C.L.T., PUNJAB HARYANA, J & K, H.P. & UNION TERRITORY OF CHANDIGARH versus PANIPAT WOOLLEN & GENERAL MILLS. CO. LTD., CHANDIGARH

Citation: [1976] 3 S.C.R. 186 · Decided: 21-01-1976 · Supreme Court of India · Bench: R.S. SARKARIA · Disposal: Appeal(s) allowed

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Judgment (excerpt)

186 
A 
C.l.T., PUNJAB. HARYANA, J & K, H.P. & UNION TERRITOR\ 
OF CHANDIGARH 
B 
c 
D 
E 
v. 
PANIPAT WOOLLEN & GENERAL MILLS. CO. LTD. 
CHANDIGARH 
January 21, l 976 
[R. S. SARKAR!A AND S. MURTAZA FAZAL ALI, JJ.) 
Income Tox Act (II of 1922), s. 10(2) (xv)-Scope of-Payment under 
agreen1e11t between assessee and selling agent to the /Wter-Whether pernzissible 
deduction~ or a1no1111t to divi.Yion of profits between the two. 
Practice-Power of High Court to go outside staten1e11t df case subn1itted' 
by Tribunal. 
In 1952, the asscssee·company installed a new plant by raising a loan from 
the Industrial Finance Corporation, and appointed a sole selling agent of 
its. 
product. Jn 1953, the assessee changed the selling agent, and entered into an 
agreement with another selling agent. 
Under the agreement, the agent was to 
make advances and finance the assessee. 
Under cl. 7(1) of the agreement, the 
agent \Vas to get a commission at the rate of 1!% orr the net proceeds of the 
sales of ail its goods; and 50% commission on the net profits of the ne\v plant 
(the net profits being ascertained after deducting all the manufacturing costs, 
interest, insurance, etc.). The selling agent advanced 2 sums of money in the 
assessment years 1956·57 and 1957·58 r~spcctively, ancl received, during those 
2 years, two sums as their 50% commission on the net profits of the new plant. 
The assessee claimed, in its returns for those 2 years, that the amounts paid 
as commission to the selling agent were expenses incurred' to earn profit and 
could. therefore, be deducted under s. 10(2)(xv) lncome Tax Act, 1922~ but 
the Jncome Tax Officer disallowed the claim. 
On appeal, the Appellate Assis-
tant Commissioner held in favour of the assessee, but the Tribunal, on further 
appeal, held that the agreement between the assessee and the selling agent 
amounted to a ioint venture for the distribution of profits between the two, after 
the profits were ascertained, and upheld the contention of the Revenue that 
the two sums were not legal deductions withins. l0'(2}(xv). 
On reference, the 
High Court held in favour of the assessee. 
Allowing the appeal to this Court, 
F 
HELD: (l)(a) In order to fall withins. 10'(2)(xv) the deduction claimec! 
G 
H 
must an1ount to an expenditure lNhich was 1aid out or expended wholly and ex-
clusively for the1 purpose of the business, profession or vocation; and' this dependS". 
upon the facts of each case; and 
[191 G-H] 
(b) In ·order to determine the reasonableness of the expenditure, the test of 
cornn1ercial expediency would have to be adjudged from the point of vie\v of 
the businessm:ln :1nd not of the Income Tax Department. [191-H-192A] 
(2) Jt is we11-sett1ed 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 d'escribihg an agreernent in a 
particular form. though, in essence and substnnce. it may be a different tran· 
saction. 
r194 G~Hl 
(a) Clause 3 of the agreement requires not onry consultation by the assessee 
with the selling agent, but also the consent, for- the programme of manufacture 
of the product. that is. if the agent withholds its consent. it could veto the pro-
grammi of mai1ufacture. 
Such a Iimit~ti'on praced· on the power of the assessee-
is not in consonance with a pure and simple contract of agency. 
[192 F-G} 
(b) Under cl. 6(1) the selling agent would have to make a full and complete 
investment for the working of the new plant to ttie fiJllCst possible capacity 
' • 
C.I.T. v. PANIPAT WOOLLEN MILLS 
187 
including wa,ges, power, stores, repairs etc. 
This is more in consonance \Vith 
A . 
.a partnership than an agency. 
[193 C-DJ 
(c) Clause 6(ii) provides that the plant should be 
~ommencement and the termination of the agreement. 
the role of a simple selling agent. 
[193 D-E] 
overhauled before the 
This is also beyond 
(cl) Sub-clauses (viii) and (ix) of cl. 6 show that any damage to the goods 
in transit would have to be debited to the account of the new plant and that such 
accounts would have to be maintained separately. The object of these sub-
B 
.clauses is that the selling agent should be in a position to ascertain the net profits 
and control the working of the ne\v plant. 
fl93El 
(e) An analysis of the terms of cl. 7(i) shows that the selling agent \"'as able 
to secure most liberal and profitable· terms. 
While it is diffic

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