Patna High Court
Commissioner Of Income-Tax, Bihar & ... vs Bharat Collieries Ltd. on 29 September, 1966
Equivalent citations: [1968]68ITR42(PATNA)
JUDGMENT
In this case the Income-tax Appellate Tribunal was asked by this court to state a case, under section 66(2) of the Indian Income-tax Act, on the following question :
"Whether, on the facts and circumstances of the case, the sum of Rs. 2,88,504 is allowable as a deduction under section 10(2) (xv) of the Indian Income-tax Act, 1922 ?"
The assessment year involved was 1954-55. The assessee is a public limited company and they claimed a deduction of Rs. 5,60,245 as expenditure incurred wholly for the purpose of their business which they paid as commission to Messrs. Republic Chemical Corporation, America. The Income-tax Officer, in the first instance, allowed that expenditure to the extent of Rs. 90,576 and disallowed the balance of the claim. On appeal by the assessee, the Appellate Assistant Commissioner allowed the commission at the rate of three per cent., i.e., Rs. 2,71,840, out of the assessees claim. Since the balance of Rs. 2,88,504 was disallowed by him, the assessee came in appeal before the Income-tax Appellate Tribunal. They examined the assessees claim and the correspondence produced by the assessee in that respect. From the two contracts that were produced before them, they found that the assessee had entered into a contract for supply of coal to Headquarters, Japan Procurement Agency, Yokohama, Japan (referred to in the order of the Appellate Tribunal as J. P. A.). That coal was to be delivered at the South Korean ports for consumption by the U. S. A. Army. The first contract was made on the 30th June, 1952, for supply of 50,000 metric tons of coal and the second contract was made on the 8th of February, 1953, for supply of similar quantity of coal. The rates quoted for those two supplies were different. Those two contracts were obtained by the assessee through Messrs Republic Chemical Corporation, Japan Ltd. (referred to as Republic Japan by the Appellate Tribunal in its order). Messrs. Republic Chemical Corporation Japan Ltd. was a subsidiary of the concern styled Messrs. Republic Chemical Corporation, U. S. A. Messrs. Republic Chemical Corporation Japan Ltd., had rendered services to the assessee and acted as their agent in Japan and kept the assessee informed about the demand for coal by the Headquarters, Japan Procurement Agency, Yokohama, and other prospective customers. They filed tenders on behalf of the assessee for supply of coal to the Headquarters, Japan Procurement Agency, Yokohama.
The Tribunal further found, on a perusal of the correspondence produced by the assessee, that they (the assessee) had agreed to pay Messrs. Republic Chemical Corporation Japan Ltd. commission of 1.723 U. S. A. dollars per ton of coal supplied to the Headquarters, Japan Procurement Agency, Yokohama. This rate was also found by the Tribunal to be in accord with the normal commercial transaction, although the rate was high. In that view, the Tribunal allowed the entire claim of the assessee about payment of commission on sale of coal in Japan under the two contracts. It is to be mentioned that the first contract stipulated for a rate of commission of 9.5 per cent., whereas in the second contract the commission rate was three per cent. The revenue wanted the Tribunal to state a case in regard to the allowing of commission in excess of three per cent. but since the Tribunal refused to state the case, the revenue obtained a rule from this court.
Learned counsel appearing for the revenue contended that, since the assessee entered into Japan market for supply of coal to the Headquarters, Japan Procurement agency, Yokohama, for the first time, they had to agree to pay a higher rate of commission to their agent in Japan, the Republic Chemical Corporation Japan Ltd. In that view, the learned counsel contended, the whole payment of commission at the rate of 9.5 per cent. under the first contract cannot be said to be incidental to carrying on business of the assessee or an integral part of the profit earning process in the (assessees) business. The high rate of commission, according to him, was paid partly for securing an advantage of enduring character, inasmuch as, by such payment of high commission, the assessee was able to have a new market outside India for supply of their coal. No doubt, the first contract, dated the 30th of June, 1952, was the first business that the assessee secured in Japan market and their agent in Japan was responsible for securing that order, inasmuch as they (the agent) had submitted the tender for the assessee to the purchaser-company, but there was nothing by way of advantage of any enduring benefit in that transaction; neither the assessee obtained any monopoly rights nor any abnormal concessions in regard to the supply of coal in that country or to their purchasers. It was nothing more than securing an order for supply of coal from a customer which was, in the ordinary course, a business of the assessee. It was neither an extension of their business nor any exclusive rights in regard to supply of coal in that country. The assessees were carrying on the business of supply of coal in this country and in normal course, through the help of their agents, they approached customers and secured their orders from time to time. The activity that resulted in the first contract, dated the 30th of June, 1952, in Japan, was in no way different from the activities of the assessees business in this country. The mere fact that a customer was found outside the country will not make any difference in the nature of expenses incurred in payment of commission to the assessees agent in Japan or in this country. It is a normal practice in the commercial world to yield to a high rate of commission or to grant special rates of sale in certain cases, e.g., in the case of a first customer in a particular area. These things are conceded as the seller wants to here access to other customers through his first transaction in a particular area or place.
It is well settled that the amount and extent of a particular expenditure would not determine the character of that expenditure. If that would be in connection with the business itself, in the sense that it is an integral part of the profit-earning process in that business, it is then allowable as a deduction under section 10(2) (xv) of the Act. In that view, and particularly on the findings of fact arrived at by the Appellate Tribunal that the high rate of commission paid to the agent of the assessee in the first contract, viz., 9.5 per cent. approximately, was normal commercial transaction, the assessee were justifiably allowed the deduction.
Learned counsel for the revenue referred us to some cases in respect of his contention, but, in our view, the facts of all those cases are completely distinguishable and cannot be brought in to apply to the instant case. He referred to the case of Altherton v. British Insulated and Helsby Cables Ltd., where the respondent-company claimed a deduction in respect of a sum contributed to a pension fund in accordance with a trust deed on the ground that substantial and lasting advantage was obtained by the assessee-company, that was help not be an expenditure which could be said to be an integral part of earning profit in that business. Similarly, in the case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, the asssessee obtained monopoly rights and payments made in that connection were taken to be expenditure incurred for an asset or advantage. In that case, their Lordships of the Supreme Court held that whether a particular expenditure can be allowed as a revenue expenditure will depend upon the facts of that case. Their Lordships observed that the aim and object of the expenditure would determine the character of the expenditure, whether it is a capital expenditure or a revenue expenditure. There cannot be any doubt that the payment which was made to secure the outstanding advantage, such as the monopoly rights, cannot be compared with the transaction of a sale in the normal course, as was done in the present case, in a new area without having any special privilege or exclusive rights either in regard to sale or supply or prices or period of supply. The third case relied upon by the learned counsel was the case of Henderson v. Meade-King Robinson & Co. Ltd. There also the facts were entirely different. The assessee, who was carrying on the business of oil importers and distributors, made an advance of loan to a whaling company in consideration of their continuing to be its agent for all time. This was, for obvious reasons, considered as an enduring advantage obtained by the assessee and, therefore, the claim of revenue expenditure was disallowed. The last case was that of Bhor Industries Ltd. v. Commissioner of Income-tax. The assessee there secured four-fold concessions including monopoly rights from the Diwan of the Bhor State by an agreement and the payment made for that concession was claimed by the assessee as chargeable to revenue, with a view to getting rid of the liability. The obtaining of monopoly and other concessions were held in that case to be advantages of enduring benefits and not incidental to the business itself. It cannot be said that the facts of any of the four cases above can be brought at par with the circumstances and facts of the present one as found and accepted by the Appellate Tribunal. There was no dispute from the side of the revenue that commission was paid by the assessee to their agent in Japan at the stipulated rate, nor was it contended that it was out of the run of the commercial practices obtaining in that country or in regard to the business practice of the assessee.
Learned counsel appearing for the assessee referred us to the case of Bombay Steam Navigation Co. Private Ltd. v. Commissioner of Income-tax, in which two shipping companies were amalgamated and interest was paid on the unpaid purchase price of the shares of one of the amalgamated companies by the other. That payment of interest was held to be incidental to carrying on of the business and not to securing any enduring benefit to the assessee-company. There, their Lordships of the Supreme Court held that the incidence of commercial trading must be kept in view in deciding whether a particular expenditure is chargeable to revenue or not. Another case brought to our notice by the learned counsel for the assessee was that of India Cements Ltd. v. Commissioner of Income-tax. The assessee in that case obtained a loan of rupees forty lakhs from the Industrial Finance Corporation. In connection with getting that loan, certain documents had to be prepared and registered and expenditure to the tune of more then eighty thousand rupees was incurred in the shape of stamp duty, lawyers fee, registration charges, etc. Revenue contended in that case that the above expenditure was of a capital nature but it was not accepted by the Supreme Court. They held that those expenses were an integral part of the profit-earning process, because the business could not have proceeded without incurring that loan. The principles laid down in the aforesaid two cases seem to be more applicable to the case before us.
For the reasons given above, the answer to the question shall be in the affirmative and for the assessee. In view of the circumstances of the case, there shall be no order for costs in this reference.
Question answered in the affirmative.