Law:

Section:

Section 37(1) of the Income-tax Act, 1961 (Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922) - Business expenditure - Allowability of - Assessment year 1955-56 - Commission paid by assessee-company to its sole selling agents was disallowed on ground that during relevant accounting year all sales were effected by assessee directly and no sales were effected by selling agents and, therefore, payments were not made for business considerations - Whether mere fact that no sales were effected by selling agents themselves could lead to conclusion that expenditure was not expended for purposes of assessee's business - Held, no - Whether, moreover, in view of fact that assessee incurred expenditure in question in character of trader, it was to be allowed as deduction under section 10(2)(xv) of 1922 Act - Held, yes FACTS By an agreement, the assessee-company appointed 'J.K.' as their selling agents who were entitled to selling agency commission on all sales, whether made through them or directly. They were responsible for payments due from purchasers as also due fulfillment of all contracts made by the assessee and also for the consequences arising from breach of contract by the buyers and losses and damages arising therefrom to the assessee. Payment of commission made to 'JK upto the assessment year 1954-55 were allowed as admissible expenditure in the hands of the assessee. For the assessment year 1955-56, however, the commission was disallowed by the ITO on the ground that all the sales were effected directly by the assessee and no sales were effected by 'JK' thereby holding that the payment had not been made on business considerations. This was confirmed by the AAC. The Appellate Tribunal, however, opined that the mere fact that no sales were effected during the previous year by 'JK' did not necessarily mean that the agreement was not acted upon. It, therefore, upheld the assessee's claim. On reference, the High Court held that the commission was not allowable as business expenditure. On appeal to the Supreme Court : HELD The only reason that persuaded the High Court to come to the conclusion that the expenditure in question was not expended for…

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