture rather than a contract of agency. Sub-clause (i) of clause 7
runs thus :
"7. Conunission
(i) The Agents shall be allowed a commission at !}%
(one and a quarter per cent) on the net proceeds of sales
of all goods. Such commission shall be chargeable upon
money actually credited to the Company, and not on out
standing debts, if any. Besides, Agents will get 50% (fifty
per cent) commission on the net profits of the Worsted
Plant. The net profits will be ascertained after deducting
all the manufacturing expenses, interest, insurance, deprecia
tion and selling commission etc. For ailowina annual de
preciation in the value of the machinery and buildings and
mterest on the value of machinery, bdldings and commenc
mg from the date on which manufacturing actually starts
under this Agreement, a lump sum of Rs. 50,000/- has been
agreed to be deducted for determining the net profits or loss
194 SUPREME COURT RE;i'ORTS [1976] 3 S.C.R.
position. In case of net Joss, if any, there will be a deduc
tion of 50% (fifty per cent) of such loss from the Agent's
Account."
Analysing the terms of this sub-clause it would appear that
the agents have been able to secure most liberal and profitable
terms. To begin with they were to get a commission at the rate of
one and a quarter per cent on the net proceeds of sales of all goods.
There can be no objection to this. Secondly, the agents will get
50% commission on the net profits of the worsted plant. The net
profits would have to be ascertained after deducing all the manufac
turing costs, interest, insurance etc. The conduct of the agen.ts in
sharing half of the net profits does not appear to us to be consistent
with the payments made to the agents for services rendered. It is
difficult to Jay down any rule of universal application as to what per
centage of profit would be consistent with the payment in lieu of ser
vices but taking the totality of the provisions of the agreement it seems
to us that the percentage of profits and the manner in which it is to be
-determined is more consistent with the position of a partner than that
of an Agent. Finally the provision for sharing the loss incurred by
the Company and for a lump sum deduction of Rs. 50,000/- is totally
inconsistent with a contract of agency. Further more, sub-clause (iv)
of clause 7 provides as under :
"(iv) The commission account will be maintained sepa
rately by the Agents and the commission will be payable
to the Agents by the Company every six months. In the
same way, the amount of Rs. 25,000/- for six months as
provided in sub-clause (i) above, will be paid to the Com
pany every half-year within ten days. The profit and loss
account of the Worsted Plant will be made every six months
within ten days and the adjustments will be made accord
ingly by actual payments, as the case may be, within ten
days."
The above sub-clause clearly provides for a separate commission ac
count to be maintained by the agents and the commission to be paid
every six months. Consequently the agents agreed to pay a sum of
Rs. 25,000/- for six months every half year within ten days. We
might further mention here that the provision in the agreement re
garding sharing of the loss is absolutely peculiar to this particular
agreement and there is not a single authority, which has, in spite of
such a provision, held that the transaction does not amount to a
joint venture or a division of profits. The provision regarding the
consent of the agents to the sales and the programme of manufacture
is also pertinent in order to determine whether the transaction amoun
ted to a joint venture in the garb of a contract of agency. It is well
settled that the Court in order to construe an agreement has to look
to the substance or the essence of it rather than to its form. A party
cannot escape the consequences of law merely by describing an
agreement in a particular form though in essence and in substance it
may be a different transaction. In .these circumstances, therefore, if
we construe the agreement as a sort of a joint venture or a transac
tion like a partnership which has been given the form and appearance
d a contract of agency, the law must have its course.
C.l.T. 1'. PANIPAT WOOLLEN MILLS (Fazal Ali, !.) I 95
Our attention has been drawn by the learned counsel for the Re
venue to a decision in British Sugar Manufacturers Ltd. v. Harris
(Inspector of Taxes )( 1 ), where Greene, M. R. clearly observed that
where a person contributes to some sort of joint adventure which
ultimately results in division of profits, it could not be construed as
a remuneration for services. In this connection, Greene, M. R. ob
served as follows :
'·rt is not cash that passes in exchange for these profits,
it is services; and the badge of such a contract is remunera
tion for services, and therefore the first thing that this re
muneration would certainly not be is a share of profits pur
chased by the employee. x x x
I can conceive of a case where a person contributes to some
sort of joint adventure services, while others contribute per
haps capital, land, plant, and goods, arranging between
themselves (it may be something short of a partnership)
that nobody shall get anything until the pool of profits is
ascertained, and then they shall divide it up between them in
specified proportions. That, it seems to me would be a real
agreement for division of profits, because there would be
one profit fund only. There would not be two 'profit' funds
to be ascertained for different purposes."
These observations seem to us to cover the facts of the instant case:
Having regard to the terms and conditions of the agreement detailed
and analysed above, there can be no doubt that the agents by con
tribnting to the investments and by sharing the profits as also the
losses have actually contributed to a joint venture and ultimate divi
sion of the profits with the principals and the agreement must be
construed as an agreement for division of the profits in specified pro
portions as mentioned therein. Tt is true that in the aforesaid case
on the facts found the Court held that the transaction did not amount
to a joint venture but it was clearly pointed out in the judgment
that there is a very thin line of distinction between a contract for pay
ment of a share of profits simpliciter and a payment of remuneration
which is deductible in truth from the profits divisible. We, therefore,
find ourselves in complete agreement with the observations made by
Greene, M. R., which aptly apply to the facts of the present case on
the basis of the various clauses of the agreement dated October 20,
1955.
The High Court, however. appears to have relied upon the deci
sion in Dharamvir Dhir's case (supra). The facts. of that case
appear to be clearly distinguishable from those of the present case.
What had happened in Dharamvir Dhir's case was that the as
sessee was an employee of the firm earning a particular salary. The.
employee entered into a coal raising contract with a coal company
and ·as he did not have the necessary funds he persuaded a oublic
charitable trust to advance to him sums upto 1 ! lakhs on payment of
(l) 7 I. T. R. IOI,
D.
interest at 6 per cent. and share ll/16ths of the profits of the ,busi
nc'5. The assessee agreed that the coal raising contract would be
carried on in accordance with the policy settled between him and. the
trust and the trust could withdraw its money at any time. It is, there
fore, clear that in the first place the agenl, namely, the trust, agreed
to finance the assessee by giving him a lorn of Rs. l t lakhs at 6 per
cent interest. This was undoubtedly permissible. The trust was. also
to get ll/16th of the profits of the business. It was, however, not
agreed between the parties that the profits would be ascertained after
deducting the net expenses as mentioned in the agreement before us.
It is true that the contract was to be carried on in accordance with
the policy settled between the assessee and the trust but that did not
give any veto power to the trust to tarpedo the contract. In the instant
case the agreement clearly provided !or the consent of the agents not
only at the beginning of the manufacture of the yarn by the plant to
he installed by the assessee Company but at every stage in the pro-
gramme of manufacture. Even at the stage of the sale of the products
the consent of the agents was necessary. In other words, the· agents
were given a complete controlling power so far as the manufacture
and sale of the products of the assessee Company were concerned.
No such stipulation is to be found in Dharamvir Dhir' s case (supra).
Finally, not only there was no provision in Dharamvir Dhir's case
under which the trust was to share the losses but there was an ex-
press provision to the contrary, namely, that the trust was not liable
for any loss. Thus the mere payment of interest at the rate of 6 per
cent. on the Joan advanced to the asscssec and a percentage in the
profits of the business would be quite consistent with a remuneration
in lieu of services lent and would certainly amount to an expenditure
incurred by the assessee wholly and exclusively for the purpose of the
business which was conducted by the assessee. The same, however,
cannot be said of the present case. It was on the peculiar facts of
the Dharamvir Dhir's case that this Court observed as follows:
"On the facts proved in the present case the trust agreed
to finance the business of the appellant on the terms set out
in the agreement and there is nothing to show that he could
have m.ade any better arrangements or wonld not have lost
the contract if he had failed to enter into the agreement,
i.e. the agreement to pay the amounts in dispute. There
fore, in a commercial sense, the payments were an expendi
ture wholly and exclusively laid ou_l for the purpose of the
business."
G It may be mentioned that this Court had considered the decisio;,. in
the British Sugar Manufacturers Ltd.'s case (supra) and had approved
of the same.
Great stress was laid by counsel for the assessee Company on the
fact that this Court could not go behind the commercial expediency
which had to be determined from the point of view of a businessman.
H Even so whatever be the commercial considerations, it is djfficult to
hold that the commercial expediency dictated the assessee Company
to allow itself to he completely overshadowed by its selling agents so
as to pay them not only for the services rendered but also allow them
I
C.I.T. v. PANIPAT WOOLLEN MILLS (Fazal Ali,!.) 197
to share profits control the manufacture of the goods and the pro- A
gramme thereof and also to share the losses. The test of commercial
expediency cannot be reduced in the shape of a ritualistic formula,
nor can it be put in a water-tight compartment so as to be contined
in a strait jacket. The test merely means that the Court will place
itself in the position of a businessman and find out whether the ex
penses incurred could be said to have been laid out for the purpose
of the business or the transaction was merely a subterfuge for the B
purpose of sharing or dividing the profits ascertained in a particular
manner. It seems to us that in ultimate analysis the matter would
depend on the intention of the parties as spelt out from the terms of
the agreement or the surrounding circumstances, the nature or charac-
ter of the trade or venture, the purpose for which the expenses are
incurred and the object which is sought to be achieved for incurring
those expenses. If the expenses incurred amount to a profit of art C
enduring nature they may be treated as capital expenditure, where~s if
the expenses merely serve to promote or increase the commercial
activity they may amount to an expenditure which is incurred for
the purpose of the business.
Reliance was also placed by counsel for the assessee Companv
on the decision in J. K. Woollen Manufacturers v. Commissioner of D
Income Tax, U.P.(' ), where this Court observed as follows:
"The question as to whether an amount claimed as ex
penditure was laid out or expended wholly or exclusively
for the purpose of business, profession or vocation as re-
quired und,.r Section 10(2) (xv) of the Income Tax Act
has to be decided on the facts and in the light of the circum
stances of each particular case. x x x x
In our opinion, neither the High Court nor the Appellate
Tribunal has applied the proper legal test in this case. As
pointed out by this Court in C.l.T. Bombay v. Walchand
and Co. Private Ltd., 1967-65 ITR 381= (AIR 1967 SC
1435) in applying the test of commercial expediency for de-
termining whether an expenditure was wholly and exclusi
vely laid out for the purpose of the business, reasonableness
of the expenditure has to be adjudged from the point of
view of the businessman and not of the Income Tax Depart-
ment. It is, of course, open to the Appellate Tribunal to
come to a conclusion either that the alleged payment is not
real or that it is not incurred by the assessee in the charac-
ter of trader or it is not laid out wholly and exclusively for
the purpose of the business of the assessee and to disallow
it. But it is not the function of the Tribunal to determine
the remuneration which in their view should be paid to an
employee of the assessee."
Tt w?uld appear that in the aforesaid case the only question was re
gardmg the qu.antum of remuneration to be given to the General
Manager and this Court observed that the businessman must be given
complete freedom t°, fix the terms of his employees after taking an
(I) [1969] I. S. C.R. 525.
19 8 SUPREME COURT REPORTS [1976] 3 S.C.R.
A overall view of the situation. This was not at all a case where an
agreement like the present one was entered into between the assessee
Company and its agents. On the other hand in Commissioner of
Income-tax, Kera/a v. Travancore Sugars and Chemicals Ltd.('), this
Court added a word of caution that the test of commercial expediency ._
should not be applied in a mechanical manner and observed as •
follows :
·'In considering the nature of the expenditure incurred
in the discharge of ari obligation under a contract or a statute
or a decree or some similar binding covenant, one must avoid
being caught in the maze of judicial decisions rendered on
different facts and which always present distinguishing fea
tures for a comparison with the facts and circumstances of
C the case in hand. Nor would it be conducive for clarity or
for reaching a logical result if we were to concentrate on the
facts of the decided cases with a view to match the colour
of that case with that of the case which requires determina
tion. The surer way of arriving at a just conclusion would
be to first ascertain hy reference to the document under
which the obligation for incurring the expenditure is created
D and thereafter to apply the principle embalmed in the de
cisions of those facts. Judicial statements on the facts of
a particular case can never assist courts in the construction
of an agreement or a statute which was not considered in
those judgments or to ascertain what the intention of the
legislature was. What we must look at is the contract or
the statute or the decree, in relation to its terms, the obliga-
E tion imposed and the purpose for which the transaction was
entered into."
The learned counsel for the assessee Company relied on the aforesaid
case because the question whether the transaction amounted to a joint
venture appears to have been raised but it appears that this point had
been given up when the case was sent on remand and was therefore
F not decided. In these circumstances, the decision in the aforesaid
case does not appear to be of any assistance to the assessee Company.
The Tribunal had interpreted the agreement keeping into account
the tests of commercial expediency and we find ourselves in complete
agreement with the view taken by the. Tribunal. The High Court on
the other hand relied upon what it called the surrounding circum-
G stances that the asscssee Company was a losing concern from its
inception and had to get rid of the previous selling agents M/s Murli
dhar Chiranjilal because they caused considerable embarrassment to
the assessee Company. While the standing counsel for the Revenue
has admitted that the Company was running at some Joss there was
no evidence that the Company was in such a bad shape that it Imel
to get rid of the first selling agents because the selling agents were
! 1 causing embarrassment to it. The High Court then relied on the fact
that the first agency which was entered into with M/s Murlidhar
(I) 88 l.T.R. 1, 10.
.l
C.I.T. v. PANIPAT WOOLLEN MILLS (Fazal Ali,!.) 199
Chiranjilal in 1953 also resulted in loss as a result of which the
second agreement dated October 20, 1955 was entered into. This
does not appear to be of much consequence. The High Court then
relied on the fact that the agents had no other connect10n with the
assessee Company except that of the business connection. The High
Court further found that the promoter of the assessee Company Mr.
Desh Bandhu Gupta had a stature which enabled him to borrow
loans from the Banks on personal security and as he died in an air
crash the credit of the Company went down and it was not able to
raise money from the Banks. There is absolutely no warrant for
these facts referred to by the High Court which are neither mentioned
in the agreed statement of the case submitted by the Tribunal to the
High Court nor in the order of the Tribunal. It is well settled that
the High Court is not entitled to go behind the statement of the case.
In Commissioner of Income-tax, Poona v. Manna Ramji and Com
pany(') this Court observed as follows :
"In this respect we are of the view that the Tribunal is
the final fact finding authority. It is for the Tribunal to
find facts and it is for the High Court and this Court to lay
down the law applicable to the facts found. Neither the
High Court nor this Court has jurisdiction to go behind or
to question the statement of facts made by the Tribunal.
The statement of case is binding on the parties and they are
not entitled to go behind the facts of the Tribunal in the
statement. When the question referred to the High Court
speaks of 'on the facts and circumstances of the case', it
means on the facts and circumstances found by the Tribu
nal and not on the facts and circumstances as may be found
by the High Court."
In Commissioner of Income-tax, Bombay v. Poona Electric Sup
ply Co. Ltd.( 2 ) the Bombay High Court observed as follows :
"It is true that the Electricity Act exercises control on
the business of the licensee, but the control that is exercised
by reason of the aforesaid proviso is to compel the assessec
to distribute part of its clear profits if it is found that 'clear
profits' are in excess of the reasonable return as contem-
plated under the Act. That, in our opinion, would only
amount to apportionment or distribution of the profits after
they have been earned. It cannot, therefore, be said that the
amount set apart for the purpose of distribution amongst
the consumers is not chargeable to tax on the ground that
it represents over-charge."
This case however was decided on its own facts and has no applica
tion to the facts in the instant case.
IJ.
l_l~li.ance was also pl.aced by counsel for .the assessee Company on H
a D1v1Slon Bench deci~ion of the Patna High Court in Jamshedpur
(!) 86 l.T.R. 29, 37. (2) 49 I.T.R. 9\3, 924.
14-L 390 SCI/76
200 SUPREME COURT REPORTS (1976] 3 S.C.R.
Motor Accessories Stores v. Commissioner of Income-tax, Bihar &
Orissa(') where Untwalia, CJ., as he then was, observed as follows:
·"'That position being accepted the matter as to what
amount was payable to Parikh ought to have been adjudged
from the assessee's point of view and not from the depart
ment or Tribunal's point of view. It has to be emphaSlse<l
that unless there is a limitation put by the law on the amount
of expenditure a lesser amount than the amount expended
cannot be allowed merely because the assessing authority
thinks that the assessee could have managed by paying a
lesser amount as a prudent businessman. The test of pru
dence by substituting its own view in place of the business
man's has not been approved by the Supreme Court in the
decisions referred to above."
Herc also the observations were confined only to the question that
the test of prudence was to be determined from the point of view of
the businessman. Jamshedpur Motor Accessories Stores' case (supra)
was also concerned regarding the quantum of the payment of com
mission and does not appear to be useful in deciding the point at
issue in the present case.
Some other decisions were cited at the Bar but they have no
bearing on the issue and it is not necessary for us to refer to them.
What is, therefore, important to us is that no decision has been cited
before us which takes the view that even though under the contract
of agency the selling agents who agreed to make substantial invest
ments in the assessee Company and got interest on the loans apart
from the commission they also shared profit to the extent of 50%
as also Joss to that extent and had complete controlling power in the
manufacturing programme or the sale of the products and yet t11e
transaction would be one ·of agency simpliciter and not a joint ven
ture. On the facts found by the Tribunal and those mentioned in the
statement of the case as discussed above leads to the inescapable
conclusion that the present contract of agency really amounts to a
transaction by which substantial investments had been made by the
selling agents with a view to control the manufacturing programme
and the agents had also agreed to share the profits and losses equally.
This is, therefore, nothing but a joint venture to divide the profits
after the same are ascertained and cannot in any sense be deemed
to be expenses incurred by the assessee Company for the purpose of
its business or for that matter for earning profits. In fact in Pondi
cherry Railway Co. Ltd. v. Commissioner of Income-tax, Madras('),
Lord Macmillan pointed out that a payment out of nrofits and cundi
tional on profits being earned cannot be legitimately described as a
payment made to earn profits. It assumes that profits have first come
into existence. But profits on their coming into existence attract tax
at that point and the Revenue is not concerned with the subsequent
(I) 95 l.T.R. 6€4. 672. '2) A.T.R. 1931 P.C. 165, 170.
C.l.T. v. PANIPAT WOOLLEN MILLS (Fazal Ali, J.) 201
application of the profits. In this connection the Privy Council ob- A
served as follows :
"It is claimed for the company that when it makes over
to the Colonial Government their half of the net profits it is
making an expenditure incurred solely for the purpose of
earning its own profits. The Court below has unanimously
negatived this contention and in their Lordships' opinion has
rightly done so. A payment out of profits and conditional
on profits being earned cannot accurately be described as a
payment made to earn profits. It assumes that profits have first
come into existence. But profits on their coming into
.existence attract tax at that point and the revenue is not
concerned with the subsequent application of the profits.
" " " But the principle laid down by Lord Chancellor
Halsbury in Gresham Life Assurance Society v. Styles
.(1892) A.C. 309-at p. 315, is of general application un-
affected by the specialities. of the English tax system :
' ...... But when once an individual or a company has
in that proper sense ascertained what are the profits of his
business or his trade, the destination of those profits or the D
.charge which has been made on those profits by previous
:agreement or otherwise is perfectly immaterial. The tax is
payable upon the profits realised and the meaning to my
mind i£ rendered plain by the words payable out of profits'.
Thus in short by controlling the manufacturing programme, shar-
ing to the extent of 50 % in the net profits ascertained in the manner E
,;tipulated in the agreement and above all for sharing 50 % of the
losses which are to be deducted from the commission of the a~ents
the agents become completely equated with the proprietors of the -firm
itself and therefore the contract of agency is really a sort of a partner-
• ~hip and has been given the cloak and colour of an agency to conceal
the real intent and purposi; of the commercial venture.
In view of the decisions referred to above and the peculiar facts
of the present case we are satisfied that the view taken by the Tribunal
that the payments in question were not legally deductible under s.
10(2) (xv) of the Act was correct. The vie'Y taken by the High
Court that the amounts in question were deductible under s. 10(2) (xv)
appears to be legally erroneous and cannot be upheld.
For the reasons given above, the appeals are allowed and the G
judgmen\ of the High Court is set aside and that of the Tribunal is
restored and the two questions referred to the High Court are answer-
ed against the assessee Company and in favour of the Revenue: In
view of the peculiar f\lcts of the present case, we leave the parties to
bear their own costs in this Court.
V.P.S. Appeals allowed.