ANDHRA PRADESH HIGH COURT

                          Vizagapatnam Sugars

                          Vs

                          Commissioner of Income Tax

                          (Chandrasekhara Sastry,J.)

                          30.08.1961

                          JUDGEMENT

Chandrasekhara Sastry,J.

( 1. ) THIS is a reference under S. 66(1) of the Indian IT Act. The assessee is a public limited

company incorporated in 1935 manufacturing sugar and its bye products. The assessments relate

to the years 1950 51, 1951 52 and 1952 53, the accounting years being the three years ending

with 30th June, 1949, 30th June, 1950 and 30th June, 1951. In respect of its business, the

company resolved to issue mortgage debentures of the value of Rs. 2.5 lakhs. The resolution of

the board of directors relating thereto is dated 15th April, 1941. This resolution of the board of

directors was confirmed by a resolution of the company at its extraordinary meeting held on 4th

June, 1941. It was further resolved that the company do pay brokerage not exceeding 2.5per cent

and such commission on the sales of sugar for such period as the company may determine to

such person or perrons as may negoliate in ebseuplion the of said dubeutives in due course, the

debentures of the value of Rs. 2.5 lakhs were issued and subsequently allotted. The brokerage of

2.5per cent mentioned above was also paid. As regards the commission on the sales of sugar

mentioned above, an agreement was entered into between the assessee company and Jivanchand

Ratanchand Motishaw of Bombay on 28th Dec., 1941, that he was to be paid a commission of 4

annas per Bengal maund of sugar sold during the period commencing from 1st Jan., 1941, and

ending with 31st Dec., 1961. In respect of the three years to which the concerned assessments are

made, the commission so paid to the underwriters was Rs. 45,503, Rs. 13,362 and Rs. 40,465

respectively. These amounts were claimed by the assessee as admissible deductions in the

respective assessment years. The ITO and the AAC as well as the Tribunal, Hyderabad Bench,

disallowed this claim. The assessee filed three applications before the Tribunal to refer to the

High Court the question of law which arose out of the decision of the Tribunal. The three

applications were consolidated and the Tribunal referred the following question to the High Court

for decision : "Whether, on the facts and circumstances of the case, the sums of Rs. 45,503, Rs.

13,362 and Rs. 40,465 are admissible deductions in respect of the assessments for the asst. years

1950  51,                 1951                        52and195253respectively?"

( 2. ) THE relevant portion of the resolution dated 15th April, 1941, of the board of directors is as
follows : "Agenda : I. (1) To issue first mortgage participating debentures of Rs. 2.5 lakhs on the
security of the plant and machinery of both the sugar factory and distillery for repaying the loan
to the Central Bank and the share capital of the society as per agreements dated 29th June, 1938.
.. III. (a) That the company hereby approves the agreement to be entered into between the
company on the one part and Mr. J. R. Motisqfexisting haw, share and stock broker, Bombay, on
the other part and the terms contained therein for giving a brokerage of 2.5 per cent. on the
debenture loan... (c) That in consideration of the valuable services rendered, the company do
hereby enter into an agreement with Mr. J. R. Motishaw of Bombay as per terms of the
agreement submitted to the meeting giving four annas as commission on every Bengal maund of
sugar sold, for a period of twenty years commencing from 1st Jan., 1941." In the agreement
dated 28th Dec., 1941, entered into between the assessee company and Jivanchand Ratanchand
Motishaw of Bombay, it is provided that : "Whereas the said Motishaw negotiated and procured
subscription of the said debentures of the face value of Rs. 2,50,000 (Rupees two lakhs and fifty
thousand) which have been duly allotted by the company and whereas in consideration aforesaid
the company agreed to pay 2 1/2 (two and half) per cent. brokerage on the amount of the said
debentures and commission at the rate of 4 (four) annas on the sale of every Bengal maund of the
company's sugar effected for a period of 20 years and whereas the company has already paid to
the said Motishaw the amount of the said brokerage..... It is hereby agreed by and between the
parties herein as follows : 1. In pursuance of the said agreement and in consideration of the
promises and in consideration of the negotiating for procuring the subscription of the said
debentures the company hereby agree to pay to the said Motishaw commission at the rate and on
the basis of four annas on the sale of every Bengal maund of the company's sugar during the
period commencing from the 1st day of January, 1941, and ending with the 31st day of
December,1961."

( 3. ) IT is on these facts that the assessee claimed the three amounts of Rs. 45,503, Rs. 13,362
and Rs. 40,465 as admissible deductions in respect of the assessments for the three assessment
years. The claim of the assessee that these three amounts are admissible deductions is based on
S. 10, Clause (2), sub cl. (xv), of the Indian IT Act, which is as follows: "10. (2) Such profits or
gains shall be computed after making the following allowances, namely : (xv) any expenditure
(not being an allowance of the nature described in any of the cls. (i) to (xiv) inclusive, and not
being in the nature of capital expenditure or personal expenses of the assessee) laid out or
expended wholly and exclusively for the purpose of such business, profession or vocation." ;