Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - [Corresponding to section 10(2)(xv) of Indian Income-tax Act, 1922] - Business expenditure - Allowability of - Assessment years 1956-57 & 1957-58 - Assessee company under an agreement appointed 'P' as its sole selling agent - Under said agreement substantial investments were to be made by selling agent with view to control manufacturing programme of worsted yarn - Assessee agreed to pay interest on advances to be made by agents and also 50 per cent commission on net profits of worsted plant - Further, in case of loss, agent was liable to bear half of loss - Whether having regard to terms and conditions of agreement, it could be said that contract of agency was nothing but joint venture to divide profits after same were ascertained and could not in any sense be deemed to be expenses incurred by assessee-company for purpose of its business or for that matter for earning profits - Held, yes - Whether, therefore, amounts in question were not deductible under section 10(2)(xv) of 1922 Act - Held, yes FACTS The assessee-company running at a constant loss decided to instal a plant for manufacture of worsted yarn from imported wool tops. It entered into an agreement with 'P' under which the latter were appointed as the sole selling agents 'P' agreed to finance the assessee-company and the assessee-company agreed to pay interest on the advances to be made by the agents and further agreed to pay 1¼commission on net sales and 50 per cent commission on net sales of the worsted plant. In the case of net loss the agents were liable to bear 50 per cent of such loss. For the assessment years, in question the assessee-company claimed the amounts representing commission on the net profits paid to the selling agents as a deduction under section 10(2)(xv) of the 1922 Act on ground that were deemed expenses incurred in order to earn profits. The ITO disallowed the claim on the ground that it was actually a division of profits after the profits had come into existence and had been ascertained. On appeal, the AAC held that the payment was a permissible deduction as it was incurred for the purpose of the assessee's trade in order to…

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