Delhi H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,01,779 was an admissible business expense ?

Counsel Appeared

G.C. Lalwani, for the Revenue : None, for the Petitioner

PRAKASH NARAIN, C.J. :

Two questions of law have been referred to the High Court by the IT. Tribunal, Delhi Bench “A”. These read as under : “

(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,01,779 was an admissible business expense ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in negating the Department’s contention that the sum of Rs. 1,01,779 constituted income in the, hands of the assessee ?”

Briefly stated the facts are these. The assessee entered into a sole selling agency agreement with Motors Instruments (P) Ltd. (hereinafter referred to as “the company”) on April 1, 1960. The company was a manufacturer of meters. It was agreed between the parties that these meters would be sold through the sole selling agency of the assessee. The two relevant terms of the agreement between the parties read as under: “The company will submit prices to the selling agents, who, in turn, will quote their own prices to customers or sub-agents/distributors. It is agreed that the selling agents shall sell meters and other products at the prices fixed by the company from time to time which shall be reasonable and in line with prices of other Indian meters’ manufacturers or fixed by the Indian Meters’ Manufacturers Association. Commission : The selling agents shall be entitled to 10 per cent (ten per cent.) commission on the selling prices at which meters are sold by them to the customers; the commission will be paid to the selling agents on all orders received direct or indirect during the terms of the agreement. The commission will be allowed in the bills issued by Meters & Instruments (P) Ltd. to Netar Krishana Sahgals Pvt. Ltd.” “In case of sub-agents or distributors of the selling agents they shall be paid out of the aforesaid a commission of 10 per cent (ten per cent.). Whenever the company supply the meters directly under instructions of the selling agents the company will charge prices settled between Netar Krishna Sahgals Private Ltd. and their sub-agents/distributors or buyers and pass on the difference of commission to Netar Krishana Sahgals Private Ltd. It is of course understood that the total commission at any time will not exceed 10 per cent (ten per cent.).”

The accounting year of the assessee was July 1, 1962, to June 30, 1963, the assessment year being 1964-65. In the accounting year, it seems, the assessee sold some meters at prices higher than the prices fixed by the company.

This fact was brought to the notice of the assessee by the company by a letter dated March 25, 1963. In this letter the company protested against the assessee charging higher prices and claimed that the benefit of the higher prices charged by the assessee should have been passed on to the company, the manufacturer of the meters. The assessee in reply to this letter claimed in its letter of April 8, 1963, that the company itself had not been supplying sufficient number of meters with the result that the 10 per cent. commission could not be regarded as adequate to meet the expenses which the assessee had to meet in conducting the sales of the meters. It was also complained by the assessee that the delivery of meters was not according to the time Schedule. The assessee contended that losses incurred by it on account of erratic supply of meters and non-supply of sufficient meters could result in heavy losses which could not be adequately covered by the 10 per cent. commission on sales. There was, after this, further correspondence between the parties and some negotiations. It seems that the dispute between the company and the assessee was amicably settled. As a result of this settlement the assessee accepted two debit notes totalling Rs. 1,01,779 and made it clear that no further debit notes would be accepted by it either for future or past transactions. The debit notes were made in the books of the assessee on June 29, 1963, though the debit notes were dated March 30, 1963, and May 29, 1963.

In the assessment proceedings before the ITO, a question arose with regard to the amount of Rs. 1,01,779. The ITO did not consider the debit entry of June 29, 1963, to be genuine. He also discounted the contention that the transaction was in due course of business. On appeal, the AAC took the same view as the ITO. On further appeal to the Tribunal, however, the assessee succeeded and it was held that the amount of Rs. 1,01,779 debited by accepting two debit notes was a genuine transaction and so, could not be regarded as the income of the assessee. On a motion made by the Revenue the aforesaid two questions have been referred to the High Court for its opinion.

In our opinion, no question of law really arises at all. It is a pure question of fact. The finding of fact given by the Tribunal is that the debit entry of Rs. 1,01,779 was a genuine debit entry. In this view of the matter the reference made seems to be uncalled for.

Learned counsel for, the Revenue, however, urged that reading the clauses of the agreement dated April 1, 1960, it was possible to say that the assessee was entitled to sell the meters at a higher price than the price fixed by the company and, therefore, the higher price received by it or the difference between the higher price and the price fixed by the company would be income of the assessee. There is no force in this contention. On a plain reading of the clauses of the, agreement, specially the ones which we have extracted earlier, it is obvious that the only income which the assessee could derive was the 10 per cent. commission. If he charged a price lower than the price fixed by the company, he may have been entitled to 10 per cent. or less on the price charged. That is, however, academic and we need not express any opinion on it. If a higher price was charged by the assessee, he was entitled to 10 per cent. of the sale price. Inasmuch as the assessee was bound under the agreement to sell at the price fixed by the company, if any excess price was recovered from a customer it had to give that excess to the company. By no stretch of imagination could that excess be regarded as the income of the assessee unless, of course, the assessee had been allowed to pocket the same. As it happens, the assessee was not allowed to pocket the same. The assessee had to account for it to the company which resulted in the issue of the aforesaid two debit notes. We must make it clear that all receipts would not be income. Indeed, in a contract like the one in the present case the receipts of the assessee would not be income at all. The income would be the commission that it earns. The fallacy of the argument advanced on behalf of the Revenue is that it is equating receipts with income. An attempt to question the genuineness of the transaction of the two debit notes is not permissible in reference proceedings. The genuineness has, already been upheld.

The result is that we answer the aforesaid two questions in the affirmative and in favour of the assessee. The assessee was not represented before us despite notice. So, the reference has been answered ex parte.

[Citation : 141 ITR 681]