COMMISSIONER OF INCOME-TAX, CALCUTTA, NOW WEST BENGAL III vs. IMPERIAL CHEMICAL INDUSTRIES (INDIA) PRIVATE LTD.

CIVIL APPEAL No. 1549/1968Supreme Court[1969] 3 S.C.R. 80420 February 1969Bench: 3 JudgesAuthor: J.C. SHAH, V. RAMASWAMI, A.N. GROVER OF9 pages
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What were the facts?

The assessee, Imperial Chemical Industries (India) Private Ltd., was appointed the sole selling agent for Imperial Chemical Industries (Export) Glasgow (ICI Export Ltd.) from April 1, 1948. Prior to this, ICI Export Ltd. had four selling agents in India. Upon termination of their services, compensation was to be paid to these former agents. This compensation was paid through the accounts of the assessee. For assessment years 1949-50, 1950-51, 1951-52, and 1952-53, the assessee claimed these compensation payments as deductible expenditure. The Income-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal disallowed these deductions. The Tribunal found no agreement obligating the assessee to pay this compensation, or if one existed, it was not acted upon. The High Court, however, allowed the assessee's claim. The revenue appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held as follows: 1. The High Court, in a reference under Section 66(1) of the Indian Income-tax Act, 1922, is not a court of appeal and cannot re-appraise evidence to arrive at findings of fact contrary to those of the Appellate Tribunal, unless the question of law referred to it necessitates such re-appraisal or the finding is perverse and no evidence supports it. In this case, the High Court erred in setting aside the Tribunal's finding that there was no agreement obligating the assessee to pay the compensation, as this specific question was not referred to the High Court. The assessee's failure to move the High Court under Section 66(2) meant this contention was deemed rejected. 2. In the absence of proof of the exact terms and conditions of any agreement, it was not possible to accept that the compensation paid was an expenditure laid out wholly and exclusively for the purpose of business under Section 10(2)(xv). 3. The assessee's documents suggested that the payment of compensation was the exclusive liability of ICI Export Ltd., and the assessee was not under a legal obligation to pay the outgoing agents. It was not established that the payment was by an overriding title. The Court reiterated the principle that an obligation to apply income before it is received results in diversion, but an obligation to apply accrued or received income is merely apportionment. The true test is whether the amount sought to be deducted truly never reached the assessee as income. The compensation payments were not by an overriding title created by the act of parties or operation of law.

What were the issues?

The Supreme Court had to decide the following questions: 1. Whether the High Court was justified in interfering with the Tribunal's finding of fact on a question not referred to it, specifically concerning the existence and terms of an agreement for compensation payment (under Section 66(1) of the Indian Income-tax Act, 1922). 2. Whether the compensation amounts paid by the assessee to the former selling agents constituted expenditure laid out wholly and exclusively for the purposes of business (under Section 10(2)(xv) of the Indian Income-tax Act, 1922). 3. Whether the income in question was diverted before it reached the assessee by virtue of an overriding title. Assessee's arguments (implied from High Court's decision and the Supreme Court's analysis of the High Court's error): The assessee contended that the compensation payments were a valid business expenditure and that the income was diverted by an overriding title. The assessee also implicitly argued that the High Court was justified in re-examining the facts. The revenue argued that the High Court erred in interfering with the Tribunal's findings of fact and that the compensation payments were not deductible as business expenditure nor were they diverted by an overriding title.

Which sections of the Income-tax Act were involved?

Section 3,Section 10(2)(xv),Section 66(1),Section 66(2)

AI-generated summary — verify with the full judgment below

COMMISSIONER OF INCOME·TAX, CALCUTTA, NOW A WEST BENGAL m v. IMPERIAL CHEMICAL INDUSTRIES (INDIA) PRIVATE LTD.

February 20, 1969 (J. C. SHAH, V. RAMASWAMI AND A. N. GROVER; JJ.] Indian Income-tax Act, 1922, ss. 3, 10(2) (xv) and 66(1)-Assessee appointed sole selling agent of principal-Compensation paid to former selling agents through accounts of assessee--Compensation paid through assessee's accounts whether deductible expenditure-Payment whether expenditure IG'id out for purposes of business-Payment whether urtdtr overriding title-Tribunal's finding of fact that compensation was not paid by assessee under any agreement with principal cannot be interfered with by High Court when question not referred to it.

The Imperial Chemical Industries (Export) Glasgow was a subsidiary of Imperial Chemical ~dustries London. With effect from 1st April 1948 the former terminated the services of four selling agents in India and in their 'pface ·appointed the. respondent company (another subsidiary of the Im pert al Chemiclll Industries, London) as their sole selling agents. The four former selling agents were to be paid compensation fo~ the termina- tion of their services and

The order continues below.

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