KRISHNA BUS SERVICE LTD. v.

SMT. MANGLI & ORS.

January 21, 1976

[R. S. SARKARIA AND S. MURTAZA FAZAL ALI, JJ.]

Negligence-Vicarious responsibility of the manage111ent in fatal u11ury cases-Presu1nption when arises-Liability is on both the rash and _negligent driver and the 1nanagen1ent since the driver acted "in the course of its e1n~ ployn1ent".

Duty to care-Absence of explanation by the defendflnts affords reasonable eride11ce towards contributory ne1diJzence.

C Maxin1-Res ipsa loquitur-Applies to fatal accident cases 011 road.

Second appeal-Reappraisal of evidence on record by Supre111c Coun only in exceptional cases lvhere injustice would result.

One of the buses belonging to the appellant, DLB 5749, driven by

"HS" enroute to Hissar, while negotiating a turn in village Kheri Siadh overturned, causing the death of "LWS" and injuries to many. At the time of the fatal accident, the bus was over-loaded with passengers and goods, driven by ''HS''

at an excessive speed despite protests by the passengers while negotiating a turn.

A suit for damages was filed by the legal heirs of deceased "LWS" against the driver and the appellant, the liability of the appellant arising out of the fact of its negligence in employing such a rash and negligent driver who 'was responsible for the accident acting in the course of its employment. The appellant took the plea of "vis major", there being rain on the fateful day and the breaking of the tie-rod of the vehicle when it fell into a pit and making the bus out of the controi of the driver.

The suit was dismissed fixing the "quantum damnificatus" at Rs. 34,210/- applying the principle of "quaritum meruit" and on appeal the Punjab and Haryana High Court held that the accident \Vas due to negligence attributable to the driver or both the driver and the appellant and decreed the suit, basing on the cogent and trustworthy evidence of P.Ws. 5, 6 and 8 to these facts (i) Overload of the bus with goods and passengers;

(ii) Wetness and slippery nature of the road d'ue to drizzling

(iii) The expert report of the mechanic to the effect that the "tie-rod" of the vehicle \vas only '; opened" (dismantled) but not broken a.nd the bad conditions of the foot-brake and hand brakes; (iv) Factum of negotiating a turn and passing through the habitation of village Kheri; (v) Zig-zag movement nf the bus and the fast speed at which the bus was driven despite protests and shouts of the passengers; (vi) The actual1 speed of the bus at 30 miles per hour at the time of the accident and (vii) Over turning of the bus resulting in the death of "LWS" on the spot and injuries to many. The High Court, drawing an adverse inference against the appellant and the driver for non-appearance in the witness box held that "inasmuch as bues in sol, lnd road worthy condition and driven with ordinary care do not normally overtime, and in this case the bus did overturn, the principle of "res ipsa loquitur" applied." The High Court also awarded a decree for Rs. 21,600/- with proportionate cost as damages against the appellant and the driver limiting the liabiilty of Rs. 2,000/- onJy against the insurance company.

On appeal by certificate the appellant contended (i) that it was wrong to assume that over-turning of the bus was "res ipsa loquitur";

(ii) that it was wrong to shift the onus on the appellant to show that they were not negligent and (iii) that in the absence of specific assignment of the reasons by the witnesses in their evidence the sudden breaking' of the tie rod was the cause of the accident and hence a vis major".

Dismissing the appeal, the Court,

)-..

HELD : ( 1) Ordinarily in second appeal, it is not necessary for the court to A reappraise the evidence on record because the first appellate court is supposed to be the final court of fact. rt 82El

(2) Buses in sound road worthy condition, driven with ordinary care. do not normally over-turn. It would be for the driver who had special knowledge of the relevant facts to explain why the vehicle over-turned.

The maxim "res ipsa /oquitur" v.:ould be attracted in such a case. In the present case, the defendants failed to rebut the presumption of negligence that arose frorn the manifest circumstances of the case. [184 C-D]

Shya111 Sundar and others v. State of Rajastlian, A.I.R. 1974, S.C. 890, not applicable.

Barkwav v. South Wales Transport Co. Ltd. [1948] 2 All. E.R. 460, applied.

(3) Viewed in the light of the other circumstances, in the in:sitant case, like overloading, negotiating of a turn near the village habitation on a slippery road

a duty was cast on the driver to go dead slow.

A speed of 25 to 30 miles per C hour, in these conditions and in this situation, at the turning of the road would be imprudently excessive.

[184A-B] ( 4) Had the bus been properly maintained in a sound road worthy condition and used with due care and driven with due Caution, the tie-rod should not have broken loose by the fall of the wheel in a pit hardly six inches deep, particularly when the upward thrust of the water in the pit would have largely absorbed the shock of the fall.

The pit was in the kacha berm and not right in the mettled portion. The driver could have with ordinary care and diligence avoided it.

Thus, the breaking of the tierod-assuming it did break-was, at best, a neutral circumstance. [ 184 B-Cl

(5) In the instant case the driver was admittedly an employee of the appellant-company, and at the relevant time he was acting in tho course of his em ployment.

The vehicle was the property of the appellant-company under whnse managetnent defendaht 3 was working at the material time. It is well settled that where in an action for negligence the thing causing fatal injury to the deeased and consequent pecuniary loss to the plaintiff, is shown to be under the management of the defendant or his servants and the accident is such as in the ordinary course of events, does not happen, if those who have the management use proper care, that affords reasonable evidence, in the absence of explanation by the defendants, that the accident arose fro1n want of care. The appellant con1pany was, therefore, fully liable for the negligent act of their emplovee and the injury resulting therefrom.

{185 D-F] ·

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 971 of 1968

From the judgment and decree dated the 10-5-1965 of the Punjab High Court at Chandigarh in R.F.A. No. 181 of 1957.

S. K. Mehta, K. R. Nagaraja and P. N. Puri for the appellant.

V. M. Tarkunde, !. P. Agarwal and Miss Manik Tarkunde for respondents 1-6.

The Judgment of the Court was delivered by

SARKIRIA, J.-This appeal on certificate is directed against a judgment of the High Court of Punjab and Haryana awarding to the plaintiff-respondents a decree for Rs. 21,600.

It arises out of these facts:

On January 21, 1955, Lala Wazir Singh deceased, a retired H Divisional Engineer (Railways) was travelling from Delhi to Hissar by a bus belonging to the Krishna Bus Service Ltd. (hereinafter referred to as the Company).

On the way, the vehicle went out of order.

Lala Wazir Singh and some other passengers were then transferred to another bus No. DLB 5749 belonging to the same Company. This bus was being driven by Harbans Singh, defendant 3 (Respondent 8 hercm) who was an employee of the Company, acting under its directions and instructions.

When at about 3 p.m., this bus was negotiating a turn in village Kheri Sadh, a few miles from Rohtak, it overturned, causing the death of Lala Wazir Singh, at the spot and injuries to several other passengers.

The widow, the sons, the daughters, the grandsons and granddaughters of the deceased instituted a suit in the court of the Subordinate Judge, 1st Class, Rohtak for the recovery of Rs. 50,000 as damages for the loss caused to them on account of his death.

The Company was impleaded as defendant No. 1, the Insurance Company was joined as defendant No. 2 and the driver of the bus as defendant 3.

It was alleged that the accident causing the death of Lala Wazir Singh, occurred on account of the negligence of defendants 1 and 3.

The bus, it was pleaded, wa~ not in proper order; it was overloaded with passengers and goods, and despite these facts, defendant 3 drove it at a very high speed while it was negotiating a turn.

The liability of the employer Company was sought to be fixed on the ground that it was negligent in employing such a 1:ash and negligent driver and that the accident occurred when defendant 3 was acting in the course of its employment.

In their written statement presented on July 16, 1956, the Company admitted that the bus involved in the accident belonged to it and at the time of the accident it was driven by their employee, defendant 3.

In regard to the allegations of negligence, the Company replied:

"The accident alleged by the plaintiffs was not due to any negligent or careless driving of Harban> Singh Driver of the vehicle owned by the defendant but was vis major.

There was rain on that day and the front was slippery.

The bus overturned and the death of the said Wazir Chand (Singh) was in no case the result of overturning of the Bus."

While finding that the death of Lala Wazir Singh had occurretl on account of injuries sustained by him in the accident in question, the trial court held that the accident took place "on account of the breaking of the tie-rod of the vehicle due to which the bus went out of the control of the driver".

The tie-rod, according to the trial court, broke becanse the front left wheel of the vehicle while it was negotiating a turn, fell into a pit.

The court further held that the vehicle was not overloaded and its speed at the time of the accident was not more than 20 or 25 miles per hour, and as such, was not excessive.

On these premises, the trial court concluded that the plaintiffs had failed to prove that the accident involving fatal injuries to the deceased, was due to rash or negligent driving by defendant No. 3.

It further held that in case Issues 1 and 2, were decided in favour of the plaintiffs, the maximum damages awardable to them would be Rs. 34,210, i.e., the amount of pension which the deceased would have earned, bad he been alive for 9 years and 2 months after the accident.

On these findings, the trial. court dismissed the suit leaving the parties to bear their own costs.

Aggrieved, the plaintiffs preferred an appeal to the High . Court.

The Division Bench who heard the appeal, has. after appraising the evidence on record, reversed the findings of the trial court and held that "the accident was due to negligence attributable to defendant 3 or both defendm; its l and 3".

This finding of negligence recorded by the High Court is based on facts appearing in the evidence of PWs .. 5, 6 and 8 who were found by it to be entirely trustworthy.

These facts are : (i) The bus was overloaded with goods and . passengers.

There were 60 or 62 passengers including 10 or 12 children, in it (vide PWs 5 and 6) .

(ii) It was drizzling; the road was wet and slippery (vide P.Ws. 5 and 6); (iii) The tie-rod of the bus was not found broken but only "opened" (dismantled) when it was examined by the expert motor mechanic, PW 8, on the day following the accident The hand brake and the foot-brakes were also found in a bad condition; (iv) At the time of the accident the bus was negotiating a tum and passing through the habitation of village Kheri; (v) Immediately before the • accident the bus was making a zig-zag movement and was being driven at fast speed despite the protests and shouts of the passengers asking the driver to slow down; (vi) the speed of the bus at the material time, according to PW 6, was about 30 miles per hour; (vii) The bus overt\1me<l as a result of which Lala Wazir Singh died at the spot '\ and other passengers, including PW 5, received serious injuries.

, The High Court further reinforced its finding with an adverse .... inference against the defendants drawn from the fact that the driver (defendant 3) who knew best the relevant facts, did not appear in the witness-stand to explain the circumstances in which the accident

occurred.

In this connection it observed : ·

"Buses do not, in such circumstances, normally and in the ordinary course, turn turtle. . The transaction . thus speaks for itself : in other. words res ipsa loquitur and in the absence of explanation by defendant No. 3 and his employer, defendant NC). 1 the established facts and circumstances accompanying the fatal injury caused to the deceased clearly raise a presumption or. at least permit an ·

inference of negligence on the part of defendant No. 3 The Court below was thus clearly wrong in negativing negligence on the part of defendant No. 3.

I would accordingly reverse the conclusion of the court below on this point and hold that the accident was due to the negligence of defendant No. 3 and was not inevitable which could not be obviated by ordinary care, caution and skill on his part."

On the above .facts and the premises, the High Court concluded !hat the accident was due to the negligence of the driver and was "not inevitable which could not be obviated by ordinarv ca••. caution and skill on his part". In the result,_ it awar9ed a decree for Rs. 21,600

A as damages against defendants 1 and 3 proportionate costs, limiting the liability of the Insurance Company, defendant No. 2 to Rs. 2,000 only, plus proportionate costs.

Hence this appeal.

It is an undisputed fact that Lala Wazir Singh died in the bus accident on 21.1.1955. It is further common ground that the bus while negotiating a turn, had overturned causing fatal injuries to the deceased, and that at the relevant time it was being driven by Harbans Singh defendant, an employee of the appellant Company. It is also admitted that the bus belonged to the appellant-company.

The only issue in controversy is, whether the accident involving the death of L. Wazir Singh, was caused due to the negligence of defendant 1 or both defendants 1 and 3.

Mr. Mehta, appearing for the appellant contends that the High Court while conceding that the plaintiffs' witnesses were not -able to assign the reason for the accident, wrongly spelled out negligence on the part of the driver from the bald circumstance that the bus had overturned.

It is submitted that the High Court committed an error of law inasmuch as it assumed that the overturning of the bus was res ipsa loquitur and had shifted the burden on the defendants to show that the accident and the consequent death of L. Wazir Singh was not due to their negligence. It is submitted that res ipsa loquitur is merely a Latin phrase and does not convey any legal principle.

Reliance has been placed on this Court's decision in Shyam Sunder and ors. v. State of Rajasthan(\).

Mr. Mehta further maintains that the trial court had correctly held on the basis of evidence on record, that the accident occurred due to the sudden breaking of the tie-rod and not due to any negligence on the part of the driver.

To us, none of these contentions appears to be well founded.

Ordinarily, in Second Appeal it is not necessary for this Court to reappraise tbe evidence on record because the first appellate court is supposed to be the final court of fact.

Nevertheless, on the insistence of the Counsel for the appellant, we have examined the evidence on the record.

We have no hesitation in holding, in agreement with the High Court, that the evidence rendered by PWs 5, 6 and 8 was reliable and cogent enough to establish facts which, in their totality, unerringly point to the conclusion that the accident was due to the negligence of the driver, defendant No. 3.

Kali Ram, PW 5, was one of the passengers in the ill-fated bu~.

He, also, received injuries in the accident.

For treatment of his injuries be remained in hospital for twenty days.

He was therefore supposed to have personal knowledge and experince of the circumstances in which the accident occurred.

He testlfied that the bus was overloaded, and the driver unheeding the protests and shouts of the passengers to go slow, was driving it at a fast seed.. He further stated now near village Kheri, the vehicle after makmg zig-zag movements overturned causing the death of one passenger at the spot and injuries to the witness and other passengers.

(I) A!R 1974 SC 890.

Subedar Ram Kishan, PW 6, is a retired Army Officer and knows motor-driving.

His house is just near the place of the accident.

According to his estimate, the speed of the bus, while it was negotiating the turn, just before the accident, was 30, miles per hour and it was moving in a zig-zag manner, being not in the control of the driver.

Jn cross-examination, the witness accepted a suggestion put by the defence, and stated that in his presence, the driver had told the police that the accident had occurred due to the breaking of the tie-rod. The witness further conceded that there was pit by the side of the road, but repelled the suggestion that the tie-rod could be broken by a sudden jerk at the turning.

Raghbir Singh PW 8 was a motor mechanic.

He examined the bus at the site on the 22nd January.

According to him, the tie-rod had not broken down, but had been "opened", implying that it had been subsequently tampered with.

The witness found that the handbrake and foot-brakes of the vehicle were in a bad condition.

He did not find the pipe of the hydraulic foot-brake in a broken condition.

For its finding that the accident had taken place on account of the breaking of the tie-rod of the vehicle, the trial court sought support from the evidence of PW 5 and DW 6.

It is manifest that correctly read, the evidence of PW 6 does not justify that conclusion.

The mere fact that sometime after the accident during police investigation, the driver came out with the story that the accident occurred due to the breaking of the tie-rod, was no ground to believe, without demu,·, that such breaking was the cause of the accident.

The evidence of the expert, DW 6, was dogmatic and worthless.

His opinion was not based on an examination of the vehicle and was rightly rejected by the High Court.

On the other hand, the testimony of PW 8 who bad examined the vehicle one day after the accident: was quite convincing, and it could reasonably lead to the conclusion that the tie-rod of the vehicle had been tampered with an untied sometime after the accident.

The defendants led oral evidence to prove that near the place of the accident, there was a pit in the road, and when the bus was negotiating a turn, its front wheel fell in that pit, and as a result of this fall, the tie-rod end of the steering wheel broke loose and the bus went out of control.

In the first place, DWs 2 and 3, who were examined to substantiate this story, did not say that the wheel of the bus had fallen in that pit. Secondly, the story of this pit and the breaking of the tierod, was not even faintly adumbrated in the written statement.

It was subsequently developed as an after-thought.

Even if it is assumed for the sake of argument that one wheel

of the bus had fallen into the pit, and the resultant shock broke the tie-rod causing the vehicle to go out of control, then also that would not, when viewed in the light of the other circumstances of the case negative the inference of negligence on the part of defendants l and H 3.

The pit was according to Gordhan, DW 2, hardly four feet in

J3-L390SCJ/76

length and 6 inches deep.

It was not in the mettled part of the road bl!t in the kacha berm.

The bus was negotiating a turn. There, the road runs through the habitation of a village.

It was drizzling and the road v.as wet and slippery. The speed of the bus at the relevant time, according to PW 6, was 30 miles per hour, and according io DWs 2, 4 and 5, Jt was 25 miles per hour.

The bus was overloaded.

In these peculiar circumstances, a duty was cast on the driver Lo go dead slow.

A speed of 25 to 30 miles per hour, in these conditions and in this situation, at the turning uf th~ road, would be jrnprlidcntiy excessive.

Had the bus been properly maintained in a sound 'roadworthy condition, and used with due care and driven with due caution, the tic-rod should not have broken loose by the fall of the wh.cel in a pit hardly six inches deep, particularly when the upward truust of the water in the pit would have largely absorbed the shock of the fall.

The pit was in the kacha berm and not right in the mettled portion.

The driver could have with ordinary care and diligence avoided it.

Thus, the breaking of the tie-rod-assuming it did break -was, at best, a neutral circumstance.

As rightly pointed out by the High Court, buses in sound 'roadworthy condition, driven with ordinary care, do not norm,; lly overturn.

It would be for the driver who had special knowledge o! the. relevant facts to explain why the vehicle overturned.

The maxim res ipsa loquitur would be attracted to such a case.

Defendants 1 and 3 had failed to rebut the presumption of negligence that arose from the manifest circumstances of the case. ·

In Barkway v. South Wales Transport Co. Ltd. (1) a motor omni- E bus loaded with passengers was passing through a village when the off-side front tyre burst; the omnibus went over to the off-side of the road, mounted the pavement, crashed into some railings, and feU down an embankment, killing four of the passengers, including the plaintiff's husband.

On these facts, Asquith L.J. summarised the position as to the onus of proof thus :

"If the defendants' omnibus leave the road and falls down an embankment, and this without more is proved, then res ipsa loquitur, there is a presumption that the event .is caused by negligence on the part of the defendants, and tlie plaintiff succeeds unless the defendants can rebut this presumption,

(ii) It is no rebuttal for the defendants to show, again without more, that the immediate cause of this omnibus leaving the road is a tyre-burst, since a tyre-burst per se is a neutral even consistent, and equally consistent, with negligence or due diligence on the part of the defendants.

When a balance has been tilted one way, you cannot redress it by adding an equal weight to each scale.

The depressed scale will remain down.

This is the effect of the decision in Laurie v. Raglan Building Co. Ltd., where not a tyre-burst but a skid was involved.

(1)(1948] 2 All-E-.-R-:460.

(iii) To displace the prcsumpticm, the defendants must go further and prove (or it mnst emerge from the evidence as a whole) either (a) that the burst itself was due to a specific cause which does not connote negligence on their part but points to its absence as more probable, or (b) if they can point to no such specific cause, that they used all reasonable care in and about the management of their tyres."

The above observations apply with greater force to the facts of the present case.

Sh yam Sunders case (supra), cited by Mr. Mehta docs not advance his case.

There, the radiator of the vehicle was getting heated frequently and the driver was pouring water therein alter every 6 or

7 miles of journey.

It took the vehicle 9 hours to cover a distance c of 70 miles and thereafter it suddenly caught fire.

On these facts this Court, speaking through Mathew J ., held that there was some defect in the mechanism and the driver was negligent in putting the vehicle -0n the road.

Since the driver could not explain tl)c cause of the accident which was within his exclusive knowledge and it was not possible for the plaintiff to give any evidence as to the cause of the accident, the maxim res ipsa /oquitur was attracted to the case.

Coming back to the instant case, it may be observed that the driver was admittedly an employee of the appellant-Company, and at the relevant time he was acting in the course of his employment.

The vehicle was the property of the appellant-Company, under whose management defendant 3 was working at the material time.

It is well settled that where in an action for negligence the thing causing fatal injury to the deceased and consequent pecuniary loss to the plaintiff, is shown to be under the management of the defendant or his servants and the accident is such as in the ordinary course of events does not happen, if those who have the management use proper care, that affords reasonable evidence, in the absence of explanation by the defendants, that the accident arose from want of care.

The appellant-Company was therefore fully liable for the negligent act of its employee and the injury resulting therefrom.

No other point has been argued before us.

l n the light of all that has been said above, the appeal fails and is hereby dismissed with costs.

S.R.

Appeal dismissed.

KRISHNA BUS SERVICE LTD

MANGLI & ORS

January 21, 1976

R. S. SARKARIA

S. MURTAZA FAZAL ALI, JJ.

Kheri Siadh

Punjab and Haryana High Court

Kheri

S. K. Mehta

K. R. Nagaraja

P. N. Puri

V. M. Tarkunde

P. Agarwal

Manik Tarkunde

SARKIRIA

Lala Wazir Singh

Delhi

Hissar

Krishna Bus Service Ltd.

Lala Wazir Singh

Harbans Singh

Kheri Sadh

Rohtak

Subordinate Judge, 1st Class, Rohtak

July 16, 1956

Harban> Singh

Wazir Chand

Harbans Singh

L. Wazir Singh

Mehta

Kali Ram

Subedar Ram Kishan

Raghbir Singh

Gordhan

Asquith L.J.

Sh yam Sunders

Mathew


A C.l.T., PUNJAB. HARYANA, J & K, H.P. & UNION TERRITOR\

OF CHANDIGARH

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 asscsseecompany 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 rspcctively, 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 Assistant 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!

must an1ount to an expenditure lNhich was 1aid out or expended wholly and exclusively 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, forthe programme of manufacture of the product. that is. if the agent withholds its consent. it could veto the programmi of mai1ufacture.

Such a Iimitti'on praced on the power of the assesseeis 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 difficult to lay do\vn any rule of universal application as to \Vhat percentage of profit would be con- .sistent with the payment in lieu of services, the conduct of the selling agent, in the present case, in sharing half of the net profits is not consistent with payments made to <igents for services rendered. Taking the totality of the provisions of C the agreement, the. percentage of profits and the manner in which it is to be determined is n1ore consistent with the position cf the selling agent as a partner than as an agent. f194 A-Cl

(f) In cl. 7 there is also provision for the selling agent sharing the loss incurred by the assessee, by deducting 50% o.f the !oss from its remuneration. and for a lumµ sum deduction of Rs. 50,000 /- towards depreciation etc., for determining the net profit or loss position. Clause 7(iv) provides for a separate -commission account to be m'aintained by the selling agent and for payment of D commission every 6 months. Having regard to the terms and conditions of the agreement, the view taken by the Tribunal that the tWo sums were not legally deductible under s. 10(2) (xv) was correct. By contributing to the investments. by controlling the manufacturing programme, by sharing to the extent of 5() per cent in the net profits ascertained in the manner stipulated in the agreen1ent, and above all, by agreeing to share 50 per cent of the losses which are to be deducted from the commission of the agent, the selling agent has actually contributed to a joint venture and became completely equated with the assessee, and, E therefore, the agreement between the two is really a sort of a partnership and has been given the cloak and colour of an agency to conceal the real intent and purpose of the commercial venture; and it must be construed as an agreement for division of profits in specified proportions. [194 C-D, F; 195 E-G: 201 E-Fl

British Sugar Manufacturers Ltd. v. Harris (Inspector of Taxes), 7 I.T.R. 101, applied.

(3) The decision in Dltaram1'iI's case (43 J.T.R. 7) is distinguishable.

(195 G-H] F

(a) In that case it was not agreed between the assessee and the trust. which -a.greed to advance a loan to him, that the profits would be. ascertained after deducting the net expenses as in the agreement in the present case.

[196 B-C]

(b) While the contract was to be carried on in accordance with the policy "Settled between the assessee and the trust, in that case, it did not give any veto power to the trust to torpedo the contract.

In the present case, the agreement gave to the selling agents controlling power at every stage in the programme of G manufacture and even at the stage of the sale of the products, by requiring the consent of the selling agent. fl96 C-DJ ( c) Not only was there no provision in Dliaran1vir's case under which the trust was to share the loss, but there was an express provision to the contrary.

Therefore, the payment of interest at the rate of 6 per cent on the loan advanced 1o the assessee by the trust and a percentage in the profits, in that case, is quite consistent with a remuneration in lieu of services lent and would amount to an expenditure incurred by the assessee, wholly and exclusively for the purpose H of the business which was conducted by the assessee.

[196 D-EJ ( 4) In the present case, it is difficult to hold that commercial expediency dictated the assessee to allow itself to be completely overshadowed by its selling

agent. so as to pay them not only for the services rendered but allow them to share profits, control the manufacture of goods and to share the losses. The test of commercial expediency cannot be r¢.uced to the shape of a ritualistic formula.

The test merely means that the Court will place itself in the position of a businessman and find ollt lYhether the expenses incurred could be said to have been laid out for the purpose of the business, or whether the transaction was merely a subterfuge for the purpose of sharing or dividing the profits ascertained in a particular manner. In the ultimate analysis1 the matter \\'Ou!d depend on the intention of the parties as spelt out from the terms for the agreement or the surrounding circumsnces, the nature or character of the trade or venturep the purpose for which the expenses are incurred and the object which is s;:ught

to be achieved for incurring those expenses. lf the expenses incurred amount to a profit of an enduring nature, they niay be treated as capital expenditure;

v; heas, if the expenses merely serve to promote or increase the commercial activity, they. may amountto an expenditu_re which is incurred for the purpose of the business.

[1961; I-197D]

I. K. Woollen Manufacturers v. Commissioner Of lnco1ne TaxJ U.P. [1969]1 .s.C.R. 525, distinguished.

Com1nissioner of Income Tax, Kera/a v. Travancore Sugar and Che1nical:1 -Ltd., 88 I.T.R. 1, 10; Commissioner of Income Tax, Bombay v. Poona Electric

Supply Co. Ltd., 49 I.T.R. 913, 924 and lamshedpur Motor Accessories Stores

v. Commissioner of Income Tax, Bihar & Orissa. 95 I.T.R. 6_64, 672 referred to.

(5) The High Court is not -entitled to go behind the Statement of the case submitted by the Tribunal.

But, in the present case. in interpreting the agree-· ment, the High Court relied upan what it called surrounding circumstances, namely. that the assessee was a losing concern from its inception, that it was in such a bad shape that it had to get rid of its fust selling agent_ because, it caused considerable embarrassment to the assessee while the second selling: agent \Vas prepared to give the assessee advantageous terms; that the selling agnt had no other connection than a business connection with the assessee; and that because of the death of one of the promoters of the assessee, who commanded credit in the money market, the assessee was not able to raise money from the banks. But, these facts were not found by the Tribunal nor was there any

\\'arrant for any of the assumptions. [198G-199C] ·

Co1nmissioner of Incomf!'-Tax, Poona v. Manna 'Ran1ji and Company, 86 I.T.R. 29, 37, followed.

(6) The facts found by the Tribunal and those mentioned in its Staterue_nt of the case to the High Court, lead to the inescapable conclusion that the agreement is nothing but a joint venture to divide the profits after they are ascertained~ and hence, the payments to the se1Iing agent cannot, in any sense, he , deemed to be expenses incurred by the as5esse-e for the purpose of its business or for earning profits.

Pondicherry Railway -Co.~ Ltd. v. Commissioner of /11con1e Tax, Madras.

AI.R. 193LP.Ci 165, 170, referred to. ·

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 622 & 623 of 1971.

Appeals by special leave from -the judgment and order dated the 20-1-1970 of the Punjab and Haryana High Court at Chandigarh in I.T. Reference No. 2 of 1965.

B. B. Ahuja and S. P. Nayar, for the appellants.

A, N. Goyal, for the respondent

The Judgment of the Court was delivered by

FAZAL Au, J.-These are appeals by the Revenue by special leave against the order of the High Court of Punjab & Haryana dated

~ , /'

' •

January 20, 1970 answering the questions referred to the High Court A by the Tribunal in favour of the assesseeslrespondents and against the Revenue.

The appeal arises. in the following circumstances.

M/s. Panipat Woollen & General Mills Co. Ltd.-hereafter referred to as 'the assessee Company' had two Departments-( 1) for spinning of yarn from raw and waste wool and (2) for spinning of B yarn from imported wool tops. The second Department which carried on the operations of spinning of yarn from imported wool tops was started some time in the year 1952. Weaving operations were, however, carried on in both these Departments. One of the Departments was known as M/s. Panipat Woollen Mills, Kharar while the other one was known as Mis. Navin Woollen Mills.

It is said that the assessec Company was running at a constant loss as a result of which c in 1952 the assessee Company decided to instal a plant for manufacture of worsted yarn from imported wool tops by raising a loan of Rs. 7 lakhs from the Industrial Finance Corporation. The plant went into production in September 1952. The assessee Company appointed M/s. Murlidhar Chiranjilal as the sole selling agents for the worsted yarn on payment of 2 % commission. Subsequently on December 15, 1953 the assessec Company entered into an agreement with Mis. , D Saligram Premnath under which the latter were appointed as the sole. selling agents on certain specified conditions, the important of which being that the agents were to finance the assessee Company to the extent of Rs. 2,50,000/- and the assessee Company agreed to pay 6% interest on the advances to be made by the agents and further agreed to pay 2 % commission on the net proceeds of sales of goods in India.

Before expiry of this agreement, another agreement was entered into E by the assessce Company with the agents on October 20, 1955 under which the agents were to get 6% interest on all the advances made by them, l:i-% commission on net sales and 50% commission on net sales of the worsted plant.

What is more was that the agents agreed to a deduction of 50% of the loss incurred by the assessee Company from their remuneration.

There were a number of other conditions with which we shall deal later.

The selling agents M/s. Saligram F Premnath advanced a sum of Rs. 6,26,8471and Rs. 8,71,8731and received Rs. 37,157/- and Rs. 73,7871as 50% commission on the net profits of the worsted plant in the course of two years, namely, assessment years 1956-57 ending on March 31, 1956 and 1957-58 ending on March, 31, 1957.

The assessee Company accordingly in its return for the year 1956-57 claimed the amount of Rs. 37,157/- and Rs. 73,7871for the assessment year 1957-58 as a deduction c;; under the provisions of s. 10(2) (xv) of the Income-tax Act, 1922. ' The case of the assessee was that the two amounts mentioned above being in the nature of commission paid to the selling agents would be deemed expenses incurred by the Company in order to earn profits and would, therefore, fall within the ambit of s. 10(2) (xv) of the Income-tax Act, 1922-hereafter referred to as 'the Act'.

The Income-tax Officer, however, disallowed the deduction and held that the , deduction claimed was actually a division of profits after the profits Jiad come into existence and had been ascertained, and therefore could not be claimed as a valid deduction under the provisions of the Act.

190 SuPREME COURT REPORTS

[1976) 3 S.C.R.

The assessee Company went up in appeal to the Appellate Assistant Commissioner who accepted the plea of the assessee Company and held that the payment was a permissible deduction as it was incurred for the purpose of the assessee's trade in order to facilitate the business of the assessec.

The Revenue then went up in appeal before the Tribunal which after considering the facts and the law on the subject upheld the contention of the Revenue and held that the sums in question were not legal deductions as contemplated under s. 10(2)(xv) of the Act but amounted to application of profits after they were earned.

The Tribunal further held that the agreement dated October 20, 1955 amounted to a joint venture for the distribution of profits between the assessee Company and the selling agents after the profits were ascertained.

The assessee Company then approached the Tribunal for making a reference to the High Court and the Tribunal accordingly referred the !oilowing two questions to the High Court for its opinion :

"l. Whether on the facts and in the circumstances of the case, the Tribunal rightly held that the sums of Rs. 37,157/- \ and Rs. 73,787 /- were chargeable to tax in the hands of the A assessce Company in the assessment years 1956-57 and 1957-58 respectively?

2. Whether on the facts and in the circumstances of the case, the Tribunal rightly disallowed the assessee Company's claim for deduction of the payment of Rs. 37,157 /- and Rs. 73,787/-, under sec. 10(1) and Sec. 10(2)(xv) of the Income-tax Act, 1922, in the assessment years 1956- 57 and 1957-58 respectively?"

E The High Court by its i.udgment dated January 20, 1970, answered both the questions in favour of the assessee Company and held that the payments in question amounted to a legitimate deduction under s. 10(2)(xv) of the Act, and the Tribunal was wrong in disallowing the same.

Thereafter the appellant moved the High Court for grant o( leave to appeal to the Supreme Court which having been rejected the appellant filed a petition for special leave.

The special leave F having been granted, the appeal is now before us.

The High Court in reversing the order of the Tribunal mainly relied on what it described as the surrounding circumstances under which the alleged payments were made to the selling agents by the assessee Company as spelt out from the agreement entered into by the assessee Company with the selling agents. The main point which was argued before the Tribunal as also before the High Court was that the cumulative effect of the interpretation of the various clauses of the agreement dated October 20, 1955 unmistakably revealed that in the garb of an agency the parties entered into a joint venture for distributing the net profits, after being ascertained , between themselves and that is why there was an express provision in the agreement by which the agents agreed to share the losses to the extent of 50% which were to be deducted from the remuneration payable to the agents.

The Tribunal held that the agreement amounted to a joint venture resulting in division of net profits and therefore the amount paid to the agents could not be claimed by the assessee Company as a deduction under

s. 10(2)(xv) of the Act, as it was not incurred for the purpose of the business or for earning profits.

The High Court held that the mere fact that the agents agreed to share the profits and the losses would not take the case of the assessee beyond the ambit of s.

10(2)(xv) of the Act in order to show that the payments made to the agents were not expenses incurre.d for the purpose of the business.

The High Court laid special emphasis on the fact that the Revenue could not examine the question of the commercial expediency of the businessman to incur expenses or earn profits in a particular manner.

The High Court accordingly found that the agreement per se was a contract of agency and not a joint venture and accordingly the High Court accepted the plea of the assessee Company.

In support of the appeal Mr. Ahuja, the learned standing counsel for the Revenue submitted the following two points before us :

(1) In the first place it was submitted that there being an express provision in the agreement dated October 20, 1955 by which the agents agreed to share losses which was a provision peculiar to the present transaction and was not at all covered by any authority cited before the Tribunal or the High Court, that itself was proof positive of the fact that the transaction amounted to a joint venture with a view to division of profits; and

(2) It was argued that the High Court had exceeded its jurisdiction in travelling beyond the agreed statement of the case framed by the Tribunal and had relied on certain

materials which were not at all found by the Tribunal in its E order nor were those materials mentioned in the statement of the case.

Mr. A. N. Goyal counsel for the assessee Company has, however. submitted that the view taken by the High Court is absolutely correct and t.he facts of the present case are clearly covered by the decision of this Court in Dharamvir Dlu'r v. Commissioner of Income-tax, Bihar & Orissa( 1 ). A number of other cases have also been cited at the Bar and we shall refer to the same after marshalling the facts found in the present case.

Before comin~ to the. facts it may be necessary to mention that there can be no dispute with respect to the two important propositions;

(I) that in order to fall within s. 1 O (2) (xv) of the Ac~ the dedu.ct10n claimed must amount to an expenditure which was laid out or expended wholly and exclusively for

te purpose of the business, profession or vocation. This will naturally depend upon the facts of each case.

(2) that in order to determine the question of reasona?lene.ss of the expenditure,. the test of commercial expedienc) wo1;'1d have to be adjudged from the point of view H of the busmessman and not of the Income-tax Depart- (!) 42 l.T.R. 7.

A ment.

With this preface we now proceed to deal with the facts of the present case on the basis of which the questions of law referred to the High Court and answered in favour of the assessee Company arise.

To begin with, it is conceded by the learned standing counsel for the Revenue that the asscssee Company was running at a loss as a result of which it had to raise a loan of several lakhs of rupees franc the Industrial Finance Corporation. It was perhaps for this reason that the assessec Company entered into an agreement with the new selling agents M/s Saligram Premnath who were prepared to give to the assessee Company better and more profitable terms.

The main question to be determined is as to whether or not the agreement dated October 20, 1955 read as a whole amonnts to a joint venture for the . purpose of division of profits.

In order to decide this question it may be necessary to refer to some important portions of the second agreement which alone is relevant for the purpose of deciding this point. We might mention, however, that so far as the first agreement is concerned the terms thereof do not make out a case of joint venture but appear to be iu cousonance with the agreement being one of an agency simpliciter.

It is the second agreement that in our opinion appears to change the eutire complexion of the case.

This agreement is set out at p. 17 of the Paper Book and consists of ten main clauses.

The agreement was to enurc for a period of two years to commence from January I, 1956 or the date on which manufacturing actually starts under the agreement whichever is later.

This is provided in clause 2 of the agreement. It was further provided that the period of the agency could be extended further by mutual consent. Clause 3 (ii) runs thus :

"Programme for the manufacture of goods will be made from time to time by the Company in consultation and with the consent of the Agents."

F It may be noticed that this clause requires not only consultation with the agents for the progn1111n1c of 1nanufacture of goods but a tacit consent of the agents.

Tn other words, if the agents withheld their consent, they could veto the programme of manufacture.

Such a limitation placed on the power of the assessee Company does not appear to us to be in consonance with a pure and simple contract of G agency.

Clause 6 which deals with financial arrangements may be extracted thus :

"(i) The Agents shall invest full amount for the working of the Worsted Plant to the full possible capacity beginning from the purchase of tops to the completion of the yarn sales including wages, power, stores, and repairs and mamtenance etc.

Such mvestments and expenses incurred on tops, manufacturing, bank charges, transport, insurance and octroi will be debited to the account of the Company.

 (ii) Before the beginning of the arrangements under this A Agreement, the Machinery of the Worsted Plant will be overhauled and similarly before this arrangement ends the Machinery will be overhauled.

x x x x x

(viii) In case of any loss or damage to the toi:s or goods in transit or in godowns, the same will be debited to the account of the Worsted Plant.

(ix) The accounts of lhe Worsted Plant will be maintained separately in an office situated near the Worsted Plant and the Agents will have free access to the account books.

x x x x

Sub-clause (i) clearly contemplates lhat the agents would have to make lull and complete investment for the working of the worsted plant to the fullest possible capacity including wages, power, stores, repairs and maintenance etc.

This provision appears to be more in consonance with the terms of a person who is a partner in a venture rather than one who is a mere agent. Further more, sub-clause

(ii) provides that before the agreement starts the machinery of the worsted plant would be overhauled and would be again overhauled before the agreement ends.

This provision also has its own importance and appears to be beyond the role of the selling agents simpliciter.

Sub-clauses (viii) and (ix) extracted above clearly show that the damage to the tops or goods in transit would have to be debited to the account of the worsted plant and such accounts would have to be maintained separately.

The obvious object is that the agents should be in a position to ascertain the net profits and control the working of the worsted plant. Clause 7 is the most important clause of this agreement, which, in our opinion, clearly shows that the agreement in essence and in purport is a sort of a partnership or a joint venture rather than a contract of agency. Sub-clause (i) of clause 7 runs thus :

"7. Conunission

(i) The Agents shall be allowed a commission at !}% (one and a quarter per cent) on the net proceeds of sales of all goods.

Such commission shall be chargeable upon money actually credited to the Company, and not on outstanding debts, if any. Besides, Agents will get 50% (fifty per cent) commission on the net profits of the Worsted Plant.

The net profits will be ascertained after deducting all the manufacturing expenses, interest, insurance, depreciation and selling commission etc.

For ailowina annual depreciation in the value of the machinery and buildings and mterest on the value of machinery, bdldings and commencmg from the date on which manufacturing actually starts under this Agreement, a lump sum of Rs. 50,000/- has been agreed to be deducted for determining the net profits or loss

194 SUPREME COURT RE; i'ORTS

[1976] 3 S.C.R.

position. In case of net Joss, if any, there will be a deduction of 50% (fifty per cent) of such loss from the Agent's Account." Analysing the terms of this sub-clause it would appear that the agents have been able to secure most liberal and profitable terms.

To begin with they were to get a commission at the rate of one and a quarter per cent on the net proceeds of sales of all goods.

There can be no objection to this.

Secondly, the agents will get 50% commission on the net profits of the worsted plant.

The net profits would have to be ascertained after deducing all the manufacturing costs, interest, insurance etc.

The conduct of the agen.ts in sharing half of the net profits does not appear to us to be consistent with the payments made to the agents for services rendered.

It is difficult to Jay down any rule of universal application as to what percentage of profit would be consistent with the payment in lieu of services but taking the totality of the provisions of the agreement it seems to us that the percentage of profits and the manner in which it is to be -determined is more consistent with the position of a partner than that of an Agent.

Finally the provision for sharing the loss incurred by the Company and for a lump sum deduction of Rs. 50,000/- is totally inconsistent with a contract of agency. Further more, sub-clause (iv) of clause 7 provides as under :

"(iv) The commission account will be maintained separately by the Agents and the commission will be payable to the Agents by the Company every six months.

In the same way, the amount of Rs. 25,000/- for six months as provided in sub-clause (i) above, will be paid to the Company every half-year within ten days.

The profit and loss account of the Worsted Plant will be made every six months within ten days and the adjustments will be made accordingly by actual payments, as the case may be, within ten days." The above sub-clause clearly provides for a separate commission account to be maintained by the agents and the commission to be paid every six months.

Consequently the agents agreed to pay a sum of Rs. 25,000/- for six months every half year within ten days.

We might further mention here that the provision in the agreement regarding sharing of the loss is absolutely peculiar to this particular agreement and there is not a single authority, which has, in spite of such a provision, held that the transaction does not amount to a joint venture or a division of profits.

The provision regarding the consent of the agents to the sales and the programme of manufacture is also pertinent in order to determine whether the transaction amounted to a joint venture in the garb of a contract of agency. It is well settled 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 describing an agreement in a particular form though in essence and in substance it may be a different transaction.

In .these circumstances, therefore, if we construe the agreement as a sort of a joint venture or a transaction like a partnership which has been given the form and appearance d a contract of agency, the law must have its course.

Our attention has been drawn by the learned counsel for the Revenue to a decision in British Sugar Manufacturers Ltd. v. Harris

(Inspector of Taxes )( 1), where Greene, M. R. clearly observed that where a person contributes to some sort of joint adventure which ultimately results in division of profits, it could not be construed as a remuneration for services.

In this connection, Greene, M. R. observed as follows :

'rt is not cash that passes in exchange for these profits, it is services; and the badge of such a contract is remuneration for services, and therefore the first thing that this remuneration would certainly not be is a share of profits purchased by the employee. x x x I can conceive of a case where a person contributes to some sort of joint adventure services, while others contribute perhaps capital, land, plant, and goods, arranging between themselves (it may be something short of a partnership) that nobody shall get anything until the pool of profits is ascertained, and then they shall divide it up between them in specified proportions. That, it seems to me would be a real agreement for division of profits, because there would be one profit fund only. There would not be two 'profit' funds to be ascertained for different purposes."

These observations seem to us to cover the facts of the instant case: Having regard to the terms and conditions of the agreement detailed and analysed above, there can be no doubt that the agents by contribnting to the investments and by sharing the profits as also the losses have actually contributed to a joint venture and ultimate division of the profits with the principals and the agreement must be construed as an agreement for division of the profits in specified proportions as mentioned therein.

Tt is true that in the aforesaid case on the facts found the Court held that the transaction did not amount to a joint venture but it was clearly pointed out in the judgment that there is a very thin line of distinction between a contract for payment of a share of profits simpliciter and a payment of remuneration which is deductible in truth from the profits divisible. We, therefore, find ourselves in complete agreement with the observations made by Greene, M. R., which aptly apply to the facts of the present case on the basis of the various clauses of the agreement dated October 20, 1955.

The High Court, however. appears to have relied upon the decision in Dharamvir Dhir's case (supra). The facts. of that case appear to be clearly distinguishable from those of the present case.

What had happened in Dharamvir Dhir's case was that the assessee was an employee of the firm earning a particular salary. The. employee entered into a coal raising contract with a coal company and as he did not have the necessary funds he persuaded a oublic charitable trust to advance to him sums upto 1 ! lakhs on payment of

(l) 7 I. T. R. IOI,

interest at 6 per cent. and share ll/16ths of the profits of the , businc'5.

The assessee agreed that the coal raising contract would be carried on in accordance with the policy settled between him and. the trust and the trust could withdraw its money at any time. It is, therefore, clear that in the first place the agenl, namely, the trust, agreed to finance the assessee by giving him a lorn of Rs. l t lakhs at 6 per cent interest.

This was undoubtedly permissible.

The trust was. also to get ll/16th of the profits of the business. It was, however, not agreed between the parties that the profits would be ascertained after deducting the net expenses as mentioned in the agreement before us.

It is true that the contract was to be carried on in accordance with the policy settled between the assessee and the trust but that did not give any veto power to the trust to tarpedo the contract. In the instant case the agreement clearly provided !or the consent of the agents not only at the beginning of the manufacture of the yarn by the plant to he installed by the assessee Company but at every stage in the programme of manufacture. Even at the stage of the sale of the products the consent of the agents was necessary.

In other words, the agents were given a complete controlling power so far as the manufacture and sale of the products of the assessee Company were concerned.

No such stipulation is to be found in Dharamvir Dhir' s case (supra).

Finally, not only there was no provision in Dharamvir Dhir's case under which the trust was to share the losses but there was an express provision to the contrary, namely, that the trust was not liable for any loss. Thus the mere payment of interest at the rate of 6 per cent. on the Joan advanced to the asscssec and a percentage in the profits of the business would be quite consistent with a remuneration in lieu of services lent and would certainly amount to an expenditure incurred by the assessee wholly and exclusively for the purpose of the business which was conducted by the assessee.

The same, however, cannot be said of the present case. It was on the peculiar facts of the Dharamvir Dhir's case that this Court observed as follows:

"On the facts proved in the present case the trust agreed to finance the business of the appellant on the terms set out in the agreement and there is nothing to show that he could have m.ade any better arrangements or wonld not have lost the contract if he had failed to enter into the agreement, i.e. the agreement to pay the amounts in dispute.

Therefore, in a commercial sense, the payments were an expenditure wholly and exclusively laid ou_l for the purpose of the business."

G It may be mentioned that this Court had considered the decisio;,. in the British Sugar Manufacturers Ltd.'s case (supra) and had approved of the same.

Great stress was laid by counsel for the assessee Company on the fact that this Court could not go behind the commercial expediency which had to be determined from the point of view of a businessman.

H Even so whatever be the commercial considerations, it is djfficult to hold that the commercial expediency dictated the assessee Company to allow itself to he completely overshadowed by its selling agents so as to pay them not only for the services rendered but also allow them

to share profits control the manufacture of the goods and the pro- A gramme thereof and also to share the losses. The test of commercial expediency cannot be reduced in the shape of a ritualistic formula, nor can it be put in a water-tight compartment so as to be contined in a strait jacket.

The test merely means that the Court will place itself in the position of a businessman and find out whether the expenses incurred could be said to have been laid out for the purpose of the business or the transaction was merely a subterfuge for the B purpose of sharing or dividing the profits ascertained in a particular manner.

It seems to us that in ultimate analysis the matter would depend on the intention of the parties as spelt out from the terms of the agreement or the surrounding circumstances, the nature or character of the trade or venture, the purpose for which the expenses are incurred and the object which is sought to be achieved for incurring those expenses.

If the expenses incurred amount to a profit of art C enduring nature they may be treated as capital expenditure, wheres if the expenses merely serve to promote or increase the commercial activity they may amount to an expenditure which is incurred for the purpose of the business.

Reliance was also placed by counsel for the assessee Companv on the decision in J. K. Woollen Manufacturers v. Commissioner of D Income Tax, U.P.(' ), where this Court observed as follows:

"The question as to whether an amount claimed as expenditure was laid out or expended wholly or exclusively for the purpose of business, profession or vocation as required und,.r Section 10(2) (xv) of the Income Tax Act has to be decided on the facts and in the light of the circumstances of each particular case. x x x x In our opinion, neither the High Court nor the Appellate Tribunal has applied the proper legal test in this case. As pointed out by this Court in C.l.T. Bombay v. Walchand and Co. Private Ltd., 1967-65 ITR 381= (AIR 1967 SC

1435) in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Income Tax Department. It is, of course, open to the Appellate Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of trader or it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee."

Tt w?uld appear that in the aforesaid case the only question was regardmg the qu.antum of remuneration to be given to the General Manager and this Court observed that the businessman must be given complete freedom t°, fix the terms of his employees after taking an

(I) [1969] I. S. C.R. 525.

A overall view of the situation.

This was not at all a case where an agreement like the present one was entered into between the assessee Company and its agents.

On the other hand in Commissioner of Income-tax, Kera/a v. Travancore Sugars and Chemicals Ltd.('), this Court added a word of caution that the test of commercial expediency ._ should not be applied in a mechanical manner and observed as •

B follows :

'In considering the nature of the expenditure incurred in the discharge of ari obligation under a contract or a statute or a decree or some similar binding covenant, one must avoid being caught in the maze of judicial decisions rendered on different facts and which always present distinguishing features for a comparison with the facts and circumstances of C the case in hand. Nor would it be conducive for clarity or for reaching a logical result if we were to concentrate on the facts of the decided cases with a view to match the colour of that case with that of the case which requires determination. The surer way of arriving at a just conclusion would be to first ascertain hy reference to the document under which the obligation for incurring the expenditure is created D and thereafter to apply the principle embalmed in the decisions of those facts.

Judicial statements on the facts of a particular case can never assist courts in the construction of an agreement or a statute which was not considered in those judgments or to ascertain what the intention of the legislature was.

What we must look at is the contract or the statute or the decree, in relation to its terms, the obliga- E tion imposed and the purpose for which the transaction was entered into."

The learned counsel for the assessee Company relied on the aforesaid case because the question whether the transaction amounted to a joint venture appears to have been raised but it appears that this point had been given up when the case was sent on remand and was therefore F not decided.

In these circumstances, the decision in the aforesaid case does not appear to be of any assistance to the assessee Company.

The Tribunal had interpreted the agreement keeping into account the tests of commercial expediency and we find ourselves in complete agreement with the view taken by the. Tribunal. The High Court on the other hand relied upon what it called the surrounding circum- G stances that the asscssee Company was a losing concern from its inception and had to get rid of the previous selling agents M/s Murlidhar Chiranjilal because they caused considerable embarrassment to the assessee Company.

While the standing counsel for the Revenue has admitted that the Company was running at some Joss there was no evidence that the Company was in such a bad shape that it Imel to get rid of the first selling agents because the selling agents were ! 1 causing embarrassment to it.

The High Court then relied on the fact that the first agency which was entered into with M/s Murlidhar

(I) 88 l.T.R. 1, 10.

Chiranjilal in 1953 also resulted in loss as a result of which the second agreement dated October 20, 1955 was entered into.

This does not appear to be of much consequence. The High Court then relied on the fact that the agents had no other connect10n with the assessee Company except that of the business connection. The High Court further found that the promoter of the assessee Company Mr.

Desh Bandhu Gupta had a stature which enabled him to borrow loans from the Banks on personal security and as he died in an air crash the credit of the Company went down and it was not able to raise money from the Banks.

There is absolutely no warrant for these facts referred to by the High Court which are neither mentioned in the agreed statement of the case submitted by the Tribunal to the High Court nor in the order of the Tribunal. It is well settled that the High Court is not entitled to go behind the statement of the case.

In Commissioner of Income-tax, Poona v. Manna Ramji and Company(') this Court observed as follows :

"In this respect we are of the view that the Tribunal is the final fact finding authority. It is for the Tribunal to find facts and it is for the High Court and this Court to lay down the law applicable to the facts found.

Neither the High Court nor this Court has jurisdiction to go behind or to question the statement of facts made by the Tribunal.

The statement of case is binding on the parties and they are not entitled to go behind the facts of the Tribunal in the statement.

When the question referred to the High Court speaks of 'on the facts and circumstances of the case', it means on the facts and circumstances found by the Tribunal and not on the facts and circumstances as may be found by the High Court."

In Commissioner of Income-tax, Bombay v. Poona Electric Supply Co. Ltd.( 2 ) the Bombay High Court observed as follows :

"It is true that the Electricity Act exercises control on the business of the licensee, but the control that is exercised by reason of the aforesaid proviso is to compel the assessec to distribute part of its clear profits if it is found that 'clear profits' are in excess of the reasonable return as contemplated under the Act.

That, in our opinion, would only amount to apportionment or distribution of the profits after they have been earned. It cannot, therefore, be said that the amount set apart for the purpose of distribution amongst the consumers is not chargeable to tax on the ground that it represents over-charge."

This case however was decided on its own facts and has no application to the facts in the instant case.

IJ.

l_lli.ance was also pl.aced by counsel for .the assessee Company on H a D1v1Slon Bench deciion of the Patna High Court in Jamshedpur

(!) 86 l.T.R. 29, 37.

(2) 49 I.T.R. 9\3, 924.

14-L 390 SCI/76

Motor Accessories Stores v. Commissioner of Income-tax, Bihar & Orissa(') where Untwalia, CJ., as he then was, observed as follows:

"'That position being accepted the matter as to what amount was payable to Parikh ought to have been adjudged from the assessee's point of view and not from the department or Tribunal's point of view. It has to be emphaSlse<l that unless there is a limitation put by the law on the amount of expenditure a lesser amount than the amount expended cannot be allowed merely because the assessing authority thinks that the assessee could have managed by paying a lesser amount as a prudent businessman. The test of prudence by substituting its own view in place of the businessman's has not been approved by the Supreme Court in the decisions referred to above."

Herc also the observations were confined only to the question that the test of prudence was to be determined from the point of view of the businessman.

Jamshedpur Motor Accessories Stores' case (supra) was also concerned regarding the quantum of the payment of commission and does not appear to be useful in deciding the point at issue in the present case.

Some other decisions were cited at the Bar but they have no bearing on the issue and it is not necessary for us to refer to them.

What is, therefore, important to us is that no decision has been cited before us which takes the view that even though under the contract of agency the selling agents who agreed to make substantial investments in the assessee Company and got interest on the loans apart from the commission they also shared profit to the extent of 50% as also Joss to that extent and had complete controlling power in the manufacturing programme or the sale of the products and yet t11e transaction would be one of agency simpliciter and not a joint venture. On the facts found by the Tribunal and those mentioned in the statement of the case as discussed above leads to the inescapable conclusion that the present contract of agency really amounts to a transaction by which substantial investments had been made by the selling agents with a view to control the manufacturing programme and the agents had also agreed to share the profits and losses equally.

This is, therefore, nothing but a joint venture to divide the profits after the same are ascertained and cannot in any sense be deemed to be expenses incurred by the assessee Company for the purpose of its business or for that matter for earning profits.

In fact in Pondicherry Railway Co. Ltd. v. Commissioner of Income-tax, Madras('),

Lord Macmillan pointed out that a payment out of nrofits and cunditional on profits being earned cannot be legitimately described as a payment made to earn profits. It assumes that profits have first come into existence.

But profits on their coming into existence attract tax at that point and the Revenue is not concerned with the subsequent

(I) 95 l.T.R. 6€4. 672.

'2) A.T.R. 1931 P.C. 165, 170.

application of the profits.

In this connection the Privy Council ob- A served as follows :

"It is claimed for the company that when it makes over to the Colonial Government their half of the net profits it is making an expenditure incurred solely for the purpose of earning its own profits.

The Court below has unanimously negatived this contention and in their Lordships' opinion has rightly done so.

A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence.

But profits on their coming into .existence attract tax at that point and the revenue is not concerned with the subsequent application of the profits. " " " But the principle laid down by Lord Chancellor Halsbury in Gresham Life Assurance Society v.

Styles- .(1892) A.C. 309-at p. 315, is of general application unaffected by the specialities. of the English tax system :

' ...... But when once an individual or a company has

in that proper sense ascertained what are the profits of his business or his trade, the destination of those profits or the D .charge which has been made on those profits by previous :agreement or otherwise is perfectly immaterial.

The tax is payable upon the profits realised and the meaning to my mind i£ rendered plain by the words payable out of profits'.

Thus in short by controlling the manufacturing programme, sharing to the extent of 50 % in the net profits ascertained in the manner E ,; tipulated in the agreement and above all for sharing 50 % of the losses which are to be deducted from the commission of the aents the agents become completely equated with the proprietors of the -firm

itself and therefore the contract of agency is really a sort of a partner- • hip and has been given the cloak and colour of an agency to conceal

the real intent and purposi; of the commercial venture.

In view of the decisions referred to above and the peculiar facts of the present case we are satisfied that the view taken by the Tribunal that the payments in question were not legally deductible under s. 10(2) (xv) of the Act was correct.

The vie'Y taken by the High Court that the amounts in question were deductible under s. 10(2) (xv) appears to be legally erroneous and cannot be upheld.

For the reasons given above, the appeals are allowed and the G judgmen\ of the High Court is set aside and that of the Tribunal is restored and the two questions referred to the High Court are answered against the assessee Company and in favour of the Revenue: In view of the peculiar f\lcts of the present case, we leave the parties to bear their own costs in this Court.

V.P.S.

Appeals allowed.

C.l.T., PUNJAB HARYANA, J & K, H.P. & UNION TERRITORY OF CHANDIGARH

January 21, l 976

S. MURTAZA FAZAL ALI, JJ.

Income Tox Act

s. 10(2)

cl. 7(1)

s. 10(2)(xv)

Tax Act, 1922

Clause 3

cl. 6(1)

Clause 6(ii)

cl. 6

cl. 7(i)

cl. 7

Clause 7(iv)

s. 10(2)

B. B. Ahuja

S. P. Nayar

A, N. Goyal

FAZAL Au

Panipat Woollen Mills, Kharar

Mis. Navin Woollen Mills

Industrial Finance Corporation

Murlidhar Chiranjilal

December 15, 1953

D Saligram Premnath

India

October 20, 1955

Saligram F Premnath

s. 10(2)

Income-tax Act, 1922

s. 10(2)

Income-tax Act, 1922

s. 10(2)(xv)

sec. 10(1)

Sec. 10(2)(xv)

Income-tax Act, 1922

s. 10(2)(xv)

Supreme Court

s. 10(2)(xv)

s.

10(2)(xv)

Ahuja

A. N. Goyal

s. 1

Saligram Premnath

clause 2

Clause 3

Clause 6

Clause 7

clause 7

clause 7

Greene

Dharamvir Dhir

British Sugar Manufacturers Ltd.

Section 10(2)

AIR 1967 SC

1435

Chiranjilal

Desh Bandhu Gupta

Bombay High Court

Electricity Act

Jamshedpur

Untwalia

Parikh

Jamshedpur Motor Accessories Stores

Macmillan

Halsbury

s. 10(2)

s. 10(2)