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

- **Citation:** [1968] 1 S.C.R. 37
- **Court:** Supreme Court of India
- **Decided:** 1967-07-19
- **Case number:** Civil Apciai No. 2162 of 1966
- **Bench:** J. C. Shah, S. M. StKRl, V. Ramaswami
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-gujarat-ahmed-abad-v-tejah-farasram-kharawalla-ltd-4144
- **Pages:** 6

## Headnote

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 respondents 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 incurred'. To qualify for exemption the allowance must be granted to
meet expenses incurred- or to be incurred \Vholl~ and necessarily in
the performance of the duties of an office or employment of profit.
[41A]
(ii) In framing s. 4(3) (vi) the intention of the framers of the
E Act was to grant exemption in respect of amounts received by the
assessee, not for his own benefit, but for the specific purpose of
mee!'ing the expenses wholly and necessarily incurred o~ to be incurred in the performance of his duties as agent. It would therefore be reasonable to hold that the allowance granted to meet the
expenses wholly and necessarily incurred or to be incurred in the
performance of the duties of the office 01· employment of the grantee
alone qualifies for exemption under the Act, and any surplus rep maining in the hands of the grantee after meeting the expenses does
not bear the character of the allowance for meeting expenses. This
would be so even if the .employer has disabled himself from demand-
~ng refund of the amount not expended for meeting the expenses
Incurred or to be incurred in the performance of the duties of an
office of employment or profit, and the surplus remaining In the
hands of . the grantee acquires for the purpose of the Income-tax
Act, the character. of additional remuneration. (4-0C-E]
G
Tejaji Farasrom Kharaw'Jlla v. Commissioner. of Income-tax,
Bombay (Mofussil), [19481 16 I.T.R. 260, disapproved.
(iii) The allowance may be in respect of a period longer than
the accounting year or years. But on that account the whole receipt
reduced by the expenses actually incurred in the year of account is
not lia~e to be brought to tax in that year. In such a case It will
be the duty of the Income-tax Officer to determine the amount allowed in respect of the year of account in which the expenditure
B has been incurred and the difference between the amount so determind and the amount actually expended would alone be brought
to ta&. [41G]
The position in tbis respect remains the same even after the
amendment of s. 4(3) (vi) by the l'.inilnce Act, 1955. [41B]
,
SS
SUPRlillE ~'OURT BEl'ORTS
[1968] I s.o.B,
CommiHioner of Income-t~. U.P. v. Sharma & Compan11, 57 A
I.T .R. 470, disapproved,

## Text

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 respondents 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 incurred'. To qualify for exemption the allowance must be granted to
meet expenses incurred- or to be incurred \Vholl~ and necessarily in
the performance of the duties of an office or employment of profit.
[41A]
(ii) In framing s. 4(3) (vi) the intention of the framers of the
E Act was to grant exemption in respect of amounts received by the
assessee, not for his own benefit, but for the specific purpose of
mee!'ing the expenses wholly and necessarily incurred o~ to be incurred in the performance of his duties as agent. It would therefore be reasonable to hold that the allowance granted to meet the
expenses wholly and necessarily incurred or to be incurred in the
performance of the duties of the office 01· employment of the grantee
alone qualifies for exemption under the Act, and any surplus rep maining in the hands of the grantee after meeting the expenses does
not bear the character of the allowance for meeting expenses. This
would be so even if the .employer has disabled himself from demand-
~ng refund of the amount not expended for meeting the expenses
Incurred or to be incurred in the performance of the duties of an
office of employment or profit, and the surplus remaining In the
hands of . the grantee acquires for the purpose of the Income-tax
Act, the character. of additional remuneration. (4-0C-E]
G
Tejaji Farasrom Kharaw'Jlla v. Commissioner. of Income-tax,
Bombay (Mofussil), [19481 16 I.T.R. 260, disapproved.
(iii) The allowance may be in respect of a period longer than
the accounting year or years. But on that account the whole receipt
reduced by the expenses actually incurred in the year of account is
not lia~e to be brought to tax in that year. In such a case It will
be the duty of the Income-tax Officer to determine the amount allowed in respect of the year of account in which the expenditure
B has been incurred and the difference between the amount so determind and the amount actually expended would alone be brought
to ta&. [41G]
The position in tbis respect remains the same even after the
amendment of s. 4(3) (vi) by the l'.inilnce Act, 1955. [41B]
,
SS
SUPRlillE ~'OURT BEl'ORTS
[1968] I s.o.B,
CommiHioner of Income-t~. U.P. v. Sharma & Compan11, 57 A
I.T .R. 470, disapproved,
CIVIL APPELLATE JURISDICTION:
Civil Apciai No. 2162 of
1966.
Appeal from the judgment and order dated September 6, 9,
1963 of the Gujarat High Court in Income-tax Reference No. 9
of 1963.
B
B, Sen, A. N. Kirpa/, R. N. Sachthey and S. P. Nayar, for the
appellant.
I. N. Shroff, for the respondent.
The Judgment of the Court was delivered by
Slaala, J.-By an agreement dated October 29, 1928 Ciba
Undia) Ltd.-hereinafter called 'the principals'-api;>ointed one O
Tejaji Farasram Kharawalla selling agent for the District of Ahmedabad in respect of certain kinds of dyes and dye-stuffs, and agreed
to pay him commission at the rate of 12! % on sales by him of
dyes and dye-stuffs of the principals. The commission was to include
"all charges in connection with the upkeep of offices and godown,
turnover rebates and contingency expenses etc."
D
The terms relating to commission were modified by agreement
da.ted August 20,
1935 and out of the commission agreed to be
paid, 7 ! % was to be treated as the selling commission and 5 %
was to be treated as compensation in lieu of the contingency expenses which the selling agent had to meet, "such as commission
to Dyeing Masters, agents etc.". The rights of the selling agent
were assigned with the consent of the principals to the respondent E
Company with effect from October 27, 1947. In assessing the income
of the Company for the assessment year 1949-50, the Income-tax
Officer included in the taxable income Rs. 58,025 / • being the
difference between Rs. I.90,538 /- received by the Company as
"5% commission" and Rs. I.32,512/- spent by the Company for
meeting the charges which the selling agent was to meet. The p
Income-tax Appellate Tribunal, however, upheld the contention of
the Company that in the computation of the income of the Company, the "5 % commission" was wholly exempt by virtue of s. 4
(3)(vi) of the Income-tax Act, 1922.
The Commissioner then moved the Tribunal to draw up a
statement of the case and to refer the following question to the G
High Court of Judicature at Bombay:
"Whether on the facts of the case, a portion viz. 5 % ,
of the selling agency commission of 12!% received by the
assessee company from Mis Ciba Ltd. in the course of
carrying on the selling agency business is exempt from
tax under s. 4(3)(vi) of the Act?"
But the Tribunal only referred the following question:
"Whether the assessee company held an office or em·
ployment of protit within the meaning of s. 4(3)(vi) of
the Indian Income-tax Act?"
II
c.I.T. v. M/R. 'fF.JA.Tl FARA$RAM (Sltnli, J.)
A The application preferred by the Commissioner to the High Court
for calling upon the Tribunal to submit a statement on the question
originally submitted was rejected, and the High Court answered
the question referred by the Tribunal in the aJirmative, observing
that it had been conclusively determined by their earlier decision
in Tejaji Farasram Kharawal/a v. Commissioner of Income-tax,
B Bombay (Mo/ussil)(')-which arose out of a proceeding for assess·
ment to tax of the income of the original selling agent under the
same agency agreement. It appears that in so observing the Court
was under some misapprehension, for the question referred by the
Tribunal had not been decided in the earlier judgment.
Against the order passed by the High Court recording an
C answer in the affirmative on the question referred by the Tribunal
and against the order dismissing the notice of motion. the Commissioner appealed to this Court. This Court set aside the order
passed by the High Court dismissing the application of the Commissioner and without expressing any opinion on the correctness
or otherwise of the answer recorded by the High Court on the
question referred by the Tribunal. remanded the case to the High
D Court with a direction that the Tribunal be called upon to state
a case on the question raised in the application of the Commissioner.
The case was then heard by the High Court of Gujarat to
which it stood
transferred because of the reorganisation of the
State of Bombay. The High Court of Gujarat held that the "5 %
E commission"
received by
the Company represented a special
allowance to meet expenditure "such as commission to Dyeing
Masters, agents etc.", and was on that account exempt from tax.
The High Court also held that the Company held an office or
employment of profit. The Commissioner has again appealed to this
Court against the answers recorded by the High Court on the
F original and supplementary question.
G
Section 4(3)(vi) of the Indian Income-tax
Act, 1922, as it
stood in the year of assessment read as follows: -
"Any income, profits or gains
falling
within the
following classes shall not be included in the total income
of the person receiving them:
(vi) ~ny special allowance. benefit or perquisite specifically granted to meet expenses
wholly and
necessarily incurred in the performance of the
duties of an office or employment of profit."
B The clause grants exemption in respect of expenses "incurred":
but. on that. account ~n allowance granted to meet expenses· to
be incurred m future m the
perfom1ance
of the duties of an
!') [19481 I(; J.T.R. 260.
SUPREME COURT, REPORTS
[1968] I s.o.a.
office or employment of profit is not outside the exemption claimA
ed. In the context in which the expression "incurred" occurs, it
undoubtedly means ~'incurred or to be incurred". To qualify for
exemption the allowance must it is clear be granted to meet expenses incurred or to be incurred wholly and necessarily in the
performance of the duties of an office or employment of profit.
But the purpose for which the allowance is granted, in our judgment, is alone not determinative of the claim to exemption. An B
allowance though made to a person holding an office or employment of profit intended for appropriation towards expenditure
incurred or to be incurred in the discharge of the duties, does not
constitute any real income of the grantee. It is in truth expenditure incurred by the employer through the agency of the grantee.
The intention of the framers of the Act was to grant exemption in o 1
respect of amounts received by the assessee, not for his own
benefit,
but for the specific purpose of meeting the expenses
wholly and necessarily incurred or to be incurred in the performance of his duties as an agent. It would, therefore. be reasonable
to hold that the allowance granted to meet the expenses wholly
and necessarily incurred or to be incurred in the performanee of the duties of the office or employment of the D
grantee alone qualifies for exemption under the Act, and any
surplus remaining in the hands of the grantee after meeting the
· expenses does not bear the character of the allowance for meeting
expenses but for performing the duties of the office or employment.
This would be so even if the employer has disabled himself from
demanding refund of the amount not expended for meeting the E
expen~es incurred or to be incurred in the performance of the duties
of an office or employment of profit, and the surplus remaining
in the hands of the grantee acquires for the purpose of the Tncometax Act the character of additional remuneration.
We are unable to agree with the decision of the Bombay
High Court in Tejaji Farasram K/Jarawal/a's case(') that the object r
with which the grant is made by the employer determines the
Claim to exemption under s. 4(3)(vi) of the Income-tax Act. The
observations made by Chagla, C.J., at p. 267 that "what is empha.-
sized in this sub-clause s. 4(3)(vi) is the purpose of the grant. the
object with which the grant was . made.
.
.
. Once it
is established that the grant was for that particular purpose, it is
no longer necessary for the assessee to prove that in fact he exG
pended that grant for the purpose for which it was given. He may
spend more, or he may spend less, but qua that grant which is
given for a particular purpose, he is entitled to the exemption",
do not, in our judgment, give due effect to the key words "to meet
expenses wholly and necessarily incurred in the performance of
the duties of an office or employment of profit." What is exempted' H
is not the consideration paid for meeting the expenditure incurred
or to be incurred in the performance of the duties of an office or
(') 16 I.T.B. ltJO.
,
C.I.T. W. 11.{8. TB.TA.JI
FARASUK (Sha/i, J.)
A employment: the exemption operates only in respect of a special
allowance or benefit specifically granted to meet expenses wholly
and necessarily incurred in the discharge of the duties of the office
or employment.
·. The judgment of the Allahabad High Court in Commissioner
of lncome·tax, U. P. v. Sharma & Company(') and especially the
B observations of Pathak, J., . on which reliance was placed by
counsel for the Company may also be referred to. In Sharma &
Company's case(') the assessee firm which was the sole selling agent
of a "cotton mill", received a sum exceeding Rs. 67,000/· from
the owners of the mills for the purpose of meeting the expenses
in connection with the management of a retail cloth shop on behalf
of the mill and actually spent only Rs. 12,641 /-. The claim of the
Cl firm that it was entitled to exemption from liability to pay tax
under s. 44(3)(vi) of the Act (before it was amended in 1955) even
in respect of the balance retained by it was upheld by the High
Court of Allahabad. Pathak. J., observed that s. 4(3)(vi), as it
then stood, required the Income-tax Officer to enquire whether
the purpose of the grant was covered by the language of the
D clause, and he was not concerned to determine whether the amount
granted was actually expended by the recipient.
The learned
Judge in so holding was impressed by two considerations: that
the expression "incurred" means incurred already, or to be incurred in. future; and that income-tax being an annual tax in a
case where the allowance is an ad hoc allowance which is to
cover a period longer than or ending after the year of account,
E or is a periodical allowance, the Income-tax Officer may under
the Act ex.empt expenditure incurred in the year of account and
no more, and thereby the intention of the employer would be
wholly frustrated and the employee may be called upon to pay
tax on a receipt which is not his income.
The expression "incurred" means for reasons already set out
F incurred or to be incurred. But that has no bearing on the ques-
!ion whether the unexpended sur!'lus in the hands of the employee
1s taxable. And we do not feel impressed by the second considera.tion. The allowance may be in respect of a period longer than the
accounting year or which runs into the succeeding accounting
year or years.
But on that account the whole receipt
G reduced by the expenses actually incurred in the year of account
is not liable to be brought to tax. If it appears from a review of
the circumstances that a special allowance is made for a period
longer than the year of account, or that the period covered b}
the grant of a special allowance extends beyond the close of the
account year, it would, in our judgment, be the duty of the
Income-tax Officer to determine the amount allowed in respect
B of the year of account in which the expenditure has been incurred.
and the difference between the amount so determined and th~
amount actually expended would alone be brought to tax.
(') 57 I.T.B. 470.
42
SUPREllE COURT REPORTS
[1968) I s.c.n.
It may be noted that the Parliament has by the Finance Act, A
1955, with effect from April l, 1955, recast cl. (vi) of s. 4(3) of the
Income-tax Act, 1922 and has expressly provided that the special
allowance granted to meet expenses wholly and necessarily incur·
red in the performance of the duties of a.n office or employment
of profit to the extent to which such expenses are actually incurred for that purpose, was exempt from tax. The Legislature, by 8
the amendment made it clear that only the expenses actually
incurred by the assessee will be exempted under s. 4(3)(vi). But the
principle that a.n amount granted to cover expenses to be incurred
for a period which extends beyond the year of account in which
the grant is received will be allocated between the ~ar of a.ccount and the· period outside the year of account will apply to
the Act as amended.
C
There is no doubt that the selling agent under the agreement
with the principals holds an employment for profit. No argument
to the contrary was advanced before us. It is unnecessary therefore to consider the elaborate judgment of the High Court on the
question whether the selling agent holds an office within the D
meaning of s. 4(3) (vi) of the Act.
·
The appeal is therefore allowed and the answer recorded by
the High Court to the supplementary question is discharged, and
the following answer to the supplementary question is recorded:
"That portion of 5 per cent of the selling agency commission
received by the assessee company is exempt under s. 4 (3) (vi) of E
the Income-tax Act, 1922, which is wholly and necessarily incurred in the year of account in the performance of the duties of the
company as selling agent."
There will be no order as to costs in this appeal in this Court
and in the High Court.
F
G.C.
Appeal a/lowed.