COMMISSIONER OF INCOME-TAX, GUJARAT AHMEDABAD vs. TEJAJI FARASRAM KHARAWALLA LTD.

CIVIL APPEAL No. 2162/1966Supreme Court[1968] 1 S.C.R. 3719 July 1967Bench: 3 JudgesAuthor: J.C. SHAH, S.M. SIKRI, V. RAMASWAMI COMMISSIONER OF INCOME6 pages
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What did the Supreme Court hold?

The Tribunal held that the expression 'incurred' in Section 4(3)(vi) means 'incurred or to be incurred'. However, for an allowance to qualify for exemption, it must be granted to meet expenses wholly and necessarily incurred or to be incurred in the performance of duties. The intention of the provision was to exempt amounts received not for the assessee's benefit but for specific purposes of meeting expenses. Therefore, any surplus remaining after meeting these expenses does not retain the character of an allowance for meeting expenses and becomes taxable additional remuneration. The Tribunal disapproved of the reasoning in Tejaji Farasram Kharawalla v. Commissioner of Income-tax, Bombay (Mofussil) and Commissioner of Income-tax, U.P. v. Sharma & Company. Regarding the second issue, the Tribunal noted that no argument to the contrary was advanced by the revenue, and it was unnecessary to consider the High Court's elaborate judgment on whether the assessee held an office or employment of profit. The appeal was allowed, and the exemption was granted only to the extent of expenses wholly and necessarily incurred in the year of account.

What were the facts?

The assessee, Tejaji Farasram Kharawalla Ltd., was appointed as a selling agent and received a 12.5% commission on sales. This commission was later modified to include 7.5% as selling commission and 5% as contingency expenses. For the assessment year 1949-50, the Income-tax Officer included Rs. 58,025 in the taxable income, representing the difference between the 5% contingency commission received (Rs. 1,90,538) and the amount actually spent for contingency expenses (Rs. 1,32,512). The Income-tax Appellate Tribunal initially upheld the assessee's contention that the 5% commission was exempt under Section 4(3)(vi) of the Indian Income-tax Act, 1922. The Revenue appealed this decision.

What were the issues?

1. Whether the 5% commission received by the assessee company, which was designated for contingency expenses, is wholly exempt from tax under Section 4(3)(vi) of the Indian Income-tax Act, 1922, irrespective of whether the entire amount was actually expended. (Question of law) Assessee's Contention: The 5% commission was a special allowance granted to meet expenses wholly and necessarily incurred in the performance of duties. The purpose of the grant was paramount, and actual expenditure was not a condition for exemption, citing Tejaji Farasram Kharawalla v. Commissioner of Income-tax, Bombay (Mofussil) and Commissioner of Income-tax, U.P. v. Sharma & Company. Revenue's Contention: The exemption under Section 4(3)(vi) is only for expenses actually incurred. Any surplus remaining in the hands of the assessee, even if designated for contingency expenses, constitutes taxable income. 2. Whether the assessee company held an office or employment of profit within the meaning of Section 4(3)(vi) of the Indian Income-tax Act, 1922. (Question of mixed law and fact)

Which sections of the Income-tax Act were involved?

Section 4(3)(vi)

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A COMMISSIONER OF INCOME-TAX, GUJARAT AHMED ABAD v. TEJAH FARASRAM KHARAWALLA LTD.

July 19, 1967 :17 B [J. C. SHAH, S. M. StKRl AND V. RAMASWAMI, JJ.] Indian Income-tax .4ct, 1922, s. 4(3) (vi)- Allowance to agent for expenses wholly and necessarily in the performance of duties-- Exemption under section whether applicable to whole amount st sanctioned whether actually expended or not-'lncurred' whether includes 'to be incurred'.

The respondents were selling agents for the goods manufactured C by another company. They were paid 7l% on the sales .as sellinll commission and 5')(;. as con_tingency expenses. The question in in .. come-tax proceedings was whether the amount not spent out of the grant for contingency expenses was exempt from taxation by virtue of s. 4(3) (vi) of the Indian Income-tax Act, 1922. The High Court in reference held that the "5% commission" received b;,: the respon- dents represented a special allowance to meet expenditure and was on that account exempt from tax. The Revenue appealed. D. HELD: (i) .In (he context in whic.h the expression 'incurred' occurs in s. 4(3) (vi) it undoubtedly means '.incurred or to be in- curred'. To qualify for

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